Property taxes can be a substantial expense for multifamily property owners, sometimes comprising up to 35% of operating costs. Increases in property taxes – particularly those unexpected – can wreak havoc on the financial projections of a deal, turning what seemed like a promising investment into a nightmare scenario. However, by taking proactive measures during the underwriting process, investors can mitigate the risk of encountering such unpleasant surprises.
PPR’s Real Estate Portfolio Manager, Chris Cordes, recently penned an article for Multifamily Executive Magazine where he shared five crucial steps to consider when underwriting a new multifamily deal to avoid a property tax nightmare. They are:
- Understanding Tax and Assessment Processes: Property taxes are calculated based on the assessed value of the property, not its market value. Assessments are determined by local taxing authorities and can vary based on factors such as property location, size, and condition. It’s essential to understand when reassessments occur and how they might impact property taxes during the holding period.
- Conducting Historical Analysis: While there’s no crystal ball for predicting future assessments, historical tax data can provide valuable insights. Platforms such as CoStar or Realtors Property Resource offer historical tax information and sales data for comparable properties. By analyzing past assessments and sales, investors can better anticipate potential tax increases and adjust their underwriting accordingly.
- Engaging with Brokers: If a property is on the market, brokers can often provide valuable insights into the property tax structure and potential tax increases post-acquisition. Don’t hesitate to reach out to representing brokers for guidance on property taxes and assessment processes.
- Utilizing Office of Property Assessment Resources: Most taxing authorities have offices of property assessment that provide information on property records, millage rates, and upcoming assessments. Checking the departmental website can offer valuable information on when reassessments may occur, helping investors plan accordingly.
- Exercising Caution and Conservative Assumptions: When it comes to underwriting, it’s better to err on the side of caution. Using conservative assumptions for property taxes can help cushion the impact of any unexpected increases and prevent potential underperformance during the holding period.
By incorporating these steps into the underwriting process, investors can reduce the likelihood of encountering property tax nightmares and better position themselves for success in multifamily investment. While underwriting can be a daunting task, taking these extra precautions can help investors navigate unexpected potential challenges and achieve their investment goals with confidence. Click here to read the full article.
