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 facilitys 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 canand shouldlook at challenging your property-tax valuation so you can reduce your property-tax bill and raise your overall profit.
Potential Annual Tax Savings
Lets 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 lets 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.
Challenging the Assessors Valuation
You can contest the value of your property yourself, or hire an independent third party to act on your behalf. Many attorneys and commercial-property appraisers will handle an appeal for a reasonable fee. There isnt a nationwide standard for property-tax value assessment, although a property is typically reassessed every four years.
As a self-storage owner, you may contest these values during the time of reassessment, or sometimes on an annual basis. The local property-tax authority, also known as the board of appeals or board of review, will provide you with guidelines on when you may contest or challenge a value, and what items will be allowed for an appeal of value.
Some jurisdictions allow for a two-step informal appeal, then a more detailed quaisi-judicial process a bit later. You just have to ask the local property-tax authority for the rules and follow them. Make sure you abide by the timelines; and, of course, all written information sent to the board of appeals should be Certified Mail with a return receipt requested.
Consider appealing the valuation of any property if you have a reasonable belief the assessors value is wrong (i.e., the wrong building square footage, which is a mistake of fact), or the value seems excessive (subjective determination as to market value). When you receive your property valuation, check it carefully. Does the assessors office have the right information regarding facility size and zoning? If not, immediately contact the assessors office to contest the value based on these inaccuracies. They may have the wrong square footage or overall acreage, which could result in a lower valuation and tax bill.
Many jurisdictions use a market value approach on a certain date, say Jan. 1, of a specified year. Is the value accurate? If youre not sure, simply ask a competent real estate broker who handles commercial property in your area if the value seems correct. The assessor may have the wrong number or type of units. An up-to-date unit listing and rent roll would clear up these errors.
Tax assessors arbitrarily make cap-rate, income and expense assumptions to streamline their process of valuation. Many times, these subjective assumptions lead to unrealistic and inaccurate values. For example, if there are three 100-unit facilities in your market at 85 percent occupancy, a local tax assessor may determine the value of your 700-unit facility at 85 percent as well. They may use a $.75 per-square-foot operating-expense figure (unreasonably low), because one facility in the area reported that number. An organized presentation of the actual monthly income statements for the tax year from you or your accountant would help your case for a lower valuation.
The assessor also may be using a cap rate incorrectly. They may apply a 6 percent cap rate because a commercial building down the street sold at that rate. Finally, you may have a direct sales comparison for your self-storage facility, which would support your case for a lower value. The bottom line in dealing with the local property-tax assessor is to provide ample evidence supporting your valuation through clear and concise facts.
Review Your Tax Bill
Its worth your time and effort to review your property-tax bill for any factual errors or obvious over-valuation issues. Review and understand the rules for challenging the new value. Use a clear and organized approach to any appeal, follow the rules and time deadlines, and rely on the facts of your case to support your assertion of value.
You can always get a professional to deal with any tax protest or appeal if necessary. A reduction in your self-storage value for property-tax purposes will lower your property-tax bill (other things being equal), and can make your facility actually more valuable over time.
Jeffrey B. Turnbull is president of Kodiak Mini Storage LLC. Hes been involved in the self-storage business as a developer, owner and operator for more than 17 years, and currently owns two facilities in the Charlotte, N.C., market. Hes also a licensed attorney in North Carolina, a licensed real estate broker in North Carolina and South Carolina, and a past president of the North Carolina Self-Storage Association. He can be reached at [email protected] .