Op-ed by Søren Stensdal, CEO Stensdal Group

I would like to start by emphasizing that I understand and recognize the importance of a reasonable ongoing taxation of real estate. So that is not the discussion here.

But we would expect all taxation to be done on a fair, transparent and uniform basis. This means, among other things, that you have a real opportunity to test the valuation of the property.

For residential properties and land, there are significant inadequacies associated with the valuation method. However, in this case, an attempt has been made to establish a market value of the entire property and land. This means that as the owner of a residential property, you can appeal the assessment if it deviates more than 20% from a documented market value.

And that underlines the whole problem, because that's not the case when it comes to commercial real estate.

All data is available - it's just not used

Property value

First and foremost, they have completely given up on assessing the value of commercial real estate - and I simply do not understand this. Because unlike owner-occupied housing, commercial real estate has a much more direct, mathematical relationship between the area of the building, the distribution and use of the areas, the rental value of land for a given use in the area and the required return in that area. And to compensate for the condition of the property and the variation it can give to rental value and required return, the age of the building is a good benchmark. So it's relatively easy to calculate the value of the property with a relatively high degree of certainty if you have access to this data.

And you have! All basic data is known in BBR, and there is excellent data on both rental values and yield requirements in the individual areas - they are continuously determined by the country's leading commercial real estate agents.

Et voila - the property value of a commercial property can be put into a formula and will hit the real market value with a fair degree of certainty. Exactly the way it has been done so far. Were there times when property valuations weren't correct? Yes, there were. But the owner could then have them reviewed.

Land value and land tax

In addition, they have given up on independently valuing land used for commercial purposes. What they do is make an extremely theoretical calculation of the possible building right and the area they arrive at, and then multiply it by the value that the building right would have as a home. To compensate for the fact that you (after all) recognize that commercial building rights do not have the same value as residential building rights, you reduce the value of the building right by a third if it is used as an office and half if it is used as industry, storage, etc.

The problem here is that a self-invented "rule of thumb" is used, based on the assumption that there is a relatively direct correlation between the value of residential and commercial building rights in a given area. But there isn't.

If you as a property owner are dissatisfied with the assessment, it is virtually impossible to appeal your land valuation. The method means that the land value has no correlation with the real market value, which means there is no possibility to have it tested. This is a significant problem for legal certainty.

Again, in my honest opinion, this is trying to solve a problem that doesn't really exist. As described above, it is actually relatively simple to calculate the value of a commercial property. The value of the building right can be calculated quite accurately as the value of a newly built commercial property that utilizes the property's planning basis to the maximum, minus the cost that will be associated with the construction of the building in question. The value of the building right is the difference between these.

Even worse with the coverage tax

The lack of property assessments is particularly problematic for commercial properties in areas where land tax is paid in addition to land tax.

Land tax is - or was - a tax you pay on the value of the building. By definition, it's the total value of the property minus the land value. So far, so good.

But since there is no property value for commercial real estate, there is no way to calculate the value of the building. So from now on, the coverage tax will be calculated on the land value. In other words, the land value, which is calculated in such a theoretical and preconceived way that it obviously does not reflect the real value.

From a starting point of paying a tax on the building value, the coverage tax is now in practice calculated on the (theoretically) most economically advantageous use, regardless of what the actual use is. A far cry from the original intention - to tax the existing building.

The economic consequences

The financial consequences for the users of these properties are significant. Together with two other large landlords of commercial properties in Greater Copenhagen, we at Stensdal Group have analyzed what the tax consequences of all this will be when the new property taxes are fully implemented. Across our portfolios, which together amount to approximately 1 million m2 and are a representative sample of commercial properties in Greater Copenhagen, the annual tax increase is in the order of DKK 50 per m2 - with very large and very random fluctuations from property to property.

An average rental value, including operating costs, for renovated offices in these areas is probably in the region of DKK 950/m2. The tax increase thus increases the rental cost by more than 5%. The tenants in our three companies' properties alone will be hit by property tax increases of more than DKK 50 million per year!

It hits business and inflation

The question is, who does this high cost affect? I would venture to say that our commercial real estate predominantly houses the country's small and medium-sized businesses - often described as the backbone of the Danish business community. And they are the ones who will be hit by the cost. A cost they won't just absorb, of course. They probably have no choice but to raise their prices. This is a direct hit to Danish competitiveness, and at the same time, it is likely to fuel the inflation that needs to be reduced.

So it has significant economic implications. Implications that I am quite sure that the politicians who helped pass the legislation in no way intended.

Almost even worse is the arbitrariness in the implementation of the rules and the fact that you cannot actually have your assessments reviewed. This constitutes a very significant problem in terms of legal certainty and contributes to undermining the trust in public authorities that is so important for the cohesion of our society. To me, it is a blatant breach of what you could call the social contract, where citizens and businesses can trust that they pay taxes on a uniform and transparent basis. And if you believe that it has been calculated incorrectly, there is two-way communication and the opportunity to have it tested.

And as I outline above, it would actually be relatively simple to reintroduce property valuations based on approximate market values.

I am fully aware that the political "appetite" to deal with this is not very big. But make no mistake, this IS a major scandal and a creepy indifference shown towards the companies that are hit hard by this.

I can only urge all politicians to take their responsibility seriously and help change this 'oops' legislation. It may seem overwhelming, but the consequences of inaction are far more far-reaching.