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A state administrative rule reclassifying warehouses and distribution facilities from commercial structures to manufacturing buildings has created unintended – and unwanted – consequences, according to some local real estate professionals.

The Oregon Department of Revenue in 2008 made the switch as part of an overhaul of its property classification system – one it uses to assess property taxes, according to Mark Kinslow, department manager of assessment and taxation. The goal was to establish consistency for property tax billings, which each county set at its own discretion.

But real estate professionals say that by finding a solution to one problem, the state unintentionally created another.

“In the interest of creating consistency between counties, the state has created inconsistencies between new buildings and old buildings,” said Chris Robinson, a Portland property tax lawyer.

Manufacturing facilities tend to come with higher property taxes, in part because they usually contain a large amount of equipment and have short life spans because of wear and tear.

But warehouses and distribution facilities tend to have less equipment and have longer life spans, in effect functioning more like commercial buildings. And like commercial buildings, warehouses and distribution facilities are usually owned by developers and then leased out to tenants. Manufacturing facilities, on the other hand, are usually owned by the company that occupies them.

“We look at it by clarifying the intentions of the owner,” said Mark Clemons, an associate principal with Group Mackenzie and a director with the Oregon chapter of NAIOP, the commercial real estate industry group calling for a change to the system. “In a manufacturing facility, like the ones owned by Boeing for example, Boeing uses it to manufacture and produce a product.

“(For) a warehouse, a developer or investor owns the building and uses the rent from a company occupying it to produce an income.”

Clemons noted that this issue didn’t start to arise until recent months because few new warehouses have been constructed since the rule became effective. But with the economy starting to turn around, developers and business owners are taking notice, he said.

“While this obviously stalls any speculative development from developers because it makes new projects even harder to pencil out than they already are, it’s also having negative effects on businesses,” Clemons said. “Considering these buildings usually are leased using triple-net leases, the property tax most always gets passed along to the business that occupies the space.”

Moreover, distribution facilities and warehouses built before 2008 are pulled into the new classification system when a building permit is pulled on the property for work more than $10,000 or when multiple permits are pulled for work totaling more than $25,000. Consequently, Robinson said, building owners are choosing not to perform major renovations so they can avoid the new classification system and increased property taxes.

Robinson and Clemons brought their concerns to Bruce Tindall, a technical analyst with the Department of Revenue. Tindall acknowledged that the rule change created inequitable treatment between similar properties, but the department isn’t required by law to offer equitable treatment. The department is required to follow the rule, so it decided not to investigate it any further.

Clemons, however, said he had also spoken with several regional leaders who were unaware of the rule changes. He is now working with state lawmakers to develop either reclassification of warehouse and distribution facilities, or a new classification.

“It really could be its own subsection, but we will let the Legislature decide that,” he said. “While we have been primarily focused on getting this changed another way, we will look into legal action if all else fails.

“We aren’t trying to get out of paying taxes. It’s just that with the recovery of the industry as slow as it already is, a rule like this, if not changed, could put a complete stop to it.”