Coleman’s Notes: Is Hamilton Prepared for Commercial Tax Defaults on June 30?

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Joey Coleman/The Public Record

Lime Ridge Mall in August 2017

June 30th is approaching, and property tax instalments to the City of Hamilton are due again.

On April 30, 83% of the properties paid their instalment, representing 82% of total taxes due. The City recorded 10.88% of properties as in arrears at the end of 2018, thus approximately 6% of properties are delayed in paying their instalment compared to this benchmark.

[There are many complexities to this figure, for the purposes of this piece, the rough estimate is sufficient to understanding the public policy challenging emerging which Council must address]

The April 30 payment percentage seems hopeful, but is not a good metric of the economic impact of COVID-19 upon the ability of property owners to pay their tax instalments.

Many instalment payments would’ve been made prior to the emergency closures of many businesses to slow the spread of the coronavirus. This is especially in the commercial property tax class as normal business practices mean the funds for payment would be set aside prior to March 15, and in many cases, the payment processes underway before Ontario’s state of emergency began on March 17.

No Cash Flow Means No Money to Pay Property Tax

When you walk in your neighbourhood tonight, take a moment to pause and look at your local commercial plaza. Many of them are anchored by restaurants and personal service businesses (hair salon, nail parlour, etc), there’s likely a convenience store, and some other retail operations.

We all know the state of the restaurant industry, they are unable to pay rent. The personal service businesses are similarly unable to pay rent.

The convenience store isn’t selling its usual amount of lottery tickets, people are not making unexpected trips to the store when they make the impulse buys these stores rely upon to make money. In fact, people are avoiding going to the store. The convenience could be in the situation it cannot pay rent.

The other retail operations, let’s say a pet store for this example, is in much the same situation. People are not going in with their kids to buy toys and treats for the family pet; some purchases are delayed, others are done online.

It is entirely possible the owner of your local plaza is receiving no revenue; and they are “having a heart” as the Premier asked them to, waiting until the economic rebounds to figure out a payment plan.

Many of Hamilton’s local plazas are small businesses themselves. They do not have liquidity to bridge the lack of cash flow caused by COVID.

Simply put, they have no cash-on-hand, and will be unable to pay the City tax instalment on June 30. Nor is it going to change before July 31st, Council has approved a penalty free tax deferral for all property taxes, thus the City of Hamilton is at risk of serious decreases to its cash flow this summer.

While next we’ll focus upon the big single tax accounts, the cumulative impact of many smaller account going into arrears is much more substantial. More so because the larger properties have much greater land value, and are more likely to be able to pay their back taxes in the near future.

Lime Ridge Mall and the Big Box Stores – Stable

“Data released by U.S. REITs during the week ended May 15 continued to show April rent collection by retail REITs to be the most impacted by the coronavirus pandemic, with regional mall and outlet center REITs collecting the lowest percentage of April rents of the group”, this from S&P Global Market Intelligence.

S&P’s data is collected from public filings of publicly listed companies in the United States.

Lime Ridge Mall, Hamilton’s largest single tax at approximately $7.5-million per year, is a “regional mall”. S&P reports on the filing of two United States regional mall operators which report 26 and 30% rent payments.

Canada’s largest mall property company, Cadillac Fairview, is privately held. The company told various media outlets at the end of April that it was collecting between 20 and 25% of rent at it various malls across Canada.

Lime Ridge Mall is On April 24, credit rating agency DBRS Morningstar placed bonds secured by the Lime Mall property “under review with negative implications“.

US Shopping Centres, the category of destinations such as our Centre on Barton in the Lower City, Meadowlands in Ancaster, and Heritage Green in Upper Stoney Creek, are reporting between 50 to 70% rent collection reports S&P.

Many big box stores offer at least one “essential service”, these were allowed to be fully open selling both essential and not-essential goods. As emergency regulations began to allow curbside pick-up, all box stores were allowed to operate again. Whereas, indoor regional malls stores (with the exception of those offering an essential service) remain under closure orders.

RioCan, the owner of most of Hamilton’s box outlet centres anchored by Wal-Marts, reports “the Trust has collected 66% of expected April gross rents“. They report a further 17% of their tenants have entered into deferral agreements.

RioCan states they have “approximately $1.0 billion of liquidity on a proportionate share basis as of March 31, 2020”. Thus, they’ll be able to make their property tax payments.

We don’t know what Cadillac Fairview’s liquidity is at present.

The Penalties for Not Paying by July 30th.

The penalty for late property tax payment is 1.25% with a 15% interest rate.

A large private company such as Cadillac Fairview, with billions in assets, can secure short and medium term financing at much better rates.

The “mom and pop” commercial plaza cannot secure financing; especially the plazas anchored by or significantly exposed to the hospitality industry.

This is to say nothing of single commercial properties, such as those on James Street, whose only ground-level tenant is a restaurant.

The Fiscal Cliff City Council Must Prevent

The penalties Council reasonably imposed upon tax defaults during usual economic times will impose a burden which could tip some of these small owners into bankruptcy.

Thus, Hamilton City Council will need to figure out how to adjust penalties to prevent prevent them being an unjust burden upon commercial owners who cannot pay due to COVID.

Ultimately, COVID is laying bare many of the fundamental problems with property tax as the primary means of funding municipalities.

[Aside, the City of Toronto (where this problem is much more pronounced)

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First published: May 25, 2020
Last edited: May 25, 2020
Author: Joey Coleman

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