Importance of Tax Projections on Deal Success

 

When speaking about property taxes, real estate owners typically default to discussing about appeal work. What gets overlooked is the real estate tax projections and their impact on the bidding and ultimately deal success.

On average, nationally, an average appeal on real estate reduces the assessed value by about 6-8% depending on the year. Since property taxes only account for a fraction of the total operating expenses, the average appeal only reduces operating expenses by about 1-2% on average. Although every dollar counts, the impact from appeals can be minimal.

However, if property taxes are overestimated during the bidding process, there is good chance that a real estate investor not bid high enough to secure a deal. Thus, there is a high opportunity cost. On the other hand, if taxes are underestimated, then an investor could inherit a deal that has lower than anticipated cash flows. They will be digging themselves out of a hole by trying to trim other expenses which could have a negative impact on the operations.

Nobody has a crystal ball on assessments. They key to success is two understand two aspects. First, investors and consultants must try to accurately predict the assessment as best as possible without being overly conservative or aggressive. Second, and equally important, is to understand the risk factor. Certain jurisdictions have very little risk, and there is high visibility into future taxes. Others carry high risk, and the numbers can vary year to year. Other parameters can also increase the risk factor. For example, if there is an element of new construction or lease-up, then there is no guarantee on final cost or profitability. Those numbers can have an impact on the assessment in the stabilized years.

With better knowledge of assessments and risks, investors can make more informed bidding decisions. Since tax consultants are typically engaged by asset managers, the acquisitions teams do not get the appropriate information required for making good decisions. Thus it imperative for those responsible for underwriting and acquiring to engage with tax consultants directly and push them for the best possible projections with back up information. This will lead to a higher likelihood of deal success. If done repeatedly, funds and firms should outperform their peers.

Contact Info

To learn more about how property tax issues can affect your investing strategies, please reach out to Tim Feagans directly at tim.feagans@retcgroup.com.