By Amish Gupta – RETC, LP
As most property owners in Texas are well aware, property taxes are typically the largest line item expense, which can have a major impact on the both the cash flow and sale price of a building no matter the industry. In fact, property taxes should be top of mind for owners right now as appraised values begin to be released on or near May 1. Although owners do not have full control over what the ultimate tax bill will be, they do have the power to manage this large operating expense by hiring experts and appealing values when appropriate. This process should start before acquisition, during due diligence and continue through your exit strategy. By managing property taxes, there are direct benefits but the indirect benefits yield significant results as well.
This is the obvious one. The direct benefits of lowering property taxes are increased NOI and cash flow. The extra cash can then be used to distribute to investors or plowback for any capital expenditures. This can lower the overall cash contributions an asset may need over the life of the project.
By decreasing taxes and thus increasing yields, owners are effectively increasing the value of the property and also increasing their debt coverage ratios. For distressed assets, this eases the burden on any loan covenants and may prevent a need for a debt paydown. For performing assets, this allows owners to exit at a higher price point, or increase leverage, returning equity and juicing IRR for their investors.
While many investors realize and understand the direct benefits, increasing the value of the property, making it more attractive to exit or recapitalize, provides the most significant, indirect benefits.