How hard is it to determine the value of your own self-storage asset? What about someone else’s facility you’ve never visited or seen from the inside? Well, each year, county appraisers are assigned the difficult task of determining the value of every property within a municipality. Then the owners are assessed a property tax based on what the appraiser believes your site is worth.
Real estate tax payments are among the biggest areas of exposure for commercial-property owners, and they significantly impact the bottom line. Most self-storage owners pay their property taxes thinking they have no choice but to forfeit the amount assessed. However, due to the relative newness and uniqueness of our industry, you should fight to reduce your valuation. Here’s why.
To determine a value for a recently purchased property, the county appraiser may rely solely on the purchase price recorded in the public record. This is improper. In self-storage, that price generally reflects more than just the value of the building, including intangibles like the ongoing cash flow.
Intangibles are an integral part of a self-storage acquisition and have always been difficult for appraisers to account for within their analyses. Buyers can reduce their tax bill by structuring their acquisition in ways that limit their liability.
That said, the time to act isn’t when you receive your tax bill; it’s long before you ever see the appraiser’s notice. Since taxes are often paid through mortgage escrow accounts, many owners don’t realize the amount they’re actually paying.
In most jurisdictions, intangible assets aren’t taxable—at least not as part of the real estate assessment. The International Association of Assessing Officers instructs appraisers to ensure their real estate assessments are free of any intangibles. Assessors assume their presence, but must ensure they’re excluded from the assessed value. If a business-enterprise component, such as an assembled workforce, working capital, licensing rights, signage, parking-space rental, pylon signs, packaging material, etc., are included, they should be extracted and not taxed.
Self-storage facilities are typically purchased as a business rather than only real estate. Though it’s part of purchase price, there shouldn’t be any ad-valorem tax assessed toward items like furniture, fixtures and equipment, commonly referred to as FF&E. Other items to be excluded from the assessment are:
- The value of intangible assets owned by others, such as a franchisor or third-party management company
- The extra income generated from vehicle storage, moving and packing supplies, truck rentals and similar ancillary profit centers
If intangible assets are necessary to the beneficial and productive use of the taxable property, the appraiser isn’t the one who should make the ultimate decision on their value. Instead, the value should be determined by a special magistrate during your requested hearing to lower your tax assessment. The appraiser’s job is to collect taxes using the mass-appraisal method. If you never question the appraisal assigned to your property, your local government will be happy to take your money.
Appealing an Assessment
If you wish to appeal your tax assessment, you can request an informal meeting or hearing with your local authority. This can usually result in a determination as to whether any intangible assets were improperly included in your valuation.
Intangibles complicate the estimate of value. Assessors generally prefer not to use a cost approach because it reflects only the value of real property and not the going concern. However, in situations where intangibles should be excluded, it can be an effective method to lower your property-tax assessment. A breakdown related to land and improvements is usually easy to obtain by estimating construction costs, using actual costs or using data provided by cost services.
When challenging an assessment, always attempt to inflate the value of your brand, especially if you have more than one facility under the same name. Though a well-recognized brand can sometimes lead to a premium, it’s a real estate intangible that should be isolated from the purchase price. By inflating its value, you can consequently reduce the value of your real property. Creativity can bring significant assessment reductions, but success depends on your efforts.
Opinion of Value
Be aware that there’s a disconnect between how buyers and sellers perceive the value of intangible assets, how accountants report them, and how assessors, taxpayers and property-tax professionals measure them. Often, the methods used by accountants and other financial professionals are different and may not be appropriate for property-tax assessments.
Keep in mind, too, that when you submit an appeal, you’re not directly challenging your tax bill. Instead, you’re appealing the assessor’s “opinion of the value.” If it includes components that aren’t considered taxable real estate items, this can indirectly lower your tax bill and enable a refund for previously overpaid taxes.
Brian Sharpe is past president of Miami Commercial/Miami Realtors Association in South Florida. He’s a building contractor and a principal at REtag (Real Estate Tax Appeal Group), which owns a portfolio of industrial and commercial real estate assets, and provides construction, property-management, lease-negotiation and tax-appeal services. To reach him, call 305.693.3500; e-mail firstname.lastname@example.org; visit www.sharpeproperties.com.