Calculating First Year Property Taxes on New Apartment Construction
Curious how you all go about estimating property taxes for first year of stabilization. I work for a merchant developer that underwrites selling based on first year stabilized NOI and I am continuing to have a hard time getting a super accurate taxes per unit number to underwrite in my model for this first year. What I have been doing is looking at newly constructed deals that say deliver in 2017 and looking at what their taxes were per unit in 2018. I've also used my hard costs and land costs while applying the current mileage rate to get an idea of what taxes should be. I need some clarification on what others are doing, because I haven't gotten great direction from those in the office and my way of doing so now is often revealing great variability as I bounce from building to building even in similar locations.
This number will vary greatly by state. Look at comparable property appraisals for how they assessed year 1 taxes or call a county assessor for their methodology.
When modeling taxes you always want to model what they buyers taxes will be, not the sellers. The buyer only cares what their taxes will be when pricing the deal. This applies especially in CA where taxes are based on purchase price and can jump greatly from the current assessment due to prop 13. You can add value at your company by suggesting this approach as it is most accurate.
I've always thought that a great way around this is for the seller to provide financing, like a 3-year loan at 20% or something that will keep the taxes low for the buyer but net them more money in total dollar value in proceeds.
The income would be treated as interest income and taxed more heavily for the seller and wouldn't be allowed for 1031 exchange purposes. For this reason the buyer would have to pay more than the market price to offset the higher taxes for the seller. The increased amount would likely not be enough to offset the tax savings since they would only capture the savings until they sold it and wouldn't be applied to the terminal value when they sell again.
The Seller would still be responsible for depreciation recapture and capital gains tax, if applicable, at the end of the tax year.
Honestly depends on the city.
As an example, using Hard Costs and Land Costs and millage rate is how you get to taxes in Philly. But NYC will use more income approach.
You can't really look at taxes per unit across the country. Maybe it's a good metric in a particular city across buildings.
Just know that whatever number you put in there, the buyer is going to pay Ryan for a bullshit 95%-100% assessment number and act like it's gospel.
LMAO this is so true
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