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[Straight From MacCrate] Remember the Impact of Real Property Taxes on Real Estate Investments and Returns!

Jim MacCrate, MAI, CRE, ASA [1], has worn many hats in his career. He taught a number of the appraisal classes I have taken through the Appraisal Institute and I think he is one of the few people who actually understands the “J-Factor [2].” His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime.

As the rest of his colleagues (self included) lounge by the pool at the close of summer, Jim is hard at work thinking about the accuracy and impact of property taxes on real estate investments. His dedication is almost saint-like.
…Jonathan Miller

Just a reminder to investors and appraisers—real property taxes have a major impact on real estate valuation and investment returns and need your accurate analysis. Don’t just call the local assessor for the current real estate taxes and plug the information into a model to calculate the real property’s net operating income. Real property taxes are always volatile because of increasing government expenditures, reassessment upon sale, phased reassessments, elimination of exemptions for improvements, and tax abatement programs.

Why is such detailed analysis important? Most tenants for residential and commercial properties can only afford a specific percent of their gross income for occupancy costs (real estate taxes, rent, insurance and utilities). Once the occupancy costs exceed this percentage and the tenant risks defaulting on the lease, the real estate value can be affected. Your task is to clearly spell out any hypothetical or extraordinary assumptions about the real estate tax estimates.

What can you do to avoid being blind-sided? Start by getting the correct information. Remember real estate brokers do not always do their research. Be cautious if you analyze investments in different geographical locations. In fact, the Uniform Standards of Professional Appraisal Practice (USPAP) [3] states that “Prior to accepting an assignment or entering into an agreement to perform any assignment, an appraiser must properly identify the problem to be addressed and have the knowledge and experience to complete the assignment competently…….” and “Competency applies to factors such as, but not limited to, an appraiser’s familiarity with”:

If you find yourself in an unfamiliar location, such as New York or Miami , investigate not only the supply and demand factors affecting the local real estate market, but also obtain sufficient information to project the real estate taxes over the investment holding period. You may need to affiliate with a qualified local real estate appraiser to develop the stabilized income and expense forecast with the correct real estate tax estimate for your direct capitalization and projected discounted cash flow analysis. Consider the following factors that can impact accurate real estate tax calculations:

As a final note, do not forget transfer taxes and mortgages taxes that can also affect your returns on real estate investments.

Note: a special thanks to Nancy Reiss of The Write Stuff.