I am curious how you guys think about property tax underwriting, specifically through revaluation periods.
My group has encouraged underwriting what is essentially the worst case scenario for tax revaluation periods in our markets... assuming assessors take 80%-95% of the transaction price and holding the mill rate flat for the revaluation year. While this might not have a huge effect on newer builds that have traded hands a few times, it absolutely kills any deal where the owner has held the property for a while, simply because the assessor is so far behind in their appraisal. What's more is that these deals aren't pricing in the inherent tax risk for the buyer. Of course we can always appeal after the fact but there's no guarantee of a reduced tax bill.
How are you guys dealing with this challenge, specifically on older vintage product that have not traded within the last revaluation period?
If it's a development deal, Lenders will typically underwrite the tax that the appraiser puts into the appraisal/feasibility study which is an estimate of the current tax rate multiplied by ~70-95% of the Hard Costs and Land Value. In a refinance, we see Lenders typically underwrite pro formas where the property tax is calculated as the current tax rate multiplied by the loan amount (as that would become the Lender's basis in the property if they have to foreclose).
Just curious, what market are you in that handles it this way?
There's no universal answer...in my mind. It depends on the market.
Some jurisdictions will physically appraise properties each year...others will do it every several years. Some states limit the amount a property can increase in taxable value in a given year...others do not. Some times the current owner may be grandfathered in with a lower rate and the property tax valuation will reset with a sale...and some times it does not.
You need to pull several tax comps in a given market to understand how the local appraiser generally conducts their valuations. For your situation...look at recent transactions (using Real Page data or another source) to see how the appraiser reacted to those valuations post-sale.
That’s helpful. I’ve actually pulled recent sales and calculated fmv as a percent of the actual sales price. On this particular deal that I am looking at, the assessor has chased up to 97% of recent comps sales prices during the last reval. That type of revaluation approach on this deal would result in a more than doubling of the property tax which is a non starter. My issue is the brokers are only modeling one year of income and expenses and slapping a cap on that and therefore not factoring in the consequence of this valuation on future cash flows. I am left wondering if there are buyers out there who ignore revaluation consequences and underwrite say 2.5% tax growth in perpetuity?
I've put together a lot of real estate tax estimates, and it really boils down to a market by market approach. I would suggest calling the assessor for each property's market and having a discussion with them about how they reassess properties. That being said, I would not mention the specific property, as that can cause them to dig into it and raise the taxes on it.
If you get a copy of a Ryan, LLC tax report (or similar tax report) you can often reverse-engineer the process in that report after a conversation with the market's assessor. Taking that approach is typically good enough for initial underwriting. I would recommend having a tax study done during due diligence on any deal.
Do people include the value of significant tenant improvements for re positioning office buildings?
Can only speak for my shop, but when we have RE tax numbers that are hard to estimate, we'll usually hire/have the sponsor hire a tax expert to opine. Even then it's a bit of a guess but its a pretty specialized field and it isn't something that most "deal guys" have a lot of experience in, especially because the process varies SO wildly from market to market.
My two most recent deal closings were in NY and AZ. In Maricopa county, the local govt literally puts the tax numbers online, there is no transfer related tax assessment and if you call the tax assessor's office and aren't a douchebag, they'll basically tell you what they're thinking and barring something unforeseen what kind of increases to expect. In NY....the sponsor hired a pricey fucking attorney to tell us what numbers to plug.
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