Development costs to Assessed Values
Anyone have a halfway decent rule of thumb to estimate assessed values from development costs?
A few projects I've worked on the assessed values have come in all over the map -- as low as 50 to as high as 80%. Trying to get a sense of what's "reasonable" and "typical" as I'm working on a project that would see us potentially develop in a new market.
Figured I would jump in since you’ve gotten limited responses, I did valuation for three years before moving to acquisitions so I’ve experienced this challenge/frustration multiple times.
Would you mind getting a little more specific on what you are using this assessed value for? This will help shape what answer or assumption you use.
For example, if you are using it for underwriting purposes to determine the Real Estate Taxes to utilize in your NOI projection for an acquisition I would advise you to stick more on the conservative end of the spectrum and assume the assessor will value your property close to market value as you want to build that margin of safety into your land acquisition price.
It really depends on your local municipality and state for how assessed values are determined. In California, assessed values don’t change until a property changes ownership while Connecticut re-assesses every five years to give you a spectrum. Assessors in all areas will utilize the Sales Approach (comparing recently sold buildings to yours) to determine value and some will even utilize the Income Approach. Often the country/city are incentivized to maximize assessed value as the tax rate is often flat so higher property values = more taxes.
Thanks.
To some degree, yes -- looking at this from either an acquisition perspective or a development perspective (greenfield development) to get a sense of taxes payable once the asset is up and running.
Ultimately looking at this from the OpCo side of things and how a NNN lease would affect earnings and expenses there -- with the key assumption that once developed, we'd likely look to sell off the real estate assets to a REIT/other investor to provide some liquidity to our initial investors in the OpCo (where PropCo is really just a side project to get the main business up and running). To give you some perspective, the taxes I baked in to the analysis somewhat jumped off the page -- but this is a group not accustomed to developing things itself (which is why I'm here...!)
I'm trying to keep things conservative by assuming development costs will ultimately mirror assessed value, but my boss wants more of a refined approach...
and ultimately looking at New England locations -- from Maine to Greenwich, CT and just about everything in between (at some point we'll hit New York, but will likely come down the Taconic for that instead of I-95...)
Got a little lost in your first explanation differenciating your perspective on what I believe is operating versus property management companies.
That being said, if you are underwriting and want a more refined but conservative approach we typically focus on marking the costs which are “known” by the city 100% at market value then take a high level “guess” of what percentage the city will “capture”.
For example, in most municipalities the entity in charge of taxes will certainly know the acquisition price as well as have a good idea of hard costs so count those both at 100%. Now when it comes to consultant, marketing and financing costs they won’t really have a good gauge but to be conservative estimate their taxable value anywhere from 70-80% of their true cost.
Again, this is more of an art than a science so mess with the assumptions above and develop a reasonable range then choose appropriately.
RET are unfortunately not a "general rule of thumb" line item, as you know since every municipality is different. For instance, some places have a % cap on the asset value appreciation, some reassess every 5 years, etc. All of these needs to be taken into consideration when modeling, as RET are usually a big % of your gross expense ratio/yield on cost/etc. However, during the development period, I'll usually just use 100% of the cost basis. In reality, yes there are assessed value %'s, and during construction it is even harder as there is no revenue or income...thus it usually is just left at tangible value (i.e. hard cost). However, a lot of municipalities are now applying some grossed up % of soft costs in addition to hard costs, as it's obviously inaccurate to assume a developing building is just hard costs and no soft. Now, what % of these soft costs can be argued to have ongoing value is another story.
So simply...if you're looking at taxes during the development period, I would apply 100% of the cost basis at that time just to be conservative - it should never be lower than the total hard costs spent to date on the project. Once it's completed and leased up, as mentioned you can't go wrong with 90%+ of "market value". But as mentioned above - it's worth spending more time and making sure it's accurate.
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