Managing Your Largest Expense
For the majority of self-storage facilities, property taxes are the first or second largest expense—despite the fact that they are typically only owed once a year. Since property taxes are such an enormous expenditure, it’s in every operators’ best interest to carefully manage their tax payments.
Unfortunately, there is no single rule of thumb to follow when it comes to property taxes as each municipality within the United States has its own unique set of guidelines. To further complicate matters, operators with multiple storage sites must deal with numerous taxing authorities as well as various tax regulations, deadlines, and valuation standards. Moreover, the rules and procedures that determine property taxes are a moving target, with annual updates and/or additions that can make the tax appeal process an arduous undertaking.
Aside from the plentiful property tax nuances, most owners and operators should expect to shell out more cash this year as the market values for self-storage facilities continue to soar. And the higher valuations have resulted in an increased awareness of self-storage, catching the eyes of tax assessors across the nation.
“Property tax is one of the easiest ways to raise revenue,” says Deron Webb, managing principal of Phoenix, Ariz.-based Wentworth Webb & Postal, LLC, a group of specialists who identify, develop, implement, and market state and local tax solutions and strategies. “And there is pressure on municipalities to do that.”
Ken Nitzberg, chairman and CEO of Devon Self Storage, concurs. “Counties and school districts live off property tax,” he says, adding that their budgets are based on property valuations. “Most look at real estate tax as a giant piggy bank.” In addition, he warns operators that school districts are usually unwilling to negotiate property tax changes.
While it may seem insensitive to attempt to cut into their budgets, Webb reminds operators that property tax should be treated like any other operating cost. “Try to lower it,” he says. “It’s prudent for operators to make sure that number is being managed. You should pay your fair share—nothing more, nothing less.”
Although operators can always file an appeal, which is advised and discussed later in this article, the easiest way to pay less property tax is simply to be proactive. According to Drew Hoeven, president of real estate at Westport Properties, Inc., the parent company of US Storage Centers, some states may offer reduced rates for paying property tax ahead of schedule. “In Florida, for example, operators can pay early for three to four percent savings,” he says. “That’s a significant cost savings.”
Besides the potential tax reduction, Nitzberg sites public knowledge as the reason Devon Self Storage takes a proactive approach to property taxes. “Don’t wait for the tax bill,” he says. “Every single year we review every single lien tax. Filing proactive appeals enables us to deal with just the tax assessor staff and not the public. When you file reactively, it’s public.”
As an example, Nitzberg recalls a large financial institution filing a reactive property tax appeal; its hefty tax reduction, as well as the job losses and budget cuts that would have to occur to balance the municipality’s reduced finances, made front-page news in the local newspaper. Obviously, this incident wasn’t good public relations situation for the bank.
The Valuation Process
While tax assessors attempt to make accurate valuations, there are various approaches used to determine property tax and, therefore, varying degrees of accuracy. “Assessed value is kind of like a Ouija board,” says Nitzberg. “It’s all over the place.”
According to Webb, most valuations in Arizona are determined by market value through a mass appraisal technique. Also known as the “cost approach,” its fundamental principle is to conclude how much it would cost to replace a property after accounting for depreciation. Nitzberg calls this approach “chasing sales” as the assessors base the valuations on recent comparable sales within the market, which can result in aggressive—and oftentimes exaggerated—assessments that assume purchase prices are equivalent to market value. This is frequently the case with older storage properties as depreciation can be difficult to estimate.
Hoeven believes the income approach is probably the best valuation analysis, unless it’s a recent sale. For this approach, assessors use market rent, expenses, and cap rate to calculate a valuation. However, the income approach is frequently based on comparable properties as well since tax assessors are unable to visit every piece of commercial real estate.
This is especially true in larger counties or municipalities such as Dallas County in Texas. Jay Kanter, managing partner at Texas-based Realty Tax Consultants, LLC, who represents properties in New Mexico and Arkansas as well as properties within 54 of Texas’ 254 counties, provides the following example: While there are roughly 1.8 million people in Dallas County, there are less than 100 tax assessors. Of those 100 assessors, 30 focus only on commercial real estate. There are approximately 722,000 parcels of property within the county.
“There is not enough manpower to check them all,” says Kanter, who adds that the trend in Texas is for all districts to move toward an income approach. “Leased properties are better valued by income, land by sales comparison, and owner-occupied and restaurants by cost approach.”
Although the income approach seems to work for Texas, perhaps because Texas is one of the non-disclosure states that doesn’t require buyers or sellers to disclose the purchase prices of real estate properties, it isn’t a viable option for every area.
Ben Vestal, president of Argus Self Storage, says that the income approach “can’t really be applied as some operators are better than others.” And Webb tends to agree. “From a government standpoint, the income value approach is typically jaded or flawed,” he says.
Just as there are several valuation approaches, there are numerous factors that can influence the assessed value of a self-storage facility. Some of those influential elements include construction type and quality, zoning, age, location, market activity, profitability, unique features, lot size, and facility square footage. Storage operators should be aware of the criteria used by their local tax assessors to determine valuations, especially if they wish to file an appeal. In Texas, tax payers have the right to request all of the information used for their valuations, and Kanter strongly advises operators to “do that” as the data they provide can simplify the appeal process.
Plan To Appeal
Even before receiving their property tax bills, operators should plan to appeal. “Be prepared to file an appeal automatically,” says Nitzberg, who states that $20,000 off of a tax bill increases a property’s value by approximately $330,000. “You have a right to appeal a valuation. Be mindful to manage the process.”
And the other professionals interviewed for this article agree with Nitzberg. “There’s no reason not to file since the outcome could result in a lower tax bill,” says Hoeven. “The money is better in your pocket than the government’s.”
“Operators should always file an appeal,” adds Kanter. “You can always recall an appeal, but it’s hard to file late. You have almost everything to gain and nothing to lose.” Kanter continues by saying that operators should be prepared to file lawsuits if they are unhappy with the appeal results. “Most are settled outside of court,” he says, “since review boards don’t want to spend taxpayer money on legal fees.”
Protocol For Appeals
Despite the fact that mill rates, also known simply as tax rates, vary by location, there is one general rule: They cannot be appealed. In Texas the tax rates are determined by county; they are typically set between 2.2 percent and 2.75 percent. “You can’t argue the rates,” says Kanter. “All appeals are based on values.” Similarly, other states, such as California with its Proposition 13, have tax rates that raise by a set percentage each year.
While the mill rates are set and cannot be appealed, there is a good probability that the property’s valuation is off. For this reason, it is essential that operators thoroughly review their property tax bills. “Make certain the information is correct,” Kanter says. “Make sure what they present is accurate and that you’re not being taxed on property that isn’t there.”
Indeed, attentiveness is key. “Take diligent notice,” says Webb. “Review and research the bill to look for errors.” Webb also reminds operators: Don’t put off tomorrow what you can do today. For example, tax payers in Arizona receive their property tax bills a year a half before they are due. However, some operators disregard or misplace the notices and end up missing the deadline to appeal.
Of course, just about any factor used to determine the property’s valuation could be erroneous. However, two of the most common errors involve miscalculations of square footage and unit mix. Kanter says operators should double check the square footage to see whether it’s listed as gross or net. The square footage listed for climate-controlled storage needs to be reviewed for accuracy as well. Basically, any item that has a numerical value should be verified as you are searching for evidence that you are being overtaxed.
If your research indicates that your property’s valuation is wrong, it’s time to start preparing an appeal. “It needs to be a very concise, thorough, and detailed appeal,” Nitzberg says, “or it won’t go anywhere.”
In addition, when appealing a valuation, Vestal suggests that operators first identify how the taxing entities assessed their properties. “Then address areas where you feel that they’ve made assumptions that are not in line with the market,” says Vestal.
For example, Devon Self Storage creates in-depth valuation models to present to the assessor staff when filing proactive appeals. Monthly occupancy reports, rent rolls, and other financial information, such as income and expense reports, can be combined into professional appeal portfolios to help prove your case. Remember: Valuations should reflect the property’s market and income. They should not be an inflated estimation.
As a side note, operators in Texas can utilize a unique provision that is not applicable in any other state. According to Kanter, the Texas Constitution provides that taxation shall be “equal and uniform,” and the Texas Property Tax Code expands on that notion by stating “A property owner is entitled to relief on the ground that a property is appraised unequally … if the appraised value of the property exceeds the median appraised value of a reasonable number of comparable properties appropriately adjusted.” In essence, properties are compared and adjusted by percentages to account for variances in age, size, location, amenities, etc.
“Equal and Uniform, also known as Equity, is an extremely important tool used by owners and property tax consultants to keep property taxes as fair as possible,” says Kanter. “It is so ‘fair’ that the larger county appraisal districts are lobbying to have it overturned. Primarily because Texas, like four other nearby states, is a non-disclosure state. As such, there is no requirement for buyers and/or sellers to disclose the transaction price of a piece of real property. The overall benefit of the constitutional provision is to not put one property at an advantage or a disadvantage. The provision is so powerful that it will ‘trump’ market value.”
What’s more, Texas is one of the seven states without state income tax, therefore property tax rates are high as they are heavily relied upon for revenue. “Property tax accounts for 45 percent of the taxation within the state,” says Kanter, who adds that some areas, such as Houston, have no limit on how much a valuation can increase. “They can go up 100 percent,” he says. “The sky is the limit because there is no commercial cap.”
Hire An Expert
When the burden of property taxes becomes too much to bear, it’s time to hire a professional tax consultant, tax appeal company, or property tax firm. As a matter of fact, Hoeven believes that hiring a property tax consultant is a prudent decision. “Look into retaining a consultant,” he advises, adding that their fees are well worth the money. “Consultants typically charge based on your savings.” This means they are paid a percentage of your savings after the property tax appeal has been approved. Plus, their expertise tends to result in greater property tax reductions. Keep in mind that reducing the property tax increases the net operating income, which, in turn, results in an increased property value.
“Rely on experts,” says Hoeven. “Seek professional assistance just to make sure all the boxes are checked. Rely on them, and provide them with as much information as possible.”
And while Webb agrees with Hoeven, he recommends that operators “find someone who understands the nuances” of self-storage property taxes.
As this article has mentioned on at least one occasion, the property tax realm is an ever-changing environment. For that reason, it’s imperative to “stay on top of it,” as Webb says. “Don’t get complacent.”
Property tax updates are typically posted on county and municipality websites. Some even enable users to sign up to receive updates via email. County websites may also provide detailed information about how to appeal tax assessments as well as appeal deadlines and rights by jurisdiction. The American Property Tax Counsel’s website, www.aptcnet.com, is another great resource, with property tax articles, national updates, and a property tax representative directory.
In addition, for those who wish to learn how to properly value properties for taxes, sales, or loans, the Self Storage Association (SSA) offers an informative class about valuation. “The Self Storage Valuation & Acquisition Course” provides clarity through insight and Excel worksheets. The program is typically held every six months at varying locations across the U.S.
At the end of the day, the professionals interviewed for this article all agree that taking the time to manage your property tax is well worth the effort. Although there is no definitive way to calculate your potential property tax savings prior to receiving a decision from the panel reviewing the appeal, it’s likely that you will enjoy a tax break. In fact, according to “Taxing Self Storage: Will Owners Face An Increase?,” an article published in the May 2015 issue of Messenger, more than 50 percent of taxpayers who appeal property valuations can expect tax relief in the form of a 10 to 15 percent reduction, which is nothing to sneeze at.
Erica Shatzer is the editor of Mini-Storage Messenger, Self-Storage Now!, and Self-Storage Canada.