Rising real estate appreciation and soaring property tax assessments have grabbed lots of headlines lately, but it's not only homeowners who are blanching at their tax bills. So are apartment owners, who are facing higher property taxes at the same time as their properties struggle with a soft rental market.
“With market values staying strong because of the favorable interest rate climate, we're seeing fairly robust values on the assessed values side,” says Gary Miller, a former Trammell Crow employee who now runs Turnkey Design Associates, an apartment consulting firm in Minneapolis. “But this is happening in a business climate where occupancies have been hammered pretty hard.”
Apartment owners are feeling it. At Mid-America Apartment Communities, property taxes already comprise more than 22 percent of the company's operating expenses and take 11 percent of the revenue—percentages that are expected go even higher in 2005. “Property taxes have increased faster than our revenues,” says Simon Wadsworth, executive vice president and CFO at the Memphis-based REIT.
It's caused many apartment owners to go on the offensive. If they successfully challenge a tax assessment, they can control how much of their revenue goes to taxes and thereby increase the value of a particular property. “If a property will be sold and you can get $20,000 off the tax assessment, you may be able to get $200,000 or more on the value of the property,” Wadsworth says.
But challenging an assessment isn't easy. Legal expenses get costly, and owners must be prepared for the possibility that their assessment could go even higher. If the appeal fails, owners are faced with cutting costs to accommodate the bigger tax bill or even exiting a market with burdensome taxes.
Fighting City Hall Challenging a tax assessment starts long before the notice arrives in mail. Many multifamily firms meet with their tax advisors at the beginning of the year and calculate a value for each property. If an assessment comes in too high, the apartment owner and tax consultants already are mobilized to fight.
“We have a planning session at the beginning of each year with each consult and lay out a plan for each of our properties,” Wadsworth says. “We see which assets are most exposed, where we think we're going to get reassessments, and [we] go into battle.”
In most localities, that battle plan has three clear steps: appealing to the tax assessor, going before a review board, and, if all else fails, suing in court. The property owners' argument is an economic one: Weak operating fundamentals are undermining apartment property values, so high property tax assessments do not accurately reflect the property's value.
Most apartment owners say they can get some tax relief simply by sending their consultant back to the local assessor to plead their case. “These consultants are usually guys that come from the county tax assessor's office,” says Dan Haefner, senior vice president of Lane Asset Management in Atlanta. “They know all of the guys that still work there. In a lot of cases, there's a relationship.”
If the assessors don't agree to cut taxes, the next option for many owners is the board of appeals. But Haefner says there is a risk involved. “[The board] may say, ‘I think your value should actually be higher,'” he says. “Then you have to litigate.”