Designing effective tax strategy for commercial real estate owners - by Donald Mancini

Donald Mancini, Kelleher & Sadowsky Associates, Inc.

What is your real estate tax strategy for your commercial property?

If you don’t have one, you are not alone. Many commercial real estate owners lack a clear strategy for how to approach their real estate taxes – one of the largest expenses associated with owning commercial real estate.

Why is it important to have a real estate tax strategy? For starters, if you structure your leases as gross (property expenses and real estate taxes included in the tenant’s rent), then any savings in your property tax expense go right to your bottom line, thereby increasing the net income for your property (which directly correlates to increased value of your property). And as a commercial real estate owner, maximizing the value of your investment is your primary task.

If your leases are structured as NNN (tenants pay the operating expenses and taxes in addition to base rent), there may not be a direct cash benefit to you as the property owner, but having lower taxes at the property certainly makes your tenant’s occupancy costs more attractive – which in turn makes your property more attractive. Anything you can do to gain an edge over your competition is an essential part of CRE ownership, and managing your real estate tax liability is a vital part of that responsibility.

Developing an effective real estate tax strategy is a step-by-step process.

The first step is to obtain a copy of the property card from your local assessor to ensure the information the assessor is using to value your property is correct. Often times, there are inaccuracies in the information that can artificially increase your property assessment, thereby increasing your tax liability. One common discrepancy we see in the assessment information is the inaccurate reporting of a building’s square footage, typically where the town’s information overstates the actual figure. Another common (and potentially costly) error occurs where a property has been improperly classified – i.e., as manufacturing instead of warehouse. So it is important that you take the time to ensure the assessor’s information for your property is accurate.

The next step is to speak to a local market expert about your assessment each year, to validate that it is within market parameters. Assessments are issued annually around January 1^st, and any appeal for abatement is typically due by February 1^st, so this is a time sensitive step. Whether you call a local appraiser or commercial real estate broker, you want to ensure that the valuation the assessor is placing on your property is a reasonable approximation of the asset’s actual value. Most appraisers and CRE brokers can provide an indication of “ballpark value” with a brief phone call, and most are more than willing to do so. If there is a large delta between the CRE professional’s estimate and the assessor’s value, a property tax abatement can be filed to rectify the problem.

Once it is decided a tax abatement is necessary, the importance of assembling a team of experts to guide you through the process cannot be stressed enough. A qualified CRE attorney, broker and appraiser can provide the legal and real estate expertise necessary to help you gain a favorable abatement. Most quality attorneys who specialize in property tax abatements will work on a contingency basis – getting paid a percentage of the tax savings as a fee – and collect when the abatement process is successful. The appraiser will charge a fee for the appraisal and then an hourly rate if testimony and/or court time are necessary. The CRE broker will also charge an hourly rate for testimony and/or court time. Sophisticated CRE owners usually employ a cost/benefit analysis, calculating the return on investment (ROI) before going through this process. Typically, the ROI is calculated by dividing the tax savings for the current tax year (and sometimes one to three years in the future if it can be negotiated) by the expected cost of going through the abatement process.

As the year has just begun, now is the time to be employing your real estate tax strategy for the coming year. The investment in time required to go through the process can reap tremendous rewards.

Donald Mancini is a principal at Kelleher & Sadowsky Associates, Inc., Worcester, Mass.