What are some techniques in decreasing property taxes when the economy is doing great and values are going up, and when the economy is in a downturn and values are going down? How often should you request a reassessment? How to approach properties in multiple states? Nicholas Mau, Partner at FirstPointe Advisors, shares his knowledge.
Tell us a little bit about you.
I am a partner with FirstPointe advisors, we are a full-service real estate tax consulting firm based in Fort Lauderdale, Florida. We handle real estate tax appeals primarily across the state of Florida but we assist in property tax appeals across the country. I've been in the real estate tax consulting world for 16 years, I started my career with a big four accounting firm working in their real estate tax consulting department and have made my way through multiple different acquisitions and then ultimately joined my managing partner, Brian De Potter at First Pointe Advisors in 2016 and we have been growing our firm at a rapid pace ever since.
We are currently in a recession and there are two distinct differences of appealing taxes: when the economy is doing great, and they want to come after you and get more money for your properties; and also, when the economy is starting to go down and property prices actually decrease. Let's start with some techniques for decreasing taxes when the economy is doing great.
Looking at a property in a good economic time, you must take into consideration all of the different factors that you have for that property, the income producing potential of the property, what's the end place income, and comparing that to what the overall market looks like, what is the market occupancy, market rental rates, market cap rates and things of that nature. Diving more specifically into the nuances of the property is really going to be where you're going to find opportunities when it comes to properties in an up market.
The property appraiser is going to have a little bit more of the shoe on their foot when it comes to valuations in an up market. The sales are going to be supportive of higher values, the incomes are going to be supportive of higher values so this is where it really is a lot more imperative to be diligent in the review of the individual property to ensure that you're taking into consideration all of the nuances. You should look into what are some of the challenges that this individual property may have, are there little things that are not evident to the property appraiser or to the appraisal district from their mass appraisal perspective because they are required to value all the property within their jurisdiction so they're looking at the overall market factors. Market cap rate might be 4% for an industrial property, but is that necessarily the correct cap rate for the property that you have, which might have an additional risk factor associated with it, where there's near term leases that are coming due or there might be some different occupancy challenges that they may not know.
Getting into the nuances in an up market is where you're really going to find opportunities for potential savings in a property tax appeal. I am not saying that it's not important in a down market, it is equally as important in a down market, but it's much more pertinent for a successful appeal in a market that is on the upward trend.
What about in a down market, what should they do to have the value decreased?
In an up market, the values are typically a lot quicker to be raised, whereas there's hesitation in the community to lower values when the market tends to turn downward. It's definitely important to make sure that the appropriate factors are being considered: making sure that the right rental rates are being used; if rental rates have decreased, ensuring that the appropriate market rental rates are being applied; if it is indeed a fee simple market valuation scenario, making sure that the appropriate vacancy and collection losses are being considered and that any nuances with the property in terms of near term lease expirations are being considered, or credit defaults.
A lot of office properties right now are struggling where tenants are vacating in today's marketplace offices, especially some suburban offices are struggling with tenants that are vacating because they don't need as much space. Property appraisers and appraisal districts don't necessarily know these things are occurring until it's brought to their attention, so it's important to make sure that that type of information is being put forth to them and being provided to them.
One thing that we are seeing in this market is sales velocity has slowed dramatically across a lot of property types in the commercial real estate world. And one thing that is a challenge with that is data. Having good data becomes a challenge. When you have a lot of sales and you have brokers that are selling deals at 3.5, 4.5 cap rates, everybody's willing to sling out their cap rate when cap rates like that transact. But one thing that we're seeing in today's marketplace is when properties do transact, the brokers and the property owners, the people that are selling those deals are a lot more tight-lipped on what is the cap rate that properties traded for because a lot of people are taking haircuts on these deals or are not getting the same valuation they once thought they could, so they're not releasing that information as much.
Data has become a lot more difficult, and one thing that you can do is to rely upon building cap rates through the weighted average cost of capital, or an equity dividend rate, or looking at the debt service coverage ratios and different things like that to try to come up with an accurate estimate and support for the positions that you're taking in your property tax appeal.
In some states like Texas, they cannot look at the sales price of a property, do the techniques vary by state? If someone owns property in multiple states, how would you recommend them approaching it?
The methodologies are different in every state, there's no two states that are alike, as you mentioned, Texas is a non-disclosure state so when a deed is filed and a property is transferred, it's not a requirement to disclose what that purchase price is. The appraisal districts don't necessarily have that data at their disposal, they may have access to Costar or to Trepp or other types of data sources, but they don't necessarily have the same type of data that a lot of other states like Florida have, or other disclosure states have. So, those methodologies are definitely going to differ.
A couple of things that are very important for a property owner to ask themselves or their consultant is to really understand the overall process of the valuation. How does the property appraiser value the property within their jurisdictions? What is the timing of those valuations? What is the date of value? When does the value notice come out? Is there a corresponding deadline that needs to be followed in order to ensure compliance with an appeal deadline? In most jurisdictions, when a value notice is released, there's typically a countdown to a deadline, whether that's an informal appeal deadline, an administrative deadline, or a court-type related deadline, there's usually a deadline that's associated with that value notice being released.
Setting an overall business plan for your portfolio is important, as well as working with your consultant to understand what the process looks like: Is it an informal process that's followed by an administrative process? Is it just an administrative process? Is there an opportunity after that administrative process for a lawsuit? And is that lawsuit in your typical judicial system? Or is it in a tax court? In some jurisdictions, there's data requirements, submission requirements for certain data. For instance, in Connecticut, and in Maryland, there's a requirement for your income and expense statements to be submitted to the property appraiser or to the appraisal district in order to be in compliance. And if you don't, there can be a penalty that's levied against the property owner in the form of a penalty on the real estate tax, that's also something that's very important to consider. How frequent is the valuation done? Is it an annual revaluation? Is it a biannual revaluation, in Colorado, is it every four years, in North Carolina, it's at least every four years, no longer than every seven. In certain jurisdictions, they're actually looking to shorten that down to two years. So, having an understanding of the overall way that the property tax system works is a very important thing for you as a property owner to understand, but also finding a consultant to work with that can help you with that.
Walk us through that one property that you're super proud of that you managed to reduce taxes for and what was the percentage that you were able to reduce it by?
It was a scenario where there was a purchase of an entire hospital system that involve multiple properties, business value, all kinds of different things. The property appraiser increased the value of the property based on many different factors but there was a deed that was recorded and the deed didn't necessarily encompass just real estate value and so the valuation of that property was changed from 10 million to 60 million. In the appeal process, hospitals are complicated properties, there's a lot of different things to consider, this was an older property and the methodology that was used was the cost approach. For special use properties, the cost approach is a lot of times the most valuable, or the most relevant valuation methodology to understand what the bricks and sticks are worth, what is the real estate worth when excluding all of the non-real estate related items. This is an appeal that was presented in Florida to a special magistrate, which is an independent third party at the administrative level, and that individual ruled in our favor, and the value was reduced from 60 million down to about 30 million. It wasn't reduced all the way back to the 10 million, but it was a win. We still believe that it probably deserves a little bit more, but it was a success nonetheless in a tough, challenging appeal process.
How long did that take?
The appeal process in the state of Florida is as follows: the value notice is released in mid-August, the appeal has to be filed within 25 days and then from that point, we get scheduled for our hearing. Once we're scheduled for a hearing, and after the appeal is filed, the valuation process begins. Ultimately, we're working on the cases as they come up.
The valuation process for us on this particular property was probably a couple of weeks of work of research and site inspections, and discussion with the client and different things like that, and then ultimately submitting that information within the timeframe that's required because there's ultimately timeframes that are required with that process to ensure that the evidence that you're presenting is going to be viable, and it's going to be able to be presented at the at the actual administrative value adjustment board hearing. Putting that information together, providing it to the property appraiser, having those discussions with them on an informal basis, trying to come to a negotiation or trying to come to a settlement with them and ultimately reviewing their evidence and presenting it to the Value Adjustment board is a long-drawn-out process. This was one that just completed a couple of weeks ago. We filed the petition back in September and came to a resolution in early April.
Do you charge a percentage of the tax break that you're able to get or is it a flat fee?
There's different fee structures and it all depends on the type of scenario that we're working with, whether it's a single property or a portfolio of properties but generally speaking, in the property tax consulting world, there's typically a what's called a performance-based view or contingency fee that is charged that is a percentage of the real estate tax savings that is generated, not necessarily the valuation that is saved but the tax savings that's generated. And there's typically a fixed fee or a flat fee component, but that's going to depend on the type of services that are required by that particular client, whether it's just appeals, that's a service that's being offered, or if there are other ancillary services that are offered such as assistance with underwriting and pre-acquisition due diligence, or property tax forecasting, budgeting, different things like that is all going to depend on the way that that engagement is structured. But the answer to your question for the most part is we are compensated on a contingency fee basis or performance fee basis of the real estate taxes that are saved.
Should we send the tax assessment to our tax consultant yearly? What if we just got it decreased a year ago?
One of the things that we talked about beforehand was the do's and the don'ts. Definitely don't throw that thing in the trash, don't put it into the look at it later pile. It's amazing how many times I get calls from property owners that are late to the deadline, maybe just a week, maybe two weeks, or six months, and they say, "Hey, I just got my tax bill". In the state of Florida, you get your tax bill in November. By that time, it's too late, if you're looking at your tax bill, and you wonder why is you tax bill so high, it's unfortunately too late to file an appeal. And in that circumstance, in relation to Florida for example, that date that the notice is mailed out is mid-August and that starts the 25-day window in which we have to file an appeal to protect your right to challenge that value as of January 1st of that year. For 2023, we're looking at a data value of January 1, 2023. The notice comes out in August, the appeal deadline is in September and then we're working those appeals throughout the year once we get scheduled for those hearings.
When you get a notice, whether it's in Florida, whether it's in Maryland, Georgia or Texas, these are all jurisdictions that have appeal deadlines. Once you miss that deadline, there's no way to go back and file a challenge. In certain circumstances, you can skip the administrative level and go straight to court. You have to also understand what the dates are, there are requirements for that because there are statute of limitations and there are dates that are required to be met with going to that next level as well.
How often should we send it to our tax attorney, every year? Let's say last year we got it appealed and we got it decreased, should I send this year's notice as well?
Generally speaking, yes. In some areas, there's on cycle and off cycle appeal opportunities. In some circumstances, like in North Carolina, the revaluations are every four to seven years and if you appeal it and you know in year one, that value is going to hold over the period unless there are changes in the property such as new construction or things of that nature, but typically in a multiple year valuation, where it's not an annual revaluation that is going to hold, but a lot of jurisdictions around the country have annual revaluations. If you're not sure, I would recommend consulting with your real estate tax professional, whether it be a consultant like myself or an attorney, if it is required to be an attorney in that particular jurisdiction. The last thing you want to do is put this in the look at it later pile, when you look at it later past that deadline, and there's not much that you can do, unfortunately.
Do you do residential as well or just commercial?
Our primary focus is commercial. We do handle some high end residential throughout the state of Florida, but our main focus is on the commercial side.
Is there anything else that we have not covered that you think is important for our audience to know?
One thing that I would say, as a commercial real estate investor, is really understand the nuances from a high-level perspective. You are a commercial real estate investor, your role is to find the deal, underwrite the deal, and to understand what the income producing potential of that property is, and determine if that is an investment that suits your needs. Your role is not necessarily to be an expert in the real estate taxes and to understand all of the minutiae of real estate taxes, and what are the things to look for.
It's important for you to be well versed enough to understand the important pieces, find a real estate tax consultant or an attorney that you like and trust with your properties and that can set a plan for you along with your investments to ensure that you're being monitored.
Secondly, as an investor, it's imperative to ensure that you understand what are the real estate taxes going to do, once you acquire a property, don't assume that the taxes of your investment are going to remain the same as what the prior owner was paying because that's certainly not the case in most jurisdictions. Understand that and work with a professional on the front end of a deal so that you're accurately budgeted, and you're not kicking yourself later down the road when you get that real estate tax bill saying, holy cow, I didn't forecast for this, how am I going to pay for it?
Have you seen people lose properties after closing because of that?
I've seen people struggle with properties very much. If we go back to the residential bubble back in the early 2000s, into 2007 - 2008, those were circumstances where people were paying lots of money for properties, and the property tax bills were getting revalued upon their acquisition and they were certainly not able to afford those, the return on your investment can definitely be impacted by a real estate tax bill that you're not expecting. You need to forecast that accurately. It may be something where you reconsider a potential offer on a property, or look at how it's going to impact your bottom line, figure out where some of the other areas that you can cut costs, and understand exactly what that opportunity is to make that the most successful investment that you can.