The Taxman Returns

Michael L. McCune Comments
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New Year’s resolutions are now comfortably behind us. They’ve not only been forgotten, but we have forgiven ourselves for not following through. Unfortunately, I am going to give you a resolution that must be kept. You must become proactive in reviewing and protesting your real estate tax assessment when it arrives.

Times have changed, and real estate taxes are becoming not only one of the largest expenses, but also one of the most volatile and subjective. Your diligence and effort in pursuing real estate tax adjustments can be rewarded not only by saving you money, but it may increase the value of your property. Let’s take a look at what is different about today’s tax environment.

The Need for Tax Revenues

First in importance, all of the local governments that rely on real estate taxes are essentially broke. The lack of funds from the federal government, the reductions of revenues from other taxes, and continued spending combine to put the pressure on real estate taxes. Most states don’t have the “Terminator” to solve their tax problems, so they raise taxes!

Political Bias

In some states, there is a legal bias in the way real estate taxes are levied between commercial and residential properties. In my own state, Colorado, the percentage of real estate taxes that can come from residential property taxes is limited to 45 percent. The result is, of course, that commercial taxes are going through the roof.

There’s no mystery here—politicians realize homeowners vote and businesses don’t! Even though states may not have actual laws to create a disproportionate legal framework that discriminates against commercial properties, there is certainly an “influence” that can be affected by vote-seeking politicians to protect the residential tax-payer. The result is usually to over evaluate commercial properties, especially the ones that don’t watch and protest their assessments. If the politicians understand this bias, so do their tax-administration employees!

Tax Appraisers

While recognizing the subtle political bias, tax appraisers are becoming more professional and well-informed. In the not-so-distant past, this was not generally the case (for reasons we all know). I was recently called by a taxing-authority appraiser in a small rural town about self-storage valuation; and the caller was very knowledgeable about the industry.

Not only are appraisers more knowledgeable, the procedures are vastly improved. Reassessments are regularly scheduled, comparable sales are updated, and the files are complete. All of this means your property’s value increases won’t be forgotten, new sales comps won’t be overlooked, and the facility will be regularly revalued.

The Self-Storage Experience

In years past, self-storage was not well understood, and most appraisers thought it was a transitional application—basically land with a temporary use. Because of the success of our industry and its newly acquired respectability, no one is naive about the profitability of self-storage. These days, when I meet people and tell them I am in this business, almost all of them say, “Those [facilities] are really cash cows.”

Prices have risen dramatically over the last few years. Cash flows have increased and cap rates have declined. Thus, real estate taxes have increased in a parallel fashion.

So What Can We Do?

Step 1: Look at your tax assessment critically. Just because it is the same as last year doesn’t mean it is right. Remember how thorough you were in last year’s evaluations!

Step 2: Create an estimate of what your property is worth. For guidance, refer to my past article titled “Do-It-Yourself Valuation,” Inside Self- Storage, July 2003. (This can be found at www.insideselfstorage.com and www.selfstorage.com/argus/articles.) The process outlined will provide only an estimate, but it will tell you if you are in the ballpark.

Step 3: Get information on comparable sales in your area. Compare those sales to your estimate of value and assessment. If the numbers don’t line up, you need to check with a local appraiser who specializes in tax protests. They often work on a contingency basis, meaning they get paid only if you win a reduction. Other appraisers work on an hourly basis. You need professional help in this protest because there is a language and set of rules with which you are unlikely to be familiar.

The Rewards

The only reasons to get involved in a tax review—and possibly a protest—are to get peace of mind or to save money and increase value. While the satisfaction you get from knowing you are fairly taxed is kind of a weak motivator, think how you would feel if you found out you had been overcharged for the last 10 years.

Perhaps a story will help illustrate how money can be saved. I recently reviewed a property for sale that was materially impacted by erroneous real estate tax assessments. I have changed the numbers somewhat to protect the owner’s privacy, but the relative magnitudes and relationships are in line with a real situation.

Three years ago, the property had a net operating income (NOI) of $150,000 and a value of $1.5 million. The property taxes were $18,000. The property taxes went up to $30,000, and the NOI went down to $65,000, with a resulting value of about $650,000. Assuming the value was right to begin, the tax rate was originally about 1.2 percent of the value and is now 5 percent. If the taxes were lowered to the previous percentage, not only would the owner save $12,000 a year, but the value of the property would increase $120,000.

This value of a property is important, not only when an owner is selling, but when refinancing is an option. Lenders just do not respond when an owner says his taxes are going to come down; the only number they believe is the assessment. Thus, by not getting control of the tax assessment, this owner would lose as much as $120,000 in a sale and $90,000 in a refinance.

Obviously, the stakes are high, and the deck is somewhat stacked against owners. The only thing you can do to protect yourself is be diligent in pursuing the correct information and protesting when you find a discrepancy.

Michael L. McCune has been actively involved in commercial real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In January 1994, he created the Argus Self Storage Real Estate Network, now the nation’s largest network of independent commercial real estate brokers dedicated to the buying and selling of self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.

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