underwriting Taxes
When underwriting taxes on a value add deal and given a T12, is it important to underwrite taxes properly and re-assess upon purchase and upon exit and calculate the yields accordingly or would it be okay if I grew the T12 bill at a standard rate. Having trouble figuring this part out and am complicating it too much.
Do you know what county the case property is in? If so I would pull the tax laws in that county for a property on a sale. You can always call the county and ask how it works. If they don’t specify any specifics like location in the case study than I would trend the T12 at 3% (industry standard)
I do know the county, yup. Thanks for the guidance! Would I basically do (purchase price plus Renovation costs) x assessed value percentage x tax rate to find my year 1 tax bill. Then grow from there throughout hold period. Then upon exit, would I reassess using the same methodology and forward 12 noi valuation?
All depends on the county. I have honestly spent sometimes 30 minutes+ trying to figure out the right approach to taxes. I will review appraisals (easier once you are employed and have access to internal appraisals), check with the county or if I am feeling lazy look at the approach used for recent internal deals in the market. You can get away by trending taxes by some percentage (3% or even 5% to be on the safer side) for refinances in most states or even acquisitions in some states but take TX for example. Depending on the county, you will have to underwrite 70-90%* PP* tax rate. It will obviously be a lot higher than previous taxes trended 3%. In CA for example, trending last year taxes by 3% is not going to work for an acqusition most likely. It will have to be 100%*PP*tax rate +special assessments.
Dude, the fact that you are thinking about all of this shows you are on top of it. I highly doubt you need to worry about being this granular for purposes of a case study. If it were me I would throw a footnote on taxes and say what you did (ie grew 3% or whatever) but highlight the true reassessment would be state/county specific and depend on guidance from tax counsel.
just out of curiosity, what state/county is it? Might be able to help you out.
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Can I pm you with a couple additional questions if you don’t mind? OP here.
This is very helpful. To clarify, it would be times purchase price, not purchase price + Reno costs?
I mean whether it's PP or PP+ reno costs, what you really are getting at is estimating assessed value after a reassessment. That's a shot in the dark many times but I have often just seen 70-90% of PP in TX.
Generally it's just PP, because the assessor's office is going on the documents that get registered with the municipality at sale. There isn't a great way of checking in on what the new owner spends to upgrade the property - it's also a bit of a disincentive, since you want owners to maintain their assets well and taxing them on improvements (by which I mean, repairs, not something which meaningfully changes the use profile like a new building on empty land) doesn't really lend itself to that
For a case study, I think just figuring out if there is a reassessment at sale in the county and acknowledging it when you present should suffice (if you want to go above and beyond, then by all means recalculate).
In real underwriting, 100% you need to consider this if it applies in the county the asset is in (reassessment methodology varies between counties, in some places you may see no change in assessment at all on sale). If there is a reassessment triggered by sale, you need to consider the implications both to your going-in NOI, and to the future buyers going-in NOI for your sale assumption (i.e. you should be capping the adjusted NOI the buyer would expect and not your forecasted NOI before a sale).
Example from Palm Beach, FL multifamily asset with $40M repositioning.
(1) For the Assessed/Market Value, increase this by Renovation Costs x 90% and then grow by 5%.
(2) For the Tax Rate, grow this 0.50%.
This gives you the Ad Valorem Amount.
(3) For the Non Ad Valorem, straight-line thru the end of the hold.
Ad Valorem plus Non Ad Valorem gives you the Base Tax Amount and then multiply by (1 - 4%) to account for early pay discount.
Website below is slowly being built out and updated:
proptxs.com
Current data is geared towards MF. Doesn't have most counties at the moment, but might help with a county you might be looking at. Info sourced primarily from assessors, but also from some appraisers.
Is everybody here just looking at old deals to see how to underwrite taxes based on acq/refi? Is there a website/prop tech solution where you input the address and we can see what the tax methodology is in every state- how taxes are currently calculated, the latest tax bill, what will happen if the asset is sold vs refi, etc. There has to be a better way than manually going through appraisals and old sizers.
Assessors aren’t going to know renovation costs. For UW purposes and how much you want to get into the weeds it depends on where you are in the process. If a desktop UW in a market/municipality you know (that’s in a state that reassesses post-purchase) you’re probably going to have a good idea of post purchase reassessment value as a % of PP and UW the top end of that and inflate outer year assessed values accordingly depending on the states assessment cycles coupled with mill rate growth. If it’s a deal with legs, typically you hire a property tax consultant to project out supported best, most likely, and worst case scenarios and incorporate. As far as tax adjusting exit event, it looks great on a page, but really means nothing if your revenue and controllable expense assumptions to get there are BS.
None of this matters unless you are awarded the deal. I agree with the general consensus here that you should do some brief research on the counties tax assessment methodology, but simply reassessing at the purchase price should be conservative enough for an initial underwriting. If the deal gets traction and you are invited for additional round of bids it might warrant a phone call with the county or even tax consultant, but on a value-add deal I wouldn't suggest getting hung up on the taxes on the initial underwriting, aside from assuming there will be some reassessment. I would focus more on underwriting the value-add execution accurately instead.
Exactly. Lol to take a step further am increasingly just inflating in place taxes for deals on the market that traded in the last 3-4 years due to assessed value being at or even above the value I’m UW to. If there’s a need to tax adjust an exit event for those on a 4-6 year hold, likely being way too aggressive with growth and/or exit cap assumptions. Regardless, RE tax exposure is “non controllable” but able to be sensitized and priced in so that a potential business plans numbers still make sense in a downside scenario
What level of diligence do you suggest for all other opex items? Tax bills are one of the few places you can get some certainty - I'd think doing more diligence there is the way to go, simply because the means by which to divine what your cost will be, is in the public sphere. Especially seeing as taxes are usually one of, if not the biggest, expenses on your income statement.
"brief research on the counties tax assessment methodology". Even a brief research takes time if we want to be accurate. If you sit in New York and are acquiring deals in the pacific north west, southwest and southeast, you can have markets with an increase in taxes capped at 3%, 5% or 10%, some based on 100% of PP or 60-80%* PP but some are are also based on 60-90% of PP * 40%* (example: GA assessment ratio) tax rate. When some counties make it hard to even locate the current tax bill, you can imagine the time it takes to figure out the tax methodology to use for an acquisition vs refinance vs a recently built asset. Have to go through old appraisals or see how it was previously underwritten if we acquired a deal in that market. I find that the whole process can take a while, do you have any tips and tricks or a cheat sheet you have developed on different methodologies for each market that you can share?
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