The Government's national rates revaluation programme could prove to be the death knell for many high-street retailers, who are poised to be hit with a dramatic increase in rates from the start of next year. Stephen Wynne-Jones investigates who has the most to lose from this so-called 'equitable' legislation. This article first appeared in the September 2013 edition of Checkout.
The Government’s national rates revaluation programme, launched in Dublin City, Dun Laoghaire-Rathdown, and Waterford City and County in 2011 and set to be rolled out across the state, has been described by those in power as a ‘more equitable’ approach to distributing commercial rates liabilities. For retailers, some of whom are facing more than 100% increases in their rates from next January, the reality is anything but.
For businesses located in town centres, where rents have skyrocketed, the revaluation process has been particularly tough, with many facing significant increases. For those situated in non-core locations, rates have duly declined - described by the Government as a ‘more equitable’ spread of the rates burden. However, when you consider that the majority of businesses in town-centre areas are retailers, the new legislation appears to be particularly damaging for a hard-pressed retail industry. It’s a process that may be long overdue - the last nationwide rates revaluation was in 1988 - but it couldn’t have come at a worse time for those on the high street.
“Rates are now calculated based on the rent value of the property in the market, which means that businesses in secondary and tertiary locations that pay lower rent will now pay lower rates,” says David Fitzsimons, chief executive, Retail Excellence Ireland. “In a nutshell, that means that retail is screwed, but other secondary- or tertiary-type businesses, such as hotels or those located in business parks, are enjoying substantial rates decreases.”
Linking ‘Rent’ And ‘Rate’
Imposed by the Valuation Office, this process of linking rates to rent (without consideration for the financial health of a business) is “far from an equitable benchmark,” Fitzsimons argues. “It doesn’t take into account the profitability of the company whatsoever. Secondly, phased implementation means that some retailers are paying a higher rate than their neighbours down the road. And, thirdly, the recent Revaluations Act [introduced without consultation with the private sector] now limits the ability to appeal, which has reduced the window of time in which appeals can be prepared.”
Additionally, while the legislation doesn’t take into account the trading circumstances of a business, valuations can be revisited if there has been a ‘material change of circumstance’ to the property itself. Thus, if a business has expanded or reduced the size of its surface area, it can apply for a new valuation to be set. However, a store that has lost business due to the arrival of a major competitor next door, or the construction of a motorway nearby, isn’t considered as having experienced a ‘material change of circumstance’.
One Musgrave retailer, who did not wish to be named, told Checkout that the process by which valuations are being calculated, without any due consideration for the trading environment, is “mind-boggling. [...] They look at the building and the location, and they ask themselves, ‘If this building was available for rent in the morning, how much would it go for?’ It’s as if all buildings were empty shells with no tenants. There’s no logic there. “If you were to ask the Valuation Office why they are choosing to do this now, in the middle of one of the worst recessions we’ve experienced, they would tell you that it’s because it hasn’t been done for ages. How is that an acceptable answer?”
For the Government, there is a sense of urgency about the whole thing. The Valuation Act was enacted way back in 2001, and as of last year, only three local authority areas had been revalued. Yet ‘accelerating the programme of revaluation’, as the Government announced in the much-publicised Action Plan for Jobs last year, could be hugely detrimental if the consequences being felt by businesses to date aren’t considered.
As recently as June, Minister Brendan Howlin hailed a rapid roll-out of the rates revaluation process as “important”, noting the positive benefits of having a system in which “there will be a much closer relationship between rental value and commercial rates valuation”. Yet those in his department, as well as his cabinet colleagues in the Environment portfolio (custodians of the Valuation Office), should consider the situation on the ground before displaying undue eagerness.
A United Voice
Arguably the most combative response to the legislation thus far came at a meeting at the Waterford City Council building in June, attended by Council members, members of the Valuation Office, and approximately 200 aggrieved business owners. “At the meeting, you were nearly scared for the guys from the Valuation Office,” David Fitzsimons recalls. “It became very obvious in the first ten to 15 minutes that it wasn’t just 200 business owners, it was 200 town-centre retailers. Those that were not there were the ones that were enjoying rates reductions - manufacturers in the south of Waterford City, for example.”
As Waterford City Business Group (WCBG), an umbrella organisation of business owners in the city, outlined at the meeting, the revaluation process leaves Waterford with an “extremely uncompetitive” city offering, unable to compete with other cities and towns in the area, with particular focus on the decision to calculate rates based on rental valuations recorded in 2011. As one business owner pointed out, “If, as we are led to believe, competing retail centres throughout the region are not valued until 2014, or even 2013, then we will be at an even bigger disadvantage. In the near future, we could very well see Waterford City trying to compete with very high 2011 rates valuations against towns whose rate valuations are based on much, much lower 2014 or 2015 rental valuations.”
Patrick Conroy, evaluations manager with the Valuation Office, who attended the meeting, was curt in his response. “There is no doubt there will be winners and losers,” a local paper reported him as saying. “The same amount of money has to be raised, but it is divided up differently. If you are raising the same amount of money, somebody has to pick up that tab.”
However, if the Waterford meeting represented a first pronouncement of opposition, the Valuation Office may have to prepare for a lot more vociferous criticism once the scheme rolls out across the country.
That is, however, if it is willing to take responsibility. With the process being undertaken by both the Valuation Office and local authorities, initial indications are that both parties have been quick to distance themselves from the worst effects of the legislation (a claim denied by Waterford City Manager Michael Walsh, interviewed on the following page). “When you meet the Valuation Office, they will tell you that they’re only doing their job and evaluating buildings. They set the valuation, and it’s the council that ultimately sets the rate,” says Tara Buckley of RGDATA, “but then you go to the council, and they say that as the Valuation Office set the multiplier, their hands are tied as to what rate they have to set. Unfortunately, in the middle is the entrepreneur, who is trying to keep their business afloat, trying to retain jobs, and then they’re being landed with an extraordinary rates increase.”
According to Buckley, the number of RGDATA members in affected areas who are facing huge rates increases from next year is far in excess of those who have seen declines. “We have some members that have seen their rates rise from €6,000 to €12,000, and others that have seen them rise from €70,000 to €130,000. In all of these cases, they have, of course, lodged an appeal. But the question needs to be asked: if the Government is committed to its Action Plan for Jobs, they must also be focused on retaining jobs in the retail sector. No individual retail business should have to face a bill from a government agency that has risen by more than 25% in one year.
“So many independent retailers over the past five to eight years have had to cut their business costs, some by up to a third. The county council needs to learn to cut their costs, so they’re not seeking the same amount of money from the businesses on the high street.”
Retail Ireland’s Stephen Lynam believes that the process reeks of an all-too-familiar situation: a lack of cohesive thinking by the Government. “Rather than look for some individual group to blame, it is instead a lack of joined-up thinking. The Department of Jobs, Enterprise and Innovation will talk about job creation and ‘do their bit’ to attract foreign direct investment, encourage indigenous enterprise, and so forth. And then you have another branch of Government doing what it believes is ‘right’ and ‘fair’, that ends up working against what the Department of Enterprise is trying to achieve.”
Local Property Tax
But wait! Wasn’t this all supposed to be addressed by the introduction of the Local Property Tax (LPT)? Back in March, the Government, seeking to alleviate fears that the LPT would be used to pay back the bondholders, announced that up to 80% of Local Property Tax within specific local authorities would be ring-fenced for use in that particular area, with the remaining 20% going into a central fund to be used by local authorities on a ‘needs basis’. Or, as one Dublin TD put it, “People might now be more in agreement to pay this, being happy that most of the money is spent locally on services they see every day.” Depending on the location, this will undoubtedly represent a core part of local government funding. In Waterford, for example, it is estimated that LPT returns will amount to approximately €2.5 million, around half the local government fund for the area.
When that is considered, along with the recent announcement that the number of local authorities is to be cut from 114 city and county councils to 31, with integrated areas called ‘municipal districts’, it beggars belief that such significant rates demands are now being placed on town-centre businesses.
So is it a question of greed? “I wouldn’t say it’s greed, just lack of courage on behalf of those involved in the reform process,” says Stephen Lynam. “There’s always a temptation to grease the wheels of reform by promising money unnecessarily. “IBEC has said there should be a reduction in the commercial rates bill overall, of €400 million. That’s not unachievable in the context of a property tax and the streamlining of local governments. And yet, now we have an incredible situation where businesses are being asked for more money.”
For the Valuation Office, the journey has only just commenced, with the revaluations process set to roll out nationwide in 2014 and 2015. Yet to ignore the detrimental impact the procedure has had on retail thus far would be a failing of the highest order for a Dáil looking to portray itself as pro-business. Unless a modicum of common sense can be applied at this stage, what is currently a regional issue could soon become a national epidemic, one that could not only result in widespread business closures, but also potentially bring down a government. n Information on the rates revaluation process, including how to lodge an appeal, can be found at www.valoff.ie