This white paper defines the value that property tax consulting delivers to investors when serviced during the acquisitions phase versus the operations phase of commercial real estate investment projects.

By seeking property tax consulting early during underwriting and due diligence phases, investors can gain a competitive advantage, increasing their deal success rate.

Click here to view this white paper.

By David Martinez – Property Tax Director, RETC

Each year appraisal districts are tasked to appraise all real estate and personal property values. Texas property tax code requires all businesses to file a business personal property tax return by April 15 of each year which must include the fixed asset location, acquisition date and cost of all assets and inventory. The appraisal district then applies a standardized depreciation table to the fixed assets in order to derive their value.

However, with a lack of resources and several hundred thousand accounts in each district, appraisal districts are forced to appraise values based on a mass appraisal technique in order to meet their deadlines. The mass appraisal technique does not take into consideration any unique functionality for complex industrial personal property or real estate valuations. And, if the values are not evaluated each year, significant overpayment of real and personal property taxes or double taxation may result.

Risks for Increased or Double Taxation

The property tax code specifically enumerates the taxation of personal property tax and real estate tax based on market value. However, as it relates to the personal property filing, the standardized depreciation schedules appraisal districts use during the mass appraisal process do not always result in the true market value of the fixed assets or inventory. For instance, industrial complex properties have unique fixed assets such as heavy machinery and equipment, and the equipment should be inspected for depreciation and value prior to filing each year.

First, owners should update the fixed asset listings and ensure only those assets that are still being used by the company are included in this list. For example, many assets may have a net book value of zero and are never properly removed from the fixed asset listing if they are disposed of – reviewing this fixed asset list annually will help eliminate being over taxed for assets the company no longer owns.

Next, the standard depreciation tables usually allow a categorization of assets to machinery and equipment, furniture fixtures, computer equipment, etc. However, industrial complex properties typically have large capital intensive assets, such as cranes or drilling equipment that are typically overlooked when filing a return. The fixed assets need to be reviewed to determine which classification they should be placed in. Some items may have large computerized components, tooling or molding components that can be separated out from the listing allowing for a faster depreciation of part of the asset. For example, if a company purchases a large printing press which also includes the use of a computer, owners can list the computer under computer equipment, to lower the value of the printing press as a fixed asset to allow for faster depreciation.

Another point to consider is obsolescence. As these large, complex industrial assets age, they typically become more obsolete due to new technology, economic or environmental changes. This significantly reduces the value of the equipment and should be accounted for when establishing the value with the appraisal district. For example, if production has been reduced resulting in a line of equipment being shut down for part or all of the previous calendar year, that equipment can take an additional factor on top of the standard depreciation. There could also be an obsolescence factor added to super adequate producing equipment that has the capability to produce a significant amount of product beyond the business’ needs.

Finally, double taxation can occur if fixed assets are reported as business personal property, but otherwise would be considered real estate and are being taxed on both the personal property and real estate accounts. The distinguishing lines between real and personal property taxes become blurred with complex property types. Typically, permanent attached improvements to real property are considered real and anything that can be moved without significant damage to the real property is tangible personal property. Large manufacturers have to take into consideration several assets that fall in the grey area, especially because the mass appraisal technique does account for this. For example, a water line that has a single purpose to keep a piece of machinery cooled in production would be considered personal property, but a water line that is routed to the break rooms would be considered real property.

It is important to hire a professional property tax advisor to assist with these filings to proactively review the filing methodology.

The Appeal Process

Once the personal property rendition is filed, the appraiser at the taxing jurisdiction will review the filing and send the appraisal district a notice of value. Additionally, the real estate value is typically set and the notice of value is usually mailed by May 1.   If the market value on either the personal property or real estate account is not in line with the true market value, the value must be appealed in writing by May 31 or 30 days from the date of notice. Once the appeal is filed, the appraisal district will usually allow the company or its consultant to discuss the issue/s with the valuation informally. If a settlement cannot be agreed upon, the appeal must go to a formal level. The formal appeal allows the company to explain its valuation issue/s to a panel of three independent appraisal review board (ARB) members. These members are citizens of the state authorized by state law to resolve protest disputes between the tax payer and appraisal district. The appraisal district is also given the opportunity to state its stance on the initial value to the ARB. The ARB will make a final decision on the value once hearing both parties’ arguments and will mail a final order to the tax payer. The ARB panel may not understand the unique valuation methodologies involved in the valuation of large industrial complex properties which does not always result in a fair value from the formal hearing. Once the final order is received, the company has 60 days to file a lawsuit against the appraisal district. Most lawsuits do not go to full litigation and are typically settled informally. Discussing the cost benefit of the lawsuit with a tax professional is recommended.

The Texas property tax code is more than 750 pages and can be as complex as the federal tax code. This, coupled with the complexity of valuation techniques for industrial properties can result in significant overpayment in property taxes or double taxation as discussed above. Property taxes are typically one of the largest fixed expense items for many companies – owners should review their assets annually and consider consulting with a property tax professional in order to ensure both real and personal property are being valued fairly for their industrial properties.

By Brian Heard – Property Tax Director, RETC

On July 22nd, Bisnow hosted the Data Center Extravaganza, which featured many talented speakers opening up about their views of the futures of data centers. The current demand for data centers is up, and Infomart Data Centers, who was one of the hosts, had exciting news to share to all who attended. Bisnow released information that “John (Sheputis) says the BMMR (…) will upend the traditional Meet-Me Room model by waiving monthly cross-connect fees to encourage interconnection within the carrier-hotel.” You can read more about this and other topics on Bisnow‘s newsletter published after the event by clicking here.

 Architect of an Open World

Photo: Dennis van Zuijlekom. 

Brian Heard has a few takeaways to share from last week:

  • There is a lot of activity both in the development of new greenfield sites to strategic acquisitions to meet demand which continues to be strong in the Dallas / Houston market
  • Panelist Bryan Loewen (Newmark Grubb Knight Frank) stated that a major trend he is seeing is customer’s desire for increased customer service as well as the box.
  • John Sheputis (Infomart Data Centers) provided a tour of their Dallas location which included a recent $40M improvement plan, additional plans to expand the facility by an additional 500K SF and the creation of Building Meet-Me Rooms which will provide inter-connectivity unique to large carrier-hotels. John’s excitement for Infomart’s future was evident and continues to demonstrate increased demands in the Dallas market.

nerd-wallet

by Hanah Cho on April 30, 2015
posted in Nerd Wallet
To view the original article, click here.

Family-Business-Succession-750x420

If you ask Amish Gupta, joining the family business was never a sure thing.

Five years ago, his father, Virenda Gupta, was ready to step back and travel more to his native India and see other places. He asked Amish to join and eventually take over RETC, a property tax consultancy in Dallas that the elder Gupta founded in 1986.

Before making the move, which had major professional and personal implications, Amish initiated frank discussions over compensation, ownership and authority. The father and son eventually agreed on a succession plan that is working well for the two men and ultimately the business.

“I wanted him to have complete rein and freedom,” Virenda Gupta says. “So I gave him marketing and sales and pretty quickly he became CEO. I took a back seat and he makes day-to-day decisions. … I believe a father-and-son team is only going to work if the son is given responsibilities and complete authority that he can exercise.”

A complicated transition

As a business owner, planning for an exit can be hard enough. But throw in a desire to maintain a family legacy and succession can become complicated — even messy. Your children or other relatives may not have any interest in taking charge, or family squabbles over the direction of your business could sink a smooth transition.

What’s more, the business itself may not survive the ebbs and flows of market and industry changes, says Monika Hudson, an assistant professor and director of theGellert Family Business Resource Center at the University of San Francisco.

The center helps families balance business issues, ownership questions and family dynamics. It’s important that all three factors be in sync for a business’s long-term survival, Hudson says.

Small Business Success Story: How Father and Son Worked to Keep Business in Family Hands

She cites the example of an expanding family business with children who did not get along. They fought so badly that it led to attorneys getting involved. The family is now splitting parts of the business.

“We have all the emotional issues that are part of being a family interfacing with those business decisions that need to be made around scale and the future,” she tells NerdWallet.

So it’s no wonder that few family businesses survive for the long haul. Only 30% of family businesses make it to the second generation, according to the Family Business Institute, a consulting firm in Raleigh, North Carolina. Just 12% of them last into the third generation and only 3% are viable into the fourth generation and beyond.

Succession planning is key

What makes family business succession so difficult? For starters, few business founders prepare and train their children or relatives to take over, according to Wayne Rivers, co-founder and president of the Family Business Institute.

“You started the business, you’re the founder. You make all the decisions,” Rivers says. “So now, you have three children, two girls and a boy, they begin to have trouble making decisions. What counsel can you give them? You have no tools in that toolbox. You say, ‘What can’t you just get along?’” 

Ensuring your business survives — whether in the hands of family members or outsiders — takes a lot of planning. Give yourself enough time to consider all possibilities, including selling to outsiders or even employees, Rivers says.

It’s important not to confuse estate planning with succession planning, according to Rivers. “And now here is a document saying, ‘If I get struck by lightning, this is what happens to my assets including my family business.’ That is not a succession plan, it’s a drop-dead plan,” he tells NerdWallet.

A survey last year by the Alternative Board, which provides industry guidance for businesses, points to the lack of planning in family business transfers. Less than a third of family business owners have a succession plan.

Of course, your child may not want the business. And maybe it’s the other way around: Your son or daughter may not be the best person to take over the business. Here’s a reality check: 42% of family business owners say nonfamily employees are more qualified, according to the Alternative Board survey.

“In some cases, the parent is the owner and feels like [the children] don’t have the right profile: They don’t love the business. They don’t have a head for business,” says Dave Scarola, vice president of the Alternative Board. 

Establish a game plan

That wasn’t the case for Virenda Gupta. He began thinking about the future of his business when he turned 60. He had faith that Amish was the best person to lead RETC, a 20-person firm that also has offices in Austin and Houston. Amish knew the business well, having worked at the firm at various times as a high school and college student. Plus, Virenda says, he was more confident in his son than an outsider taking over the business.

Virenda also knew Amish would bring skills and experience he gained at other jobs. Amish worked at consumer products giant Procter & Gamble, doing marketing and product management. He also got an MBA at the Kellogg School of Management at Northwestern University.

Sure, Amish felt the pull of family, but he also wanted to make sure joining the family business would make sense for him too. Being an entrepreneur was a big plus. So was having the flexibility to pursue his other business ventures, according to Amish. On the flip side, Amish would be giving up a coveted job with global investment firm the Carlyle Group in Washington.

“It wasn’t a done deal. He was the one who called me and said you should come back,” the now 35-year-old Amish Gupta says. 

Before committing, Amish pushed to establish a “game plan” on major issues such as authority and responsibilities as well as compensation and equity. He hashed out with his father issues such as control over day-to-day decisions and long-term strategic goals for RETC. The company has a third board member who acts as a tiebreaker vote in case father and son can’t agree on a decision. Amish says he recalls only one instance in which they butted heads before reaching a consensus.

Even though talks over money can be difficult, Amish says he wanted to make sure he would be fairly compensated, especially since he had given up a lucrative career path. Pretty early on, Virenda says he gave Amish “a critical share” of the business.

“For folks like me, our opportunity cost is serious. I graduated business school in 2007 and I’m now at an age where my friends are becoming partners at consulting firms and banks. We’re talking folks who are making half a million plus or a million depending on the industry they’re in. That was the path I had given up,” Amish says.

With a succession plan in place, Amish joined RETC as its chief operating officer in 2010. Under Amish’s leadership, the firm has shifted into taking on more sophisticated tax cases for bigger clients. The firm also saw a major staff turnover, a typical occurrence under a new leader in any business. Over the years, Virenda, now 68, has scaled back his work to accommodate his travels.

Words of advice

Father and son say they have learned some lessons along the way about making a transition. They offer these pieces of advice on succession planning for family businesses:

  1. Don’t pressure your child or children to take over the business. There is a lot of pressure especially on children of immigrant entrepreneurs, Amish says. But forcing them to come back doesn’t help the business. Even if the child wants to work or take over the family business, it may be prudent to get outside experience. Amish credits his time at Carlyle and other companies for establishing “credence with my employees who respect me and my clients who respect me.”
  2. Have tough conversations upfront about how the succession will work. This should be done not just with parents but also siblings who may or may not be part of the business, Amish says. A year ago, a family friend approached him for advice because he was facing a similar decision to the one Amish faced five years ago. Amish told him this: “You have to ask for things upfront and ask for things before you agree to come back. If you ask afterwards, you have no recourse. You can’t really quit. You can, but with any other job, you make a clean cut; you can’t do that with family stuff.”
  3. Get your children or other interested family members involved with the business without any commitment, Virenda says. “It’s important to experiment. Even though you know your children and you know their intentions, once you work together, it’s a different matter,” he says.

 

Another tax season has passed, and the Dallas Central Appraisal District continues to hold back from aggressively increasing commercial real estate property taxes. For instance, Dallas County property taxes were significantly lower than Houston’s Harris County and Austin’s Travis County by 5 and 6 percent across all markets.

During the past few years, we have anticipated an aggressive increase in Dallas County, but, luckily, owners have yet to see one. Based on data from our clients, Travis County was the leader this year with an aggressive 14 percent average increase across all markets, 1 percent higher than in 2013. Harris County saw a decrease from 22 percent in 2013 to about 11 percent this year. Dallas County had the lowest average increase of 6 percent—a low number even with the multifamily market seeing its largest increase yet of nearly 10 percent.

Dallas has been slowly increasing its property taxes by market each year, but has yet to make a large increase across all markets. What does this mean for commercial property owners? Why hasn’t Dallas seen an increase like other areas in Texas? Perhaps Dallas is waiting to see the reactions from other top Texas markets to prepare for backlash, if and when Dallas County decides to take the plunge. With that, there is still a high possibility that Dallas County will aggressively increase property taxes in the years to come.

This year’s valuation data has shown that the Texas appraisal districts are unpredictable, forcing property owners to stay on their toes. Anticipating a large increase in property taxes will be important as property owners begin budgeting for 2015. It is always better to be prepared than to be struck with sticker shock, especially because property taxes are often the largest line item in operating expenses. Although we cannot predict when it will happen, property owners should take steps to ensure valuations are fair, while limiting the margin of error when it comes to predicting property taxes as budgets are set for next year.

Below is a chart that shows average property tax increases by county and market sector, based on data from our clients.

Screen Shot 2015-03-04 at 9.15.53 PM

In recent years, Texas has made headlines for its flourishing economy, boosted by its exceptional population and job growth. As a result, numerous corporations have been drawn to relocate here, putting Dallas at the forefront of the corporate relocation trend.

With this economic boom comes an increased need for data management and data centers—a growing industry in Texas. The Dallas-Fort Worth region, in particular, has become a hub for data centers. According to Data Center Map, there are currently 118 colocation data centers in Texas with 56 of those located in Dallas alone.

One of the biggest decisions a company can make is where to lay its bricks and mortar for a data center. In addition to location, companies must also consider abatements, exemptions, and other economic incentives states offer to entice the data center industry to choose their specific region. In most cases, site decisions are heavily weighted on property taxes and sales tax, due to large capital requirements. And with property taxes usually being one of the largest annual expenses for a company, somehow they often fly under the radar during budgeting—when they should be at the top of the list.

As companies are assessing ad valorem taxes for their data center facilities, it is important to scrutinize and confirm that the property is being assessed and taxed appropriately as either personal property or real estate in order to avoid double taxation. Many appraisers are accustomed to estimating value on offices, retail strips, multifamily units, and warehouses; however, data centers are a unique property type that many local appraisers have never valued resulting in a lack of understanding of the intricacies involved in the build-out of a data center.

To ensure your data center property is valued correctly, the following points are essential to think about.

First, in states that tax both real and personal property, it’s important to ensure each assessment is distinctly defined or you risk your property being double taxed. For example, items that should be considered personal property, such as technology, software, cooling and underground cabling, are often being added to the real estate assessment by appraisers, accounting for their value twice.

Second, with the ever-changing technology market, the value of equipment in a data center quickly depreciates and becomes more obsolete with each passing year. The business personal property value is typically based on cost (less a depreciation rate), but does not include any obsolescence factor that should be addressed with aging equipment.

Keep in mind that many appraisers are unfamiliar with data centers, and the appraiser’s depreciation schedule is most likely similar to the typical commercial property tax schedule where components of personal property do not depreciate as quickly. As a result, the appraiser may value the technology component much higher than its actual current value. This is a big problem because the technology and infrastructure can sometimes account for 50 percent of the overall value of a data center.

With rapidly changing technology comes the need for intricately designed properties with the capacity to house it. Although the current design and efficiency of a data center is on target now, it may not be the preferred and most efficient design five or 10 years from now. Taking that into consideration, owners can explore the possibility of additional deprecation for their real estate value due to inefficient design or fair market value.

With appraisal districts still getting to know the data center industry, the previously discussed points are a few important issues to be aware of to ensure your property is valued fairly and correctly. Take the time to look at every angle and functionality component of your data center to mitigate property tax exposure.

Amish%20Gupta

Business name: RETC (Real Estate Tax Consultants)

Business address: 3345 Silverstone Drive

Year opened: 1986

Employee name: Amish Gupta

Position at the company: Chief Operating Officer

Total number of employees: 20

RETC is a leader in the property tax consulting industry, saving millions of dollars for thousands of clients nationwide. RETC is dedicated to creating optimum tax savings for clients and providing value to taxing authorities by negotiating fair and equitable property tax assessments in a professional and ethical manner.

What does your business offer that is unique compared to similar businesses?
RETC is more than just an appeals firm. Through our in-depth training program, we teach each member of our team to think like investors and partners. This is an important part of our firm’s value for clients, knowing that our employees have learned the same analytical acumen as top-level executives.

What is the most important part of your job on a daily basis?
Ensuring RETC employees receive superior training similar to that of an MBA to make them well rounded in business and industry practices. Our team is comprised of respected negotiators with extensive knowledge of property tax law, investor relations, new technologies and ordinances, etc. Education should be consistent throughout a career.

What are your keys to success?
RETC’s key to success is defined by our employees. We equip them for success, which in turn adds value to our company and clients. We provide an ongoing internal training program, hone their negotiating, networking and presentation skills while ensuring they provide superior client management.

What surprises you most about your job?
The human element matters. It is important to build a trusting relationship with clients and maintain open lines of communication.

Tell us something most people wouldn’t know about your company.
The name of our company, RETC, implies that our services are limited to commercial real estate properties. However, our expertise reaches far beyond “typical” real estate markets into those such as oil and gas, data centers and manufacturing.

cire

Property taxes play a big role in bottom-line decisions.

Each year, appraisal districts send out property valuations, and upon receiving a building’s assessed value, owners and investors spend time on appeals to receive what they believe is a fair value. Property taxes are one of the largest line item expenses for a company, and the amount paid can drastically affect a company’s bottom line.

Appeal Tips

Given the importance of a building’s value and its affect on cash fl ow, there are several points to consider when it comes to property tax appeals.

First, be familiar with your jurisdiction’s calendar. Specific deadlines are set for sending out valuation notices and for filing appeals. Some appraisal districts have rolling appeals without a regimented date range on when valuation notices will be sent out. In contrast, for example, Texas districts send 90 percent of the notices between May and July.
Of course, each year a certain percentage of owners end up missing the deadline for a variety of reasons. Fortunately, most states have a late filing deadline, but there are some restrictions for late protests that can differ depending on which state and county the building is located.
Late protest periods can be beneficial. For instance, investors and buyers need to pay particular attention if a property is acquired after an appeal deadline. Th e owner/investor can take advantage of the late protest period to ensure their property is valued fairly.

During a transaction, there is usually no benefit or incentive for the seller to lower property taxes, but buyers have two options on which to act. Th e buyer can either ask the seller not to appeal or withdraw any pending appeals, or they can ask the seller to file an appeal on their behalf. If the seller agrees not to file an appeal or withdraws an appeal, the buyer can file a late protest, which will give them full control over the process.
However, as mentioned before, each state and county has certain late filing provisions, and the property may not qualify for the appeal. On the flip side, if the seller agrees to file and executes an appeal for the buyer, a reduction is more than likely. Although, in this case, buyers need to be careful that they do not acquire the property at a higher value than what was settled with the appraisal districts as this could cause the appraisal districts to feel taken advantage of and hinder the future success of appeals.
Another point to keep in mind is the intricacies and potential changes of the property tax code in each state. For instance, the frequency of appraisals is usually dictated by the law, and each state has its own peculiarities. Being familiar with the details can make a large difference in the budgeted and/or underwritten expectations of an asset.

Another point to keep in mind is the intricacies and potential changes of the property tax code in each state.

A second factor is how valuations are set. Typically, valuations are set based on market value, but there may be other provisions to consider. For example, the Texas legislature is discussing repealing the equal and uniform law, which allows for a commercial property to be appraised at the same value as a similar building in its county. The law is essentially beneficial to commercial property owners because it helps keep appraisal districts from unfairly valuing a property. If the Texas legislature repeals this act, it will certainly raise the value of an owner’s property and thus increase property taxes for some investors. It is important to be aware of legislature changes such as this in your own state and county.
Other information to remember includes identifying appraisal parameters in your district. Most county laws state that valuations should be based on the real estate value only, meaning the physical structure and the land, and should be separate from the operational value. However, appraisers tend to have a difficult time defining the value of properties such as hotels and seniors housing facilities because of the value the business services, such as food, activities, and healthcare, bring to the properties. In industries such as these, owners and investors need to isolate the value of the real estate.

Getting Help

Finally, as owners and investors, if you do not understand the ins and outs of property valuations and appeals, hiring professional help is highly recommended. Tax professionals will ensure a smooth process and that the best valuation is achieved. Furthermore, always involve professional help if you are planning to invest in property outside your market — trying to understand local laws in an unfamiliar area can be tough.
Educating yourself on the local laws in your market and paying attention to the appeals calendar are the best ways to guarantee your property is valued fairly and tax burdens are kept low. Understanding local administrative policies and identifying appraisal parameters are other key factors to remember. Following these tips can help owners become more savvy investors as they learn how to best minimize property taxes.

By Amish Gupta – COO, RETC

When we hear the term “real estate,” we often think of office buildings, retail centers, multifamily, hospitality/hotels, or industrial-manufacturing facilities. Rarely do we think of the oil and gas industry. However, real estate and the oil and gas industry do overlap, specifically in regard to mineral rights. The valuation of these mineral rights is similar in nature with the real estate classes mentioned above. As such, mineral right accounts face many of the same challenges, with respect to property tax, as any other income-producing property—including the potential for double assessment.

With income-producing property, the tax burden falls on the owner, but with the valuation of mineral rights, the property tax burden falls primarily on the oil and gas operator. Oil and gas companies acquire leases, meaning they are granted exclusive rights to explore and develop minerals on the property for a set period of time. In the state of Texas, these mineral rights fall under the real estate classification for property tax purposes. Although oil and gas terminology differs drastically from the more commonly known real estate properties, the valuation and assessment is derived in a similar nature.

In Texas, a majority of the county appraisal districts outsource the oil and gas/mineral right accounts to third-party appraisal companies. These companies typically have more resources and are specialized in valuing mineral right accounts. As opposed to working with the local assessor, operators and property tax consultants work primarily with the third-party appraisal groups to provide and receive information to help derive a value for the mineral right accounts.

Oil and gas mineral right accounts are valued on the income approach, much like that of other income-producing properties. The most distinct difference is the method used, which is the discounted cash flow model. Essentially, the mineral rights are valued using the estimated cash flows from the estimated remaining life of the well which are then discounted back to a present value for the current year’s valuation.

The key factors affecting the value are production, expenses and depletion percentage, often called percentage of decline or decline curve. In addition, the status of the well can play into the valuation. If a well is shut in or not currently producing oil, temporarily or permanently abandoned, a stripper well or non-producing for any other reason, the valuation of the mineral rights may be impacted causing a reduction in the value or assessed value for a particular oil and gas lease.

Properties like those in the oil and gas industry that are valued-based on the income produced from their business often times run the risk for double assessment. In Texas, business personal property, or tangible fixed assets not permanently attached to the land or improvements, is taxable in addition to the real estate. The hospitality industry faced the double assessment issue for many years until recently, when the property tax code was changed to help reduce the potential for double assessment.

Businesses are required to file a list of business personal property utilized in their company. However, when a property is valued using the income approach, it encompasses all assets, both real and personal, to derive income, similar to that of the hospitality industry as previously mentioned. Often times, oil and gas companies are required to file a business personal property tax return for those assets above ground separate from the mineral rights. This may consist of piping, tanks, compressors, etc.

To ensure they are not double assessed, oil and gas companies need to give close attention to those mineral right leases where both a property tax return is required to be filed for the above-ground assets and the mineral rights are valued on a separate account. The only acceptable scenario for separate assessments on two accounts for the above-ground assets and mineral rights is when the mineral right account being valued using the income approach is reduced by the value of the above-ground assets being assessed on the business personal property tax account. Otherwise, your business is more than likely being double assessed.

Whether you own real estate in the hospitality industry, office building, retail centers, industrial facilities, or oil and gas mineral rights, owners should ensure their properties are being fairly and accurately assessed. Knowing how property values are derived and areas to focus on when reviewing values are critical steps. Based on conversations with multiple appraisal districts, values are expected to increase significantly this assessment year, and property owners need to ensure their potential value increases are reflective of their business and the overall market.

By David Martinez – Property Tax Director, RETC

Understand state laws, deadlines, reporting requirements, exemptions and appeals.

With the economy in an upswing and the number of construction contracts on the rise, many states will look to increase revenue by turning to local appraisers to seek additional value in both real property and personal property across all industries, including construction. Most companies are aware of the property taxes associated with real property; however, personal property is easily overlooked or overreported to the local appraisers. This mistake can result in significant penalties or overpayment in a company’s property bill. Several points of interest should be considered to ensure property taxes are fairly reported.

State Laws
Each state and taxing jurisdiction will have its own laws that distinguish what is considered and taxed as personal or real property. Real property that is appraised typically includes the land and improvements permanently affixed to the land. Personal property is typically defined as all property not permanently attached to the real estate, including machinery and equipment, furniture and fixtures, computer equipment, vehicles and inventory. As construction commences in a new
location, construction owners must ensure they are compliant with state and local laws while also taking care to avoid over-reporting items that are exempt or nontaxable either as personal or real property. For information on state laws, visit the state’s Department of Revenue website or the local taxing authorities’ website.

Deadlines
Since the deadlines to file returns and appeals and pay bills vary from state to state, setting up a calendar with the deadlines in each location where a construction firm is currently operating is beneficial and recommended. Doing so will ensure compliance with the district’s laws, keep owners from paying any penalties and interest, and prevent liens from being put on property. The key items to include on the calendar are as follows:

Assessment Date – This is the effective date the valuation of the property is appraised. In most states, this is typically “as of” January 1.

Return Deadline – The reports to the districts must be filed by this day. Note that this date could be considered by postmark or “received by date,” depending on the district.

Appeal Deadline – This is the deadline to file an appeal on either the personal or real property account. Some districts require a filing fee, and this date can vary depending on when the district sends the valuation notice.

Tax Bill Due Date – Some taxing jurisdictions require multiple payments throughout the year, and some will have one full payment deadline.

 

Reporting
Some states do not place a tax on personal property; however, the ones that do tax personal property have a reporting requirement. The taxing authority typically looks at a specific date of appraisal in order to value the property that is being taxed. That date is typically “as of” January 1; however, some states have different assessment dates, such as July 1 in Nevada. For example, if a construction owner is holding $1 million in inventory as of January 1 in Texas, the owner would need to report the inventory to the assessing authority. If the owner can sell or transfer the inventory prior to the assessment date, the inventory would not be reported and taxed. The rendering of these assets will usually include the taxpayer’s tangible fixed assets including machinery and equipment, furniture and fixtures, computerized equipment, vehicles and inventory. If the reporting requirement is not met, then the taxing authorities can impose penalties and interest for noncompliance.

Most personal property can be categorized into a depreciation table based on the typical life of the property type. These tables are different from generally accepted accounting principles (GAAP) or federal depreciation tables, because they attempt to determine the market value of the property. A professional property tax adviser can help proactively review the filing methodology and identify asset classification issues that have not been previously identified or corrected. This process typically
involves scrubbing the fixed asset listing to remove any ghost or duplicated assets that should not be reported on the initial filings and that would otherwise be included on a federal depreciation schedule. An adviser would typically gain an understanding of the business and the use of assets in order to categorize assets in the fastest depreciation table allowable as well as identify any issues that would warrant additional depreciation.

Exemptions
Some state laws allow for certain exemptions in property tax. A property tax adviser can also assist in identifying and obtaining the exemptions in order to maximize the tax-saving opportunities. Examples of possible exemption opportunities include inventory exemptions and the identification of exempt assets by jurisdictional laws or regulations. These opportunities are important to note when operating in a new district in order to take advantage of the exemptions that reduce the overall tax
liability, inherently increasing the project’s profit.

Appeals
If the value that has been placed on either real or personal property is overstated by the taxing authority, construction owners have the option to appeal the value to an authority. Each state has its own deadline to file these appeals that is either set from year to year or set a number of days from when the valuation notice was mailed to the company. The valuation disputes can sometimes be resolved informally with the authority; however, in some cases, the valuation dispute may need to be resolved in a more formal format. Be sure to understand the rules and necessary information needed to present the formal appeal to the district. Note that the formal format may require an attorney in certain states. Some states do offer further appeal options if the outcome of the formal appeal does not resolve the valuation issue. Construction owners must understand the various tax laws and deadlines in each state they operate within to ensure they are following the proper procedures. Although the 2013 filing deadline has passed, late appeals can be filed in certain states. For example, Texas allows late filing until Jan. 31, 2014. Construction owners should research which states have multiple deadlines for appeals using their state’s Department of Revenue or the local jurisdiction’s website. They should seek the help of a tax consultant if they are uncertain or do not fully understand the valuation methods or property tax-saving opportunities. Property tax advisers understand the local valuation methodologies, market conditions and tax laws and can help construction owners remain compliant with the taxing authority. As an added benefit, they also can ensure construction owners are taking advantage of any and all exemptions to help reduce the value paid on the tax bill, which can translate into savings.

Understand state laws, deadlines, reporting requirements, exemptions and appeals.

With the economy in an upswing and the number of construction contracts on the rise, many states will look to increase revenue by turning to local appraisers to seek additional value in both real property and personal property across all industries, including construction. Most companies are aware of the property taxes associated with real property; however, personal property is easily overlooked or overreported to the local appraisers. This mistake can result in significant penalties or overpayment in a company’s property bill. Several points of interest should be considered to ensure property taxes are fairly reported.

State Laws
Each state and taxing jurisdiction will have its own laws that distinguish what is considered and taxed as personal or real property. Real property that is appraised typically includes the land and improvements permanently affixed to the land. Personal property is typically defined as all property not permanently attached to the real estate, including machinery and equipment, furniture and fixtures, computer equipment, vehicles and inventory. As construction commences in a new location, construction owners must ensure they are compliant with state and local laws while also taking care to avoid over-reporting items that are exempt or nontaxable either as personal or real property. For information on state laws, visit the state’s Department of Revenue website or the local taxing authorities’ website.

Deadlines
Since the deadlines to file returns and appeals and pay bills vary from state to state, setting up a calendar with the deadlines in each location where a construction firm is currently operating is beneficial and recommended. Doing so will ensure compliance with the district’s laws, keep owners from paying any penalties and interest, and prevent liens from being put on property. The key items to include on the calendar are as follows:

Assessment date – This is the effective date the valuation of the property is appraised. In most states, this is typically “as of” January 1.

Return deadline – The reports to the districts must be filed by this day. Note that this date could be considered by postmark or “received by date,” depending on the district.

Appeal deadline – This is the deadline to file an appeal on either the personal or real property account. Some districts require a filing fee, and this date can vary depending on when the district sends the valuation notice.

Tax bill due date – Some taxing jurisdictions require multiple payments throughout the year, and some will have one full payment deadline.

Reporting
Some states do not place a tax on personal property; however, the ones that do tax personal property have a reporting requirement. The taxing authority typically looks at a specific date of appraisal in order to value the property that is being taxed. That date is typically “as of” January 1; however, some states have different assessment dates, such as July 1 in Nevada. For example, if a construction owner is holding $1 million in inventory as of January 1 in Texas, the owner would need to report the inventory to the assessing authority. If the owner can sell or transfer the inventory prior to the assessment date, the inventory would not be reported and taxed. The rendering of these assets will usually include the taxpayer’s tangible fixed assets including machinery and equipment, furniture and fixtures, computerized equipment, vehicles and inventory. If the reporting requirement is not met, then the taxing authorities can impose penalties and interest for noncompliance.

Most personal property can be categorized into a depreciation table based on the typical life of the property type. These tables are different from generally accepted accounting principles (GAAP) or federal depreciation tables, because they attempt to determine the market value of the property. A professional property tax adviser can help proactively review the filing methodology and identify asset classification issues that have not been previously identified or corrected. This process typically involves scrubbing the fixed asset listing to remove any ghost or duplicated assets that should not be reported on the initial filings and that would otherwise be included on a federal depreciation schedule. An adviser would typically gain an understanding of the business and the use of assets in order to categorize assets in the fastest depreciation table allowable as well as identify any issues that would warrant additional depreciation.

Exemptions
Some state laws allow for certain exemptions in property tax. A property tax adviser can also assist in identifying and obtaining the exemptions in order to maximize the tax-saving opportunities. Examples of possible exemption opportunities include inventory exemptions and the identification of exempt assets by jurisdictional laws or regulations. These opportunities are important to note when operating in a new district in order to take advantage of the exemptions that reduce the overall tax liability, inherently increasing the project’s profit.

Appeals
If the value that has been placed on either real or personal property is overstated by the taxing authority, construction owners have the option to appeal the value to an authority. Each state has its own deadline to file these appeals that is either set from year to year or set a number of days from when the valuation notice was mailed to the company. The valuation disputes can sometimes be resolved informally with the authority; however, in some cases, the valuation dispute may need to be resolved in a more formal format. Be sure to understand the rules and necessary information needed to present the formal appeal to the district. Note that the formal format may require an attorney in certain states. Some states do offer further appeal options if the outcome of the formal appeal does not resolve the valuation issue.

Construction owners must understand the various tax laws and deadlines in each state they operate within to ensure they are following the proper procedures. Although the 2013 filing deadline has passed, late appeals can be filed in certain states. For example, Texas allows late filing until Jan. 31, 2014. Construction owners should research which states have multiple deadlines for appeals using their state’s Department of Revenue or the local jurisdiction’s website. They should seek the help of a tax consultant if they are uncertain or do not fully understand the valuation methods or property tax-saving opportunities.

Property tax advisers understand the local valuation methodologies, market conditions and tax laws and can help construction owners remain compliant with the taxing authority. As an added benefit, they also can ensure construction owners are taking advantage of any and all exemptions to help reduce the value paid on the tax bill, which can translate into savings.

By Amish Gupta – COO, RETC

Commercial real estate property valuation notices have come and gone, leaving some owners and investors with a feeling of relief while others experienced sticker shock. The news is regularly reporting increased occupancy and rental rates. In fact, the Class C multifamily market’s rates are currently growing faster than Class A and Class B, signaling the confidence in the marketplace that the economy will continue to develop.

With lower cap rates and increased transactions like the multifamily market trend demonstrates, real estate values have continued to increase across all market sectors in 2013. In fact, Texas continues to be one of the leading economies in the United States, with increased interest from out-of-state investors particularly in the major metro areas of Dallas, Houston and Austin.

You might be saying to yourself, “All of the above sounds positive,” which is true, but anyone familiar with property taxes knows that a robust economy has a negative effect on property taxes. Cap rates are being driven down in the commercial real estate markets; with transactions occurring at lower cap rates as compared to 2010, this has given appraisal jurisdictions the evidence to increase values.

Based on information from our clients, the past few years have surprisingly shown that Dallas was the least aggressive on commercial properties as compared to Austin, Houston, and Fort Worth despite similar levels of market level support increases. Cumulative values based on numbers from 2011 to 2013 showed Dallas County values increased on an average of 4 percent on commercial properties. On similar properties, Houston’s Harris County was the most aggressive increasing values an average of 24 percent across all markets, while Austin’s Travis County and Fort Worth’s Tarrant County increases averaged about 13 percent.

However, Dallas owners and investors should not be overjoyed; instead, they should be on alert and start budgeting accordingly for commercial property taxes in 2014.

What does all this mean for the future? With Austin and Houston having been quite aggressive over the last couple of years, averaging double-digit growth on commercial properties, the big question is, are they setting the new norm? Should Dallas expect values to increase similarly over the next three-to-four years, or should we expect a return to average value growth?

Unfortunately, there is no clear answer. It will depend on asset type and location. Office and retail markets have remained more stable in valuation than multifamily, but they may see higher, continued levels of growth. On the other hand, jurisdictions may slow valuations on the growth of apartments, but that is yet to be seen in the marketplace.

With no true way to tell what appraisal districts have in store for the next few years, it is paramount to plan and budget for an increase in valuations.

Amish Gupta is chief operating officer of Real Estate Tax Consultants Group.

DALLAS-Commercial property appraisals are out and many owners who saw an increase in values are asking themselves how these valuations came to be. If you’re one of those owners questioning this year’s numbers, consider this—appraisal districts face the impossible task of valuing every piece of real estate and business personal property. Even if the valuation cycles are not every year, this almost is an impossible task. Below are just some of the reasons valuations can prove difficult and even yield incorrect values:

Volume: Appraisal districts are responsible for valuing tens and at times hundreds of thousands of properties each year, and this isn’t restricted to one type of property or industry niche. Appraisal districts are required to be the “expert” on all types of property including commercial, residential and business personal property whether they are familiar with that particular market or not.

Limited Funding: With insufficient staffing in appraisal district offices, ratios are usually in the thousands per one appraiser yielding a near impossible workload that is often met with a “cookiecutter” valuation approach. Limited funding also translates to recruiting challenges—both new hire and retention—not to mention, fewer senior staff members who have “real world” experience on valuations/acquisitions. With limited staffing and HR, many jurisdictions rely heavily on IT
capabilities, but unfortunately a lack of funding often means IT budgets are not on par with the task at hand.

Lack of Information: Most states are non-disclosure states when it comes to real estate properties, including Texas. Owners in non-disclosure states are not required to provide annual income statements nor do they have to disclose purchase price information. As a result, appraisal districts are making an “educated guess” on the value of a property based on the information they have available according to surrounding properties. Without knowing the past cash flow of a
business, appraisal districts have a hard time predicting future cash flow. This is why many values may not be an accurate reflection of a property’s value because jurisdictions have to make their best guess based on the available information and area comparables. However, all states require disclosure (or renditions) for business personal property. This process usually is more straight forward, but it does require the appraisal districts to process each rendition and “audit” any that may
seem irregular. However, just because appraisal districts have this information readily available it’s still important to closely review these valuations because you may qualify for an exemption such as the Freeport exemption.

Equitable requirements: Many state valuation codes require that properties be valued fairly in a “market” and “equitable” sense. Equitable meaning comparable properties are valued similarly on a “per pound” basis. For example, if two identical multifamily apartment complexes are situated next door to each other with no discernible difference other than one complex operating at 90 percent versus the other operating at 50 percent occupancy, the law requires that both properties are to be
valued the same. Also, reconciling “market” and “equitable” values is not possible on each property. Many times, a fair “market” and “equitable” values on the same property are quite different. Yet, appraisal districts can only tax based on one value, and therefore are tasked with an impossible assignment.

Political / PR pressures: Although theoretically appraisal districts are supposed to be immune to any pressures, there are conflicting pressures. For instance, local governments, school districts and utility districts are always seeking a higher tax base which can yield high taxable values. At times, these are the same people who are in charge of appointing the most senior level appraisers.

It is important for owners to know more about the appraisal district valuation process, which can help them decide whether to protest this year’s values. If you are an owner who experienced “sticker shock” when you opened this year’s property tax assessment, remember these points above. Appraisal districts are trying to appease all parties and attempt to valuate properties as accurately as possible. While they try to push values as much as they can without causing too much upheaval from the general public, realistically some commercial property owners will still receive inaccurate and perhaps unfair valuations.

If this is you, be sure to file your protest; and, if you missed the May 31 protesting deadline, you can file a late protest until Jan. 31, 2014. But remember, there are additional stipulations associated with filing a late protest so it’s best to turn your valuation in on time.

Amish Gupta is COO of Real Estate Tax Consultants. The views expressed in this column are the author’s own.

A local expert provides five recommendations on a topic useful to small business owners. This week, consultant Amish Gupta talked to staff writer Hanah Cho about five tips for training your employees for success.

Build an internal training program
C-suite and senior managers should use knowledge from their education and experience by holding quarterly internal training sessions. This is a pertinent part of our firm’s value for clients when they realize our employees have learned the same analytical acumen as top-level executives.

Teach negotiation
Each employee should have solid negotiation skills, regardless of role or level. Negotiating is a fundamental part of business that leads to other skill development. In fact, the best negotiators are those who don’t focus solely on winning an argument but who can find a middle ground.

Fine-tune presentation skills
Employees may excel at analytical tasks and other skills, but can they sell your company’s services and experience during a new-client presentation? Equip them with tools and knowledge to tailor each presentation, whether it’s a new-business pitch or an industry panel.

Create superior client management
Maintaining and nurturing client relationships is key in any business. Consider instituting a policy for 24-hour response, ensuring clients receive a response in a timely manner.

Teach networking skills
Sending employees to seminars and industry conferences is not enough. Networking goes above and beyond making new contacts. Coach your employees on how to develop these contacts and maintain these relationships. This can lead to new business relationships.

RETC helps property owners decide when to protest valuations

DALLAS–(BUSINESS WIRE)

Appraisal districts started releasing 2013 preliminary appraisal values as of May 1. RETC (Real Estate Tax Consultants), a leader in the property tax consulting industry, has provided tips for property owners as they determine whether or not to protest.

Property taxes are typically the largest line item expense, which can have a major impact on the cash flow and sale price of a building.

“Each jurisdiction is unique in how they value properties and administer property taxes even within state lines. The more dynamic a property is, the more volatility there will be in taxes,” said Amish Gupta, RETC’s chief operating officer. “These factors can leave owners with a tax bill that does not reflect the true value of their property resulting in overpayment.”

With property taxes and determining when to appeal, consider these factors:

— Understand local administrative policies. This is the first step in gaining valuable knowledge to ensure a property is valued fairly and to keep taxes low.

— Identify appraisal parameters. Knowing which appraisal parameters jurisdictions are willing to negotiate will help ensure a property is being valued properly and fairly.

— Recognize appraisal jurisdictions’ experience. Appraisal districts are often valuing every type of real estate, may be understaffed and may not have the technical expertise or information available to make quality valuations.

— Hire professional help. If you are not an expert and are having trouble, hire an experienced professional who knows the local rules and regulations.

If a property has seen an increase in net operating income (NOI), owners should anticipate some type of commensurate increase in property taxes. However, by managing property taxes, owners will reap the benefits of increased NOI and cash flow while increasing the value of the property and their debt coverage ratios.

Property owners are aware of the appeal process for taxes on their real estate, but many do not realize the appeal process for business personal property. Here are some things you need to know for BPP in Texas.
For taxation purposes, the Texas Property Tax Code requires all business owners to supply information on all tangible personal property used for the production of income that is owned, managed and/or controlled as a fiduciary on Jan. 1. The rendering of these assets usually will include the tax payer’s tangible fixed assets, including, but not limited to, machinery and equipment, furniture and fixtures, computerized equipment and inventory.
It is important to note that these renditions will need to be reported to the appropriate assessing jurisdiction between January 1 and April 15. If additional time is needed, an automatic 30-day extension can be requested and will be granted by the assessing office, as long as the request is received prior to the April 15 deadline.
One of the largest BPP expenses companies will find in Texas is the inventory reporting requirement. This is because inventory is taxed at full fair market value and is not depreciated like other asset classes. In order to help relieve tax payers from this expense, and to enhance local economic development, many taxing jurisdictions have approved of a Freeport exemption on this inventory, as long as the tax payers meet the necessary qualifications.
According to exemption guidelines, Freeport property includes items in your inventory that are sent out of Texas within 175 days of the date they are acquired or brought into the state. The goods must be in Texas for certain purposes, such as assembly, storage, manufacturing, processing, or fabrication. In order to qualify, the exemption must be applied for each year and must be postmarked by April 30th to be considered timely filed for full credit. To minimize their tax liability, it is important for companies to understand the state’s property tax statutes when submitting filings to the districts.
It is important to proactively review the filing methodology, as well as identify asset classification issues that have not previously been identified or corrected. This typically involves scrubbing the fixed asset listing to remove any ghost or duplicated assets that should not be reported on the initial filings. Also consider the use of assets, in order to categorize them in the fastest depreciation table allowable and identify any issues that would warrant additional depreciation. For example, we have identified assets that are listed as machinery and equipment on the company depreciation schedule; however, the use of the assets would be considered molding or tooling and would move from a 10-year life to four-year life on the Dallas Central Appraisal District’s depreciation tables. This could drastically reduce the valuation of those assets.
Also seek to identify and obtain other tangible property exemptions or tax saving opportunities. Examples of this can include pollution control exemptions, inventory exemptions, credits/incentives, and the identification of exempt assets by jurisdictional laws or regulations.
Remember, an appeal filed to the district on the valuation of a personal property account will need to be filed no later than June 1, or 30 days after the valuation notice was delivered.

Amish Gupta is chief operating officer of Real Estate Tax Consultants Group.

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With industrial vacancy rates hovering around 8% locally, the future is so bright, our crowd of more than 300 had to wear shades Friday at Bisnows third annual Dallas Industrial Real Estate Summit at the Hotel Palomar.

The 3D glasses were sponsor giveaways. (See–or don’t see–what you miss when you don’t turn up at our events.)No new supply for the past four to five years and a constant tenant demand means new construction will eventually kick in, says CBRE vice chairman and managing director Jack Fraker.In 55 of the nations 56 major markets, all are under 10% vacancy. If you look at stats, spec should be done, Jack says. Between 1997 and 2007, there was 225M SF developed each year in the US. Between 2008 and 2012, however, there was maybe 40M SF developed annually and, even then, much of that was build-to-suit. Factor in all the obsolete warehouse space that should be taken out of inventory and the market isnt keeping up, Jack says. (Soon we’ll be seeing “Cash-for-Warehouse” commercials instead of Cash-for-Gold.)

Jack says the 50k SF warehouses (and smaller) have the greatest potential for rental rate growth because no one is building for that sector; everyone is competing for the 1M SF deals. With the economy rebounding, especially the single-family homebuilding industry, Jack says there is opportunity for rent growth and spec development of small bay warehouses in well-located infill sites (especially around Frisco, The Colony, and places north.)

We considered about adding a little stacked red Lego-style hat to turnHenry S. Miller Brokerage associate John Bielamowicz into Devo, but we like him just like he is. He says rents, overall, are going up largely because of supply and demand (like Jack says, theres been no supply, but lots of demand). And, while lenders are shoveling money out the door, there are all-time historic lows for interest rates that make DFW an attractive market for users and investors. The keys, he says, include the predictable regulatory structure, the great cost of living and amenities here, and the availability of lots and lots of land.

Some little known facts about our panelists, gleaned in a lightning Q&A. Seefried Industrial Properties Texas region SVP Jonathan Stites can tell you about his 65 mph building; DFW International Airport commercial development VP John Terrell was the northeast Tarrant County karate champ in his youth; Holt Lunsford Commercial Dallas industrial division partner Jim Brice was once named the funniest accountant in the city at the Improv in Addison; Panattoni Development Co partner Rob Riner is a UTA alum whose favorite restaurant is Angelos BBQ; Prime Rail Interests prez Mike Rader is planning on having Rob take him to Angelos); Real Estate Tax Consultants COO Amish Gupta wrestled in high school and is going to Nepal this week; John brewed beer while listening to Beethoven last week; and Jack loves Mi Cocina and had hair while working overseas in the Middle East and Europe.

Event sponsor Mansfield EDCs Richard Nevins and Scott Welmaker tell us the MEDC assists brokers and developers with land/property acquisitions while also offering economic incentives to initiate development and close the deal. Mansfield and Kennedale were the stomping grounds for our DFW reporter in her high school days cruising down 287. Now, theres development on every corner.

Sponsor Perma-Pier Foundation Repair commercial division VP Denny OConnel l, with Marketing Net Wks Jo Ann Howeth, tells us the company just landed two projects with Holt Lunsford in Richardson and Fairfield Residential in North Dallas. Within American Communities, Perma-Pier has started sizeable repairs on several of its buildings at an apartment complex it owns in Irving. Additionally, the firm plans to start a fairly large mudjacking project for Honeywells manufacturing plant in Richardson.

We caught Pacheo Kochs Jim Koch and Space Center Incs Jim Ryden chatting with event sponsor The American Institute of Steel Constructions Rick Kuhn. Rick tells us the not-for-profit technical institute and trade association services thestructural steel designcommunity andconstructionindustry with the goal of making structural steel the material of choice. AISCs Steel Solutions Center provides services to help find, compare, select, and specify theright system for your project. Fromtypical framing studies to total structural systems, including project costs and schedules, the AISC can provide up-to-date information forfree. Stay tuned for more event coverage this week.

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If youre looking for money from Wells Fargo this year, you may want to request a short term. (Think of it as a brief, passionate Casablanca-style affair with a loan.)Yesterday, Southwest division manager Mike McAfee, a panelist at Bisnows fourth annual Capital Markets Summit, announced the bank is heavy on construction loans and needs to even out its portfolio.

Mike says two-thirds to three-fourths of his activity has been in construction loans. Those take a long time to reap benefits for the bank, so this year itll emphasize short-term standing loans (sweet spot: three to five-year terms). Mike says that smaller banks can be buried by regulations, but hes not as burdened by them as many people think. (Just because someone has strict parents doesn’t mean they can’t have fun.) Wells Fargo still needs to grow and serve its clients, and hes managed to do deals within regulations. In fact, it doubled production in Houston from 11 to 12.

Flagship Capital Partners managing principal David Mincberg focuses on high-leverage value-add deals and expects that sector will pick up over the next few years. He says much of the activity will come from loan maturations pushing product onto the market. He recently closed a loan for a 300-unit multifamily project that was 75% occupied and in need of significant rehab. That deal got 80% loan to cost. And Flagship financed a NW Harris County shopping center. The 400k SF asset was 60% occupied and also nabbed 80% loan to cost, including acquisition financing and some TI funds.

Grandbridge SVP Greg Young forecasts a 20% to 25% increase in loan and transaction volume this year. Hes also watching maturities over the next few years; he says what matured from 08 to 11 was traditional bank debt and they had the flexibility to handle it. But whats coming due soon is largely CMBS maturities (including $426B that was originated in 06 and the first half of 07… it’s about time they grew up), and he says many of those wont underwrite. He recently financed a to-be-built multifamily property in which he took the borrower up to 95% LTV.

Cornerstone Real Estate Advisors managing director Bruce Gadd (with moderator RETC COO Amish Gupta) says he underwrites the borrower as much as the asset. He recently put a permanent loan on the Embassy Suites Downtown and a mezz loan acting as equity on a Galleria multifamily project under construction. Amish asked our panel what borrowers most care about when choosing financing; Bruce says he occasionally loses a deal over LTV, but price is king. (It’s what’s on the inside that counts, the inside of your wallet.) David says proceeds is most important, and Mike feels its recourse.

Our sponsor Commercial Resource Capitals Jason Dannatt, Steve Hazen, and Toby Kettle raffled off a Smith & Wesson AR-15. (We hear its a hard model to find these days. Integras Craig Young won.) This week, Jason and Toby committed $19M in loans on an existing MOB in The Woodlands and Class-A office/warehouse in Northwest Houston.

Speaking of Craig, our sponsor Integra Realty Resources recently valued a portfolio of 24 multifamily and retail properties for an international REIT. It also completed rent studies on 40 medical-related assets for Stark Compliance purposes.

We snapped Caldwell Cos SVP Jim Black with our sponsor ViewPoint Bank SVP Richard Miller. Last week, Richard closed the refinancing of 240k SF North Park Shopping Center on Eastex Freeway. PAL Realty owns the center, which is anchored by Lubys Cafeteria. Jim is working on closing the acquisition of an office building in Northwest Houston and tells us his firm is pursuing other office, industrial, and land investment and development opportunities in the suburbs.

By Amish Gupta – COO, RETC

In 2012, Dallas County raised values by an average of 4.2 percent on all commercial parcels excluding land. On the bright side, this is a good indication that property values in the area are generally trending upward. On the downside, it also means higher property taxes and thus lower net operating income.
2012 values are driven by the prior year’s financial results. 2011 market occupancies and rental rates had a direct impact on the 2012 assessed values. Not surprisingly, the two sectors that had the highest revenue growths, hospitality and multifamily, also drove the growth in Dallas County assessed values.
According to the Texas Hotel Performance Factbook, total revenue for hotels increased by 13.2 percent from 2010 to 2011. Average Daily Rate (ADR) grew by 3 percent, and occupancy increased from 55 percent to 60 percent. As a result of these numbers, Dallas County grew values on average by 17.3 percent in 2012. And although hotels only represent a small fraction of the overall assessed values in Dallas County, they accounted for almost 17 percent of the total growth in value for commercial real estate values.
Multifamily accounts for 20 percent of the total commercial asset base in Dallas County, but accounted for almost 40 percent of the total growth in assessed value. Not only were the results driven by increases in revenue, but also low cap rates. According to Reis Inc., vacancy dropped from 8.2 percent to 6.2 percent in 2011, and effective rents increased by 3 percent. Additionally, trades in the market have demonstrated the willingness to purchase at lower yields. According to Real Capital Analytics, the average cap rate for all classes of multifamily trades was at 6.61 percent in Q4 of 2011. All of this led to an average increase in assessed values of 9.2 percent.
Although the values did not increase as dramatically for office or industrial, they did see slight increases at 4.6 percent and 1.9 percent respectively. Both are reflective of the slight increases in occupancies and effective rents. The limited new supply has helped start tilting market dynamics toward owners versus renters (although there is still much vacant supply available).
Retail saw similar limited growths in occupancy and effective rents according to Reis with vacancy dropping 0.7 percent and effective rents increasing by $0.10 in 2011. However, Dallas County chose to keep values constant in 2012 with a 0.1 percent growth in assessed values.
In 2013, we anticipate Dallas County to continue to be aggressive overall. Multifamily and hospitality should see continued growth in assessed value similar to what was experienced in 2012. However, Dallas County has the opportunity to increase values more aggressively in the other commercial sectors. Much of the growth that did occur in 2012 with office and retail was in certain submarkets.
Assessed values for a large percentage of assets have remained constant for two-to-three years. It is possible that those properties could see large increases in 2013 to “make up” for the lack of growth in the prior years.
Generally speaking, if a property you own has seen an increase in NOI, you can probably anticipate some type of commensurate increase in property taxes. However, take notice that if your value has not changed in a few years, Dallas County will likely take another look at it in 2013. They likely will be at least as aggressive in 2013 as they were in 2012. Additionally, they do have reason to be even more aggressive in certain sectors and submarkets due to market trends.

Amish Gupta is chief operating officer of Real Estate Tax Consultants Group.

Commercial Real Estate bouncing into 2013

Bill Bowen
News Editor

If the economy is stuck in neutral, somebody better tell the developers of the nine or more
apartment projects within the shadow of downtown Fort Worth.

Or the owners of Ritchie Brothers Auction, where the sale last week of $44 million in used
construction and other heavy equipment set records on March 5-6, as did the number of registered
bidders, more than 3,900, and the number of online bidders, 2,300.

Or the people at the Tarrant Appraisal District, where an increase of $879 million in commercial
real estate values will soon be reflected in tax notices sent to the owners and operators of North
Texas’ offices, shopping centers, factories, hotels, restaurants and apartment and townhome
developments.

Of that $879.2 million in new value, $419.8 million is in multifamily developments, up 11.5 percent
in the sector that benefited from single-family foreclosures and already a perennial performer in
the Dallas-Fort Worth development market.

Much of that development is new construction. Last year in Tarrant County, developers delivered
1,841 new apartment units. This year they are expected to complete 2,350, according to figures
from MPF Research.

Besides pure demand are certain investors looking to put their money into solid assets because of
paltry returns on treasury notes. Tax exempt bonds and other tax-favored holdings are producing
low yields right now. So the already warm apartment market is offering returns from 100 to 400
basis points higher.

“What’s happened is that, in the very large big picture sense, when treasury rates are low, they
need to find a place to put money that is safe, but at the same time provides more than a 1-
percent return,” said Amish Gupta, chief operating officer for RETC, a real estate tax consultancy
with offices in Fort Worth, Dallas, Austin, San Antonio and Houston.

Gupta said that the increase in values has his office braced for rush of property owners wanting to
protest the valuations.

The economy and job growth continue to improve and the new apartment units expected to hit
Fort Worth this year and next are expected to be absorbed fairly readily, although perhaps more
slowly in 2014, depending on a host of other economic factors.

The projects, in various stages of construction, are rising along W. Seventh Street, including West
7th, Phase III and Museum Place, along with other projects in the Near Southside and along
Samuels Avenue just north of downtown.

But the market for occupants is holding fairly steady, especially in central Fort Worth, where
occupancy is near 94 percent and average rent is at $1,667 in fourth-quarter 2012, up $137
dollars from fourth quarter 2010, according to figures from the North Texas Real Estate
Information System compiled by Downtown Fort Worth Inc.

Values of retail properties are also up 5.4 percent, according to the Tarrant Appraisal District. But
that may be more from increased leasing activity rather than new construction.

“I’m seeing more (leasing) activity now than I’ve seen in several years,” said Jon McDaniel, retail
specialist at NAI Robert Lynn commercial real estate services who handles leasing for about 45
properties, mostly in Tarrant County. “I have deals working on just about every property I have.”

McDaniels said that North Richland Hills, Mansfield, Watauga, Keller and North Fort Worth have
resurged in the past year and have projects in the works, as does north Arlington. That doesn’t
include the Renaissance Center, a power-store anchored center now under construction at the
corner of East Berry Street and U.S. 287.

“Retail properties that we have that have had vacancies for some time are starting to have a lot of
activity,” McDaniel said.

All of that is good news stacked upon last year’s advances. Total North Texas construction
contracts were up 19 percent for the region in all of 2012 with contracts totaling $9.06 billion.
Statewide, Texas enjoyed a growth rate of 10 percent in total construction of $45.78 billion.

Watching the ever-shifting needle of the tax assessors’ schedule can pay off. — By Lynn Peisner

High tax bills are a potential reality for any commercial property that brings in revenue. Sometimes, a high tax payment can dramatically affect net operating income and reduce the value of a property. As counties and cities become more cash-strapped and in need of funding sources for public services, student housing operators keep a close eye on how and why their properties are valued the way they are, and what action can be taken when an operator believes an assessment may not be accurate.

Tax assessments vary in how often properties are valuated and what criteria influences the outcome, but most owner operators agree that monitoring the scheduling and knowing how to compare your property with others using accurate data is a crucial part of ensuring a fair tax bill.

SHB spoke with Joseph Green, chief financial officer of The Preiss Company, Ari Rosenblum, president of The Woodlark Companies, and Amish Gupta, chief operating officer of Real Estate Tax Consultants, a Texas-based property tax consulting firm with offices in Dallas, Houston and Austin. In their own words, they share insights about the nature of property taxes in today’s economy and methods for protecting NOI.

Generally, the frequency with which a municipal body considers property tax reassessments is the same, regardless of the asset class. It also holds true that the criteria used by such bodies to determine the amount of any reassessments are the same. However, some jurisdictions may have their own ideas about other aspects of the process. For example, in Texas, property tax values are recalculated every year. In other jurisdictions, the process may occur every five years barring special events such as the sale of a property, which typically will cause a revaluation that year.

We have been in situations where a property’s real estate tax has increased substantially over the prior year without any rational basis. One of our properties was valued at $30 million the prior year and $35 million the next without any material change in the property’s net operating income. The $5 million difference created a significant increase in the amount of the property tax, which in turn reduced the property’s net operating income and hence the value of the property. Fortunately, we were able to appeal the revaluation and achieve a meaningful reduction of the revised tax amount.

An increase in the amount of property tax can create a material adverse economic consequence for a property owner. Any such increase would reduce the property’s net operating income, a critical component of determining value. One of the primary criteria used to determine a property’s value is capitalization rate, which together with net operating income is employed by many property tax jurisdictions to determine the value of a property.

For example, assume that a property owner has accepted a quote from a lender to refinance a $20 million loan at par based in part on a property tax of $500,000. One month after agreeing to the lender’s terms, the property is revalued and the new tax liability is $600,000. In that case, the additional $100,000 in tax liability likely would reduce the amount of the loan proceeds by approximately $1.1 million based on a 7 percent cap rate. That means the property owner would have to come out-ofpocket about $1.1 million to pay off their $20 million loan.

But a property owner can appeal an assessment. And it is easy to see why the ability to appeal a property tax assessment is a very important part of this process. The property owner usually has 30 to 45 days from the date of the revised tax to file an appeal. There are several firms, such as Marvin Poer, The Ryan Company and Paradigm, that specialize in working with the applicable governmental bodies to reduce property taxes. Approximately half of the appeals we have filed resulted in significant tax savings and a corresponding increase in the value of the project.

The dispute in an appeal usually revolves around cap rates. In some cases, taxing authorities use the same cap rate without distinguishing the projects. For example, the same cap rate may be used for a newly constructed property that is located next to a university and for a 20-year-old project located three miles from campus. Of course, the same cap rate should not apply to all properties.

Many cities and counties cannot provide the same level of basic public services such as fire and police protection today as they once did, and they are struggling to make their budgets work. As a result, they often turn to their real estate tax base and increase tax rates to provide more revenue. Perhaps instead of taxing a property at 75 percent of its fair market value, they might tax it at 85 percent. It seems likely that more of these problems may arise over the next several years, as loans that were originated before the most recent financial crisis will be coming due at a time when cities and counties that have lost revenue from a dwindling tax base are looking for ways to increase their revenues. Accordingly, owners need to be educated on the best ways to reduce their property taxes in general and to appeal the decisions of local governments effectively.

- Joseph Green

 

Tax assessments bearing a negative impact on NOI is an incredibly important issue in student housing. It’s hard to make blanket statements about property taxes and assessments because of how much the process varies in different taxing jurisdictions, but there are certainly some markets that have looked to property taxes to make up for other losses in revenue since the economy has slowed down.

Whether you do it in-house or use an outside firm, you have to stay on top of assessment and appeals schedules. They are different in each jurisdiction and the rules differ as well, so it is a fairly complicated process. But if you keep your eye on changes in assessment, you’ll be ready to appeal them by the deadline to make sure you’re not paying more than you have to.

Assessments are appealed quite often. In our experience, that process has usually come out in our favor, but that is because we typically only appeal when we think we have a strong case.

As far as appeals go, assessors often don’t have the most accurate or up-to-date information about every property, so they often make assumptions about your property based on general market data. When these assumptions are incorrect, your assessment can be way off, so presenting the assessors with accurate data is very important.

Sometimes assessors follow a strict schedule of reassessment intervals, while others reassess after a sale or an improvement to the property. This is totally market specific.

Some jurisdictions follow regular timed intervals without paying much attention to events such as sales or improvements, but others are quick to reassess after a property changes hands. In general, however, you are more likely to see a reassessment after a sale or improvements.

Assessments determine what the property tax bill will be, and this has a huge impact on NOI. Significant changes in assessment have the potential to drastically change a property’s capped value. Buyers have to take this into account when going through their analysis and creating projections, and sellers have to take it into account when setting their pricing expectations. In that same vein, changes to the capped value of a property can change how much debt the owner is able to put on it.

—Ari Rosenblum

 

Since the economy has faltered, cities and counties have had a more difficult time balancing their budgets. Since they rely heavily on property taxes, they have attempted to maintain revenue streams, and they can only accomplish that by increasing millage rates or increasing values. Over the past few years, multi-family, and in particular student housing, has seen significant transactional and development volume. This has given jurisdictions valid reasons to maintain and increase assessed values.

Due to the increased activity, jurisdictions have become more comfortable in their knowledge of how to assess values. Additionally, they have more information on market rents, cap rates and expense ratios. Therefore, they are able to defend their values armed with this information.

The higher the NOI, the higher the saleable value of a property. As with other line item expenses, sellers attempt to minimize property taxes before the property is put for sale, so they can claim higher NOIs in the
offering memorandums.

For financing purposes, banks are usually concerned with debt service coverage ratios. The increased cash flow allows bankers to provide more financing to owners as long as the coverage ratios are maintained. Buyers on the other hand must be aware that real estate taxes will most likely increase after they purchase the property. As such, they must have a good understanding where the assessed values will be in relation to their purchase price and also where the numbers will be through the hold period.

Values are assessed depending on the state and jurisdiction, and most likely there is some minimum requirement on the frequency of the revaluation. However, in some states, they can and will revalue more often than the requirement.

The two biggest occurrences that trigger reassessments are transactions and improvements (when a permit is taken out). Owners can almost be assured that a new assessment will be coming. The exact timing of when that occurs depends on the property location. Some are done with random timing, while others are done at the same time every year.

The most common misconception is that values are based solely on the market value in all jurisdictions, or what a property would sell for. In some jurisdictions, they have some type of “equal” clause. In certain scenarios, properties can be assessed for lower than the market value as long as they are “equal” with other comparable properties.

Hypothetically, a property can be newly built and the local authorities assess it based on cost of construction. If, however, the demand factors are lower than expected leading to less than expected revenues, the authorities will keep the assessed value based on cost since it is higher. It is up to the owner or their agents to appeal and convince them otherwise.

Owners should stay ahead of situations like these. Although nobody has a crystal ball, owners should anticipate how values will be assessed and should draft appeal strategies throughout the hold period. Hiring tax consultants who have local market and tax knowledge can help you in both budgeting and appealing; they are the ones who are most likely to get the best results.

The frequency of appeals depends on the local laws. Some appeals are completed every year; others such as California are done only at the change of ownership. Although not every appeal is successful, assessed values almost never increase. Therefore, there is no downside for owner-operators.

There has to be some valid reason for a positive outcome in an appeal. Most often, the reasoning is based on the NOI potential of a property. In certain jurisdictions, properties must be valued “equal” to other comparable properties. For student housing, this would be on a price per door basis. Usually, taxing authorities will lower values as long as they are given some valid argument. It is up to the owner and their agents to discover and highlight that reasoning.

—Amish Gupta

The three biggest markets for real estate activity in Texas are Dallas, Houston and Austin. On the positive, as an overall trend, market values seem to be increasing in all three cities. Unfortunately, with the increase in market values there is a corresponding increase in assessed values and property taxes.

Although the major Appraisal Districts in the three markets have similarities, there are some differences in the amount and distribution of the increases across asset types.

Of the three, Dallas County had the lowest overall increase in assessed value for commercial real estate with a 4.2 percent increase. Of note, this number also includes new construction or rehab, but the majority of the difference is accounted for in increases of existing properties. Dallas County had a more targeted approach in where it increased values in 2012. Not surprisingly, hospitality and multi-family had the largest increases at 17 and nine percent respectively. These were followed by office at five percent, industrial at two percent and retail was flat at zero percent growth.

In Houston, the Harris County Appraisal District was more aggressive and the values increased by 7.8 percent for commercial property. The level of increase was spread more evenly across the various asset types than Dallas or Austin’s Travis County. Once again, hospitality had the largest increase at 14 percent. This was followed by office at 11 percent, multi-family at eight percent, industrial at six percent, and retail at five percent. Of note, the industrial sector grew in Harris County more than Dallas or Travis, and that seems to be in line with how their respective markets have been.

Travis County has seen remarkable growth over the last few years, and the 2012 assessed values are reflective of that with a 9 percent increase on commercial property. As with both Dallas and Harris County, hospitality led the way with a 15 percent increase in values. This was followed by office at 13 percent, multi-family at 11 percent, retail at four percent and industrial at three percent.

Now, what do these numbers mean for the future? There are a few points that we feel are good possibilities for 2013.

· We feel that the Dallas County Appraisal District will be more aggressive than it was in 2012. The growth in assessed value was almost half of Harris County, and it is certain that many would argue that commercial real estate growth in Dallas has been almost or just as good as Houston. Furthermore, Dallas County has room to grow in a more balanced fashion with bigger percent increases in both office and retail.

· Overall, the hospitality sector will continue to see growth in assessments that should be at the same rate as revenue per available room (RevPAR) growth.

· Multi-family will continue to be a major driver in the growth of property tax revenue in each of the jurisdictions. Due to the pricing and transaction volume, we believe growth in 2013 will be similar to that of 2012. Specifically, since Harris County was slightly less aggressive this year, they may choose to compensate for that in 2013.

Assessed values tend to increase when there is high transaction volume, when revenues are increasing, or cap rates are contracting. We are seeing elements of all three in the various real estate sectors in 2012. Since the 2013 assessed values are based off 2012 numbers, investors should expect increases in 2013 similar to those in 2012, and in some cases, appraisal districts will choose to be more aggressive than before.

The United States is beginning to experience a demographic shift as the baby boomer generation moves toward retirement. With more retirees on the horizon, there will be an increased demand for specialized seniors housing such as independent and assisted living and memory care during the next 20 to 30 years.

The seniors housing industry is making a gradual transition from unfamiliar territory to a more pervasive market sector. Large institutional investors are gradually becoming more familiar with the industry. At the same time, real estate fundamentals are gradually improving.
Anytime a real estate asset class begins to take on more prominence and transaction volume heats up, jurisdictions begin to pay more attention. In order for owners to keep their tax burden low, the most important thing they need to do is arm themselves with strong knowledge of local appraisal rules.
With property taxes there are many factors to consider, but here are the most important to remember when considering each issue.

1 Understand local administrative policies
Understanding appraisal rules and the appeal calendar is the first step in gaining valuable knowledge to ensure a property is valued fairly and to keep taxes low.
It’s important to ask the right questions. How often is a property reappraised? Are there certain events that can trigger a reappraisal? For example, Proposition 13, which passed in California in 1978, established limitations on assessed value and set the maximum general property tax rate at 2 percent.
In this case, Proposition 13 would have been an important law to be aware of when considering the property value of a facility. Any time there is a transaction or transfer of ownership, reappraisal is triggered. If someone has owned a piece of property for 25 years, and it was originally valued at $2 million, the taxes are most likely very low, but when ownership is transferred through a sale or inheritance it must be reappraised at the current value.
Find out the notice schedule. It’s also important to ask if there is a window of appeal that occurs every year around the same time, or if owners have to be on the lookout for appraisal notices at all times. In Texas, for example, 90 percent of notices are sent between May and July.
How quickly do appeals typically get resolved and are there ways to escalate the appeal process? Timing of the appeal process varies from state to state and from county to county. Be aware of the general timing the initial appeal process takes as well as the advanced appeal process.
How does the appeal calendar interact with the payment schedule? This could have a significant impact in your pro formas and cash flow analysis. At times there can be a lag between the date of valuation and the actual payment dates. Does your jurisdiction require you to provide property financial statements? Most of the time this is not required, but some jurisdictions ask for them anyway. The vast majority of times, it makes sense to not provide any financial information if it is not required.

2 Identify appraisal parameters
Knowing the limitations of appraisal jurisdictions will help ensure a property is being valued properly and fairly.
Understand what the rules are for taxable property value in the area. It’s highly likely that the taxable value is only on the physical structure and the land. However, many seniors housing facilities offer services above and beyond the real estate that some appraisal districts may inadvertently factor into the tax rate when determining valuations.
These can include, but are not limited to, food and beverage arrangements and medical services for assisted living and memory care, as well as activity fees. Each facility administers and charges for services differently.
Although an investor may purchase a facility for a certain price, the cash flow of the property most likely includes the ancillary services listed above. From the standpoint of ad valorem taxes, it is necessary to isolate the value of the real estate. One can achieve this by using a replacement cost analysis.
It is also possible to use a stripped-down version of a pro forma, such as taking out service income and related expenses, to derive a value. The important part is to look at the value in different ways and to triangulate it to a reasonable and justifiable number.

3 Recognize the experience of appraisal jurisdictions
Appraisal districts often value every type of real estate. They are often understaffed and may not have the technical expertise or information available to make quality valuations regarding seniors housing.
Although they don’t necessarily directly seek it, appraisal districts learn from owners on how to value new property types. Sometimes owners have to push the envelope and force an appraiser to rethink his or her previous conventional knowledge of appraisals.
For example, if a facility was purchased for $30 million, it may take extra convincing as to why that same property today may only be worth $20 million of the original purchase.

4 Hire professional help
If you are not an expert and are having trouble, it is important to hire an experienced professional who knows the local rules and regulations.
It is best to involve a professional early on, typically before acquisition, in order to get a better sense of what to expect because it takes time for an owner/operator of a seniors housing facility to understand all the local nuances of property tax appraisals.
If you are having trouble understanding the dos and don’ts of working with your local appraisal district, or simply do not have the time to learn about the process, always hire a professional to help. It is never too early to start preparing for future cost expenses.

Over the past five years, the retail market has divided itself into the “haves and the have-nots.” With the ICSC Texas conference just around the corner, many attendees will hear more about retail trends such as this. Although almost everyone suffered through the economic downturn, a few properties have recovered better than others. The common theme amongst them: good location.

According to our research, the assessed value of all retail properties in Dallas County decreased by approximately 1.5 percent in 2012. Nonetheless, the retail growth that has occurred has been driven mostly by new restaurants. Aside from providing good food and a great ambiance, restaurateurs are well aware that location is just as important if not more so. As such, empty spaces in prime locations are highly sought after whereas subprime locations barely get a sniff. This imbalance of supply and demand causes pricing to materially increase for those fortunate assets located in good locations.

If you are one of the “haves”, you are in an enviable position. Either your property is already generating substantial rents or it is in a position of power with many retailers courting the location. In either scenario, the value of the property is quite high and the local appraisal districts have probably taken notice. Thus, your revenue streams likely have been partially offset by an increase in property taxes. As an owner of such assets, there are a couple of things to keep in mind.

First, if the property is not fully occupied, your financial projections will have large stair step increases in revenues as you anticipate new tenants. Appraisal districts are well aware of new occupants especially if any permits are taken out to complete the finish out. Accordingly, they will increase the assessed value. Therefore, it is prudent to increase the property taxes proportionally to the increase in revenue rather than a blanket 2 percent that many use as normal inflation. However, there are ways to curb these increases.

The second thing to keep in mind is that there may be opportunity to reduce the assessed value above and beyond what an owner may expect. For example, investors may believe the stabilized market occupancy to be 95 percent for a particular area, but the appraisal district may have a lower stabilized occupancy. Aside from occupancy, there often are discrepancies of factors between what owners believe to be true and what the appraisal districts are willing to accept. Factors include but are not limited to stabilized occupancy, expense ratios, cap rates and capital reserve requirements. Professional tax agents can help identify these discrepancies and limit your tax exposure moving forward.

If you are one of the “have-nots”, then managing your expenses is vital with property taxes likely being the highest line item. The local appraisal districts are unlikely to lower the value themselves. Owners need to demonstrate to them why the value is lower, and there are a few recommendations on how to accomplish that:

First, the value of the property may be assessed by what is considered “market level” for the area. However, there may be circumstances that are specific to a property that cause it to be below market level. For example, the property could have limited parking or access. The property may be situated where visibility is low or the signage is poor. As such, the market rents for the area may be $25/ft., but the property can only reasonably achieve $20/ft. Any way it can be proven that the subject property is unique from the rest of the area will help justify a lower value.

Second, the types of tenants a property has are important. Owners are fully aware that a property that has nationally recognized credit worthy tenants is worth more. As an example, if you have two free standing retail buildings with tenants with similar lease terms, the one with the Starbucks is worth more than the one with “Laura’s Coffee Shop.” These details often get overlooked by appraisal districts. If you are in a situation where you do have tenants, the appraisal district needs to consider the types of tenants. How likely are they to succeed in that location and if not, what is the level of assurance on the lease payments.

The most important aspect of all of this is to ensure owners are looking at every angle to mitigate their property tax exposure. At times it isn’t obvious to the appraisal districts, and owners need to demonstrate reasoning to justify a reduction. Other times, it isn’t even obvious to owners. In either situation, it is best to hire an expert to assist and achieve the best assessed values possible.

By Amish Gupta – COO, RETC

In certain pockets of Texas, some local economies have the good fortune of being part of the ever increasing popular practice, fracking – the new methodology of extracting natural gas. Almost overnight, these previous sleepy towns are turning into mini boomtowns. And as a result, local hotels are reaping the rewards.

Pearsall (a small town located on I-35 between San Antonio and Nuevo Laredo) is one of these towns. According to the Texas Hotel Performance Factbook, which sources its data from the state comptroller, in 2011 the average occupancy and ADR (average daily rate) for the city were 87 percent and $109 respectively resulting in a $94 RevPAR (revenue per available room). As a comparison, in Dallas ZIP code 75201 which includes the Ritz-Carlton and other notable hotels, this area had an average occupancy and ADR of 62 percent and $146. The resulting RevPAR was $91, which is lower than Pearsall!

Having said that, I don’t think anyone could argue that hotels in Pearsall are worth more than Uptown/downtown Dallas on a per key basis.

Nonetheless, often times local taxing entities change the assessed value of the property (up or down) based on the income it generates. If income increases by 10 percent, then the assessed value will also increase by 10 percent. In a broad sense, this is a reasonable practice when things are “normal” or stabilized. However, as people in Pearsall can attest, things are not normal, and fracking is never a sure bet.

Since the local appraisal districts have been using the same methodologies for a number of years, at times it can be difficult for them to understand why values would not increase commensurate with revenues. As such, hotel owners should make sure that they appeal their values, especially those owners who are experiencing thriving revenue due to fracking.

Using Pearsall as an example, this small town saw an increase of 44 percent in hotel room revenue in 2011. However, one could argue that the values have not increased by the same amount for the following couple of reasons:

First, just as quickly as the revenues have increased, the revenues could decrease. Hotel investors should be concerned with the sustainability of the fracking industry in the local area. But let’s face it, most hotel investors are not experts in the energy industry. It’s very difficult to assess the risk associated with gas prices (a macro-level comment) and the localized success of the fracking (requiring geo-technical expertise). For every boomtown, there is a ghost town.

Second, even if there is some level of sustainable growth as caused by the fracking industry, other competitors will rise. As with everything else, real estate follows the laws of supply and demand. Seeing the RevPAR numbers, bankers and developers will be quick to underwrite and build new hotels. In most of these remote towns, land is available and cheap, making the barriers to entry virtually non-existent. As a hotel owner, you may see a year or two of increased revenues, but the competition is coming, and pretty soon your hotel won’t be the newest on the block.

While some owners may feel hesitant to share revenue figures with the appraisal districts when they have increased quite significantly, keep in mind that the local jurisdictions already have the revenue numbers (released by the comptroller). Additionally, one can use logic-based arguments on why the assessed values should not increase commensurate to the revenue.

As a hotel owner, you want to ensure you are managing your expenses even when revenues are increasing, as is the case with many of these hotels that are experiencing overnight success. In the event that revenues decline quickly and dramatically, you don’t want to be caught with your pants down.

‘CRACKBERRY’ ADDICTION IS ON THE WANE AS MOBILE MARKET WARS HEAT UP

For a microcosm of the troubles that Research in Motion Ltd. is having keeping customers, look no further than Amish Gupta.

The chief operating officer of Plano-based Real Estate Tax Consultants, a 20-employee property tax consultancy, Gupta had used BlackBerry smartphones since he got out of business school in 2007.

At least until July of this year. That’s when he switched to an iPhone 4S.

“The biggest concern I had is that I’m not a technology guy,” he said. “To me, it’s a hassle to learn a new interface. I didn’t want to deal with transferring contacts and email. (But) it was simple and easy. That was really nice.”

In untold numbers worldwide, many people over the last five years have followed the path that Gupta went down. RIM, a Canadian company with its United States base in Irving, has seen its market share slide dramatically over the past few years, with its lunch money getting picked off principally by two rivals, Apple and Samsung Electronics (whose U.S. mobile phone arm is based in Richardson). A RIM spokeswoman said the company does not break out employment numbers at the Irving facility, which does work in research and development and a variety of “corporate support functions.”

As recently as 2008, RIM’s share of sales to end users in the smartphone market was 50.7 percent, according to market researcher Gartner. By the first quarter of this year, it had fallen to 5.4 percent, Gartner data show.

“More than hardware features, BlackBerry suffers from a lack of compelling software applications and multimedia content, due to lack of support from the developer community,” said Jennifer Kent, research analyst at the Dallas-based market research firm Parks Associates. “While RIM offers some great business and productivity apps, the consumer market for smartphones is much larger than the enterprise market, and thus most application developers focus on the iPhone first, then the leading Android handsets before spending the time and resources to develop compelling content for BlackBerry. This means consumers can do less with their phones.”

In response, a RIM spokeswoman said via email that the company has seen an increase of 220 percent in BlackBerry applications, to 89,000, compared with a year ago. She also pointed to a July blog by a RIM executive, Alec Saunders, who said that in the past year, RIM’s application vendor base has grown 157 percent.

APPS MATTER

Indeed for Gupta, a big factor in ditching RIM for Apple was the ability to use Internet and software applications. The bottom line, in his view: the iPhone allows for quick and easy surfing of the Web and application use, whereas the BlackBerry does not.

The BlackBerry did have its pluses, including the speed with which emails are delivered, simplicity of use and a keyboard. But Gupta has found most of those benefits also exist in the iPhone 4S. He concedes that typing on his new phone “requires some getting used to.”

But while more RIM customers have arguably gone the Amish Gupta route and switched, there are some hardcore BlackBerry users out there.

Landon Smith is among them. Smith, founder and managing partner of Dallas-based Riveron Consulting, has been using BlackBerrys since 2006. “I’m completely addicted to it,” he said. “I haven’t been able to convert at all to the iPhone.”

For Smith, the BlackBerry Pearl 9100 is just right. It’s small and fist in a pocket, making it easy to carry around both at work and at home.

But the device gives him access to his list of contacts, calendar, texting and phone.

Smith concedes that he will likely switch to an iPhone at some point. But with Research in Motion’s well-documented troubles front of mind, he’s bought three or four back-up BlackBerrys and batteries.

“I’m stored up for winter,” he said.

By Amish Gupta – COO, RETC

In June and July of every year, commercial property owners and their respective agents are busy appealing the assessed values of their property taxes. But for some, the May 31st commercial property tax filing deadline has come and gone, and of course there are always those unfortunate owners who missed the deadline to file an appeal. At times, these owners’ properties are grossly overvalued and they are “stuck” with a property tax bill that can be quite high, or are they?

There is a special provision in the tax code that allows owners to file a “late” protest. As one might suspect, there are some restrictions to qualify. First, there cannot have been an appeal filed and completed during the “regular” protest period. Second, the value must be over-assessed by one-third (e.g. market value at $7.5 million, assessed value at $10 million). In the end, if an owner does qualify, there will be a 10 percent penalty assessed. Nonetheless, every year we have clients taking advantage of this provision that achieve substantial reductions in their property taxes. The deadline for a “late” protest is January 31, 2013.

Investors and buyers should especially take note of this late protest period and learn how to navigate this process. Here’s why – many investors who take advantage of this provision may not acquire a property until after the appeal deadline or in some cases, a property may be in due diligence during the protest period. As such, there are certain things to keep in mind as a buyer:

The seller has little to no financial incentive to lower the property taxes if the closing is a certainty. Buyers have two options:

o First, ask the seller to not appeal or, ask the seller to withdraw any appeals they have open. This leaves the buyer with the possibility of filing a “late” protest. The positive – the buyer has complete control over the process. The downside – achieving a reduction that qualifies under the late provision could be unlikely.

o Second, ask the seller to file/execute an appeal on your behalf. There is a stronger likelihood of a reduction since there are no restrictions under a “regular” appeal. However, if the deal closes and transacts at a higher value than what was settled, then it could irritate the respective appraisal district. They could feel slighted if they were led to believe a property was overvalued when it was under contract at a much higher price. Thus, future successful appeals as a new owner could be more onerous to achieve.

Typically, we recommend our clients implement the first option for a few reasons. First, it is best to lose the battle and win the war. For most assets, the hold period is three to five years, and it makes most sense to manage your taxes over that time period than having a short-term win (especially if the taxes are prorated at closing). Second, in most scenarios the assessed values are already lower than the sales price. The buyer is usually receiving the benefit of lower taxes for a fraction of the year, and the likelihood of a large reduction is low.

The only time we recommend the second option is if the transaction price is lower than the assessed value. In this case, it is pertinent that the seller appeals the value and gets it reduced to the purchase price.

The late filing protest period is a complicated process and each jurisdiction and transaction has its own unique factors. What is MOST important is to engage a professional before acquisition who can guide you through the process and make the appropriate recommendation.

According to Real Capital Analytics, the volume of trades in multi-family is currently the highest since 2007. In the same vein, assets are trading at cap rates that are at the lowest level since 2007. Class A assets are regularly trading in the 5% range and even lower in the CBD’s of major metropolitan areas. As cap rates reach a stabilized level, owners will have to singularly rely on property performance to increase the asset value. For acquirers, the emphasis on accurate underwriting becomes even more critical.

Of all the major asset classes, multi-family properties are the ones most consistently seeing increases in value validated by the trade volume and cap rates. For this reason, they have become a target for the local budget-starved taxing entities. In many parts of the country, apartment owners are starting to feel the pinch. Those that did not budget properly are experiencing negative variances and taxes that offset any increases in revenue.

What needs to be considered about property taxes during underwriting? Although most owners/managers do an adequate job of controlling property taxes during the hold period, there is usually a lack of understanding of expectations during the underwriting process. This is understandable as each jurisdiction operates differently and has different taxing laws. We recently had a client call us one week before closing and ask us to verify what they had in the underwriting for property taxes. They had neglected to reset the assessed value upon acquisition, and thus underestimated their obligation by roughly $200,000. This equates to $4,000,000 in value. Unfortunately, I had to be the bearer of bad news, and the deal never closed.

There are numerous sources of confusion during the underwriting process, and below are a few common questions:

1. How often are values reassessed? Is there an automatic reassessment triggered by a transaction?

2. What is the exact millage rate? How are they set? How often do they change?

3. Are there limitations to the increases in assessed values during the hold period (a la Prop 13 in California)?

4. What is the timing of the assessments and when exactly are bills due?

5. What is the appeal process and how long does it typically last?

As with many government organizations, it is difficult to get clear answers to the questions above by reading websites or speaking with their staff. As such, I recommend that underwriters engage professionals who can educate and guide them through the process. It is difficult enough figuring out what the taxes will be at the outset, but even tougher to think about how to pro forma numbers through the entire hold period. By engaging professionals, investors will increase their confidence in the numbers and reduce the margin of error.

What must be done after acquisition to achieve the best property tax outcomes? After acquisition, it is important to actively manage your property tax assessments. Owners at times believe that property tax agents are able to reduce values based on their relationships with local jurisdictions. The vast majority of the time, this is not true (although relationships can be important at times).

In choosing a firm, two very important factors should be considered. First, make sure that agents clearly understand the appeal process. This can be done by simply requesting a step-by-step detailed outline of the procedures of the process. If they can’t provide that in detail, then they probably do not have a firm grasp of it. Second, hire a firm that has a strong understanding of your property type. This is paramount because your selected experts must have the analytical rigor to understand the financial statements you will be providing.

For example, we have a multi-family client with an asset whose vacancy was increasing as was their gross potential rents. The two seem incongruous on the surface. Given our expertise in both understanding financial and operational aspects, we correctly assumed (and confirmed with the client) that this was based on the new pricing software they had installed. As units were becoming vacant, the system was reverting them back to market rents rather than street rents since there was no loss-to-lease line item expense in the P&L. Accordingly, we were able to justify a lower GPR and achieve a reduction. Other firms without that expertise would not have been able to identify that discrepancy and would not have achieved any reduction.

Are you a commercial property owner who just received a property valuation from your local appraisal district? Or, are you an investor going through the due diligence process before closing an important deal? These processes can present obstacles for owners and investors such as decreased cash flow and/or increased net operating expenses due to a lack of knowledge and general understanding about property taxes and the underwriting process. Therefore, it becomes increasingly important to arm yourself with tips about overcoming these challenges successfully while still seeing a return on investment!

When looking at purchasing a deal, investors are always seeking strategies to enhance yields and thus value. Most often, those strategies involve increasing occupancies or effective rents. Owners also seek to manage and at times, lower controllable expenses. However, what is most important is that investors have as much clarity as possible into the timing and amount of changes in how an asset is performing currently versus the future.

Many investors do not pay enough attention on how to underwrite property taxes nor do they have it as part of their business plan upon acquisition. This problem is accentuated when investors are not familiar with the local property tax laws. The easy way out is to apply some type of flat percentage increase year over year (typically two-to-three percent) for all properties regardless of location and differences in property tax laws. This is not a good strategy due to the simple fact that property taxes are often the largest line item in operating expenses.

Each jurisdiction is unique in how they value properties and administer property taxes even within state lines. To top it off, the more dynamic a property is, the more volatility there will be in taxes. Class A multi-family and hospitality have seen assessed values increase, ranging from 10 to 35 percent on average. Both sectors have seen increases in revenue due to increases in rates and occupancy. Class A multi-family has also had the highest number of transactions leading to compressed cap rates. Coupled with the increases in revenues, the values have increased exponentially rather than linearly. Most recent purchasers haven’t yet realized the “fruit” of the increased values and instead are dealing with the downside of increased taxes.

Investors should hire localized experts who can help not only lower property taxes, but also help in the underwriting and budgeting process. Key questions investors should be asking?

· Will the assessed value be reset after acquisition?

· What appeal options are available and how long before resolution?

· How often are properties revalued?

· Are there any abatements or exemptions that may be applicable? (There may be some properties with expiring exemptions/abatements)

· Can and will millage rates increase? If so, how much?

At the end of the day, general partners are paid and promoted for how well they can predict future cash flows; ensuring the best method is in place for predicting property taxes is paramount. Just like all the other line items, it is impossible to predict property tax amounts with 100 percent accuracy but the goal is to limit the margin of error. This should help prevent unwelcome surprises and also increase the level of confidence during the due diligence process.

Look to the experts for help – now is the time since valuations have been released. A good property tax agent will not only help curb assessed values, but will also make investors better underwriters.

Property tax valuations have risen in Dallas-Fort Worth this year for apartments, hotels and well-located land — reflecting activity in the real estate market.

The valuations are dependent opon the class of the apartments, or the revenue of the hotels, but appraisal districts are upping the value of these properties, said Amish Gupta, chief operating officer at Real Estate Tax Consultants Group.

The firm, which is headed up by Gupta’s father, Virendra K. Gupta, reviews property tax valuations for about 5,000 properties each year.

“In 2012, we are anticipating that property values will be back up this year, especially for multifamily and hospitality properties,” Gupta said. “The biggest mistake a property owner can make is not looking at their property taxes.”

The majority of property tax valuations have been issued, and property owners have until May 31, or 30 days after the date on the notice to file an appeal.

But not all property owners will receive a notice if the property values stay the same or decrease — even though they can still go online and file a protest, said Joshua Estes, partner at Estes and Gandhi P.C. of Dallas, a property tax firm.

“The usual trigger for property owners is getting the notice in the mail, but if they don’t get a notice, they don’t think about it until later in the summer and that’s too late,” Estes said.

Estes said he expects Class A apartment properties and hotels with increasing revenue to see a bump in property tax valuations.

By how much? Estes said he’s seen some Class A apartment properties see an increase up to 15 percent.

Either way, Gupta and Estes say property owners should take a look at their property tax valuations.

“At the end of the day, property taxes can be the highest expense for an owner,” Gupta said. “If you’re not making your debt obligation, you can kiss your asset good-bye.”