By Jeffrey B. Turnbull
The last several years have been tough for the self-storage industry. Rents are down, vacancies and operating expenses are up, and our net operating income (NOI) has suffered as a result. The quickest way to improve your bottom line, and your facility’s value and bankability, is by cutting expenses.
One of the largest expense items for most owners is the annual property-tax bill. The dilemma is that by lowering your property-tax valuation, and hence your tax bill, the true value of your facility actually increases.
Local property-tax assessors have duly noted the success of our industry as a business model. Our property-tax valuations and expenses have been consistently rising over the years. As owners, we have traditionally been reluctant to contest these rising values. Maybe we thought a higher property-tax value would enable us to sell our facility at an elevated price or finance a greater amount at better terms.
For whatever reason, many owners have left this major expense item untouched. But you can—and should—look at challenging your property-tax valuation so you can reduce your property-tax bill and raise your overall profit.
Potential Annual Tax Savings
Let’s look at a quick example. Say in 2008 you owned a self-storage property producing an NOI of $280,000, with a 2008 tax value of $3.5 million (based in part on a cap rate of 8 percent). With the local property-tax rate of $.01, your property-tax bill will be $35,000 annually.
Now let’s say your rental income has dropped by 15 percent over the past several years and expenses have been flat. Your NOI for 2011 is $238,000. Cap rates have moved up to 9 percent for properties similar to yours. Can you demonstrate that your self-storage facility should have a value closer to $2,644,000 for a 2012 revaluation? You now have a strong argument for it. Your new tax bill should drop to $26,440 (other things being equal), saving you $8,560 annually.
The accompany chart demonstrates the potential tax savings. In reality, the local tax assessor may choose not to reduce the bill, even though cap rates increased and NOI decreased. The self-storage owner needs to point out the proper cap rate and the decrease in NOI to get the new "proper" value.