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.
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.
As others have said, it heavily depends on the location but generally we see two approaches:
1) Take projected gross revenue, apply expense ratio (~40%) to estimate NOI, cap this and use a percentage of estimated stabilized value for the new assessed value. Take this value and multiply by current mileage rate and add in any additional assessments. More conservative groups will increase the mill rate 3% annually. We typically see anywhere from 80% - 100% of estimated stabilized value depending on location.
2) Take total development costs, including land, and multiply by a percentage to arrive at estimated assessed value. Similar to the methodology you mention above, but have never seen anyone exclude soft costs when estimating this. May just be the vocabulary you used above. If excluded soft costs, estimated assessed value would be ~25% too low in my market
Both of these approaches are typically supported with comps in the market as you describe.
Estimating taxes is by no means a perfect science but one of these methodologies will get you in the ballpark. A quick prayer to the tax gods never hurts either.