Multifamily has been on a meteoric run and property taxes are expanding like our government debt. What are you guys seeing as potential mitigants to large reassessments on change of ownership?
We run a multifamily investment shop and the tax reassessments have prevented a ton of deals due to us earning our way back to break even with little NOI growth thereafter (excluding market rent growth)
Buying the entity
Agreed but you have to be careful stepping into a guaranty or something
I've always seen tax reassessments priced into NOI at some point during the deal, whether it be addressed in the initial offer or during negotiations.
Same, however the LLC purchase tactic hasnt been extremely effective for us. Either sellers not wanting to structure the acquisition like that or appraisers piercing through and being able to collect info needed for reassessment.
You really need to be more specific about your geography. In Illinois you will get crushed and not just in the year you buy - they have terrible terrible budget problems in that state. NJ is the same. In Seattle we have been seeing millage rates go down because values have been growing exponentially. In OH you get smacked 100% of purchase price unless you can somehow hide the purchase price. I could go on like this....
Buying the entity or making everyone sign a confidentiality agreement has not worked for us and we are going to get fucked real hard on some deals because of this. We simply assume a bad reassessment in our numbers and price the asset to where we see value given the reassessment etc.
True. We've been getting cracked on taxes in Texas and are compressing undetwritten unlevered yields by 60-75bps.
I think it would be interesting to see reassessment trends in taxes from state to state. I honestly believe many bids are getting awarded to sponsors underestimating property tax increases and partnering with unscrupulous HNWs (I.e. loose underwriting + dumb money).
Good post and interesting info.
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