April 15 is still more than four months off, but that hasn’t kept Al Campbell from thinking about taxes.
This week, Campbell, the CFO of Mid-America Apartment Communities in Memphis, Tenn., flew to Atlanta to visit with the company’s tax consultants from its different regions. They look at each property, look at last year’s assessments, gauge the value, and then the consultant tell tells them what they think next year’s assessment will be. And then they’ll decide whether to begin a dialogue with the city—before the assessment even comes out.
“We try to act early in the year before the valuation assessments comes out,” Campbell says. “We do it on a fee basis instead of a contingency. We come up with the one’s we want to challenge, hire the consultants on a fee basis and, say, ‘Go challenge these because I think we’re going to have an issue here.’ We get the dialogue started early so they have time to get communication going, allowing us to get in front of the issue potentially influencing the assessment prior to receiving the notice.”
In 2009, Campbell says the strategy has been successful, especially challenging his property’s valuations. The company entered the year thinking property taxes would be up 3 percent or 4 percent, believing municipalities would have to raise taxes in order to deal with budget issues. Instead, they went down a couple of percentage points.
“We were pretty successful in this year’s assessments for a couple of key states,” Campbell says. “I think going into next year, it was very hard to tell what was going to happen. In a couple of states—Texas and Florida—we saw that values quickly came down. Where we challenged, we were pretty successful in bringing valuations down. We saw some come down that we didn’t really challenge that hard. That was unexpected.”
While Mid-America may be more proactive than other companies, it wasn’t the only firm seeing success in challenging property taxes in 2009. In their quarterly earnings calls, many REITs, including Houston-based Camden Property Trust and Chicago-based Equity Residential, reported savings from successfully challenged tax assessments.
“As we move through 2009, we’ve had some good success on our appeals,” said Paul Earle, COO of Birmingham, Ala.-based Colonial Properties Trust, in the company’s third-quarter conference call, which was transcribed on SeekingAlpha.com. “Now we have to go forward into 2010, and there is a lot of pressure at the local level and we’ll be anxious to work through the 2010 tax appeals.”
Property tax savings can play a major role, especially when times are tight, says Jeff Adler, CEO at Multifamily Indexed Equity in Englewood, Colo. “Taxes represent something like 10 percent of the entire cost structure,” he says. “It’s a big deal.”
Still, tax breaks only help in troubled time. They can’t save an apartment firm with declining occupancies. “From a cash perspective, it’s a benefit,” says Al Pace, president and CEO of Pacific Property Company, a Palo Alto, Calif.-based apartment owner. “But it doesn’t offset a 20 percent decline in rents.”
But the benefits are also something apartment firms can’t really bank on. “You can’t put a plan together around it,” Adler says. “It’s more like windfall.”