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Tax planning and “the process” for better business results

Illustration of good planning versus bad planning in block form

In the world of real estate, the unknown hiding around the corner is one of the most unsettling aspects of buying, building, and operating real estate. And given that property taxes are the single largest operating expense, demystifying that unknown is one of the most valuable services we as real estate tax professionals can offer to our colleagues regularly buying and developing commercial real estate.

Planning is a big part of what we do here at Cavalry. We pore over assessment methodologies, tax rates, hidden non-ad valorem fees, and other property tax nuances in jurisdictions throughout the country. Why? Because to be successful in our industry you can’t just appeal an assessment, you need to help owners plan and budget future real estate taxes as well.

Over my career, the standard approach I see most people take when it comes to budgeting real estate taxes usually involves some type of growth factor applied and then extrapolated over 5-to-10 years. While this approach is the path of least resistance and the easiest to perform, it is fundamentally wrong in many cases and often leads to underestimating future real estate taxes – which can be painful to absorb into the bottom line in future tax years.

A proper real estate budgeting exercise requires you to look at a myriad of factors. Our approach is usually a three-legged stool of sorts.

First, examining a particular jurisdiction’s assessment methodology, assessment ratios, assessment data points and overall assessment trends provides a good baseline estimate.

Second, we develop a value using projected income and expenses (and/or cost to build if under construction) for the property regardless of whether that information is statutorily supplied to the jurisdiction or not.

Third, we look at comparable assessments in the market and analyze trends within that competitive set. After developing values through these three approaches, we then stake our assumptions on the most plausible or even a blend of the various approaches.

Finally, we often provide our clients with two scenarios: what we think the assessor will do, and what we think the assessment will be after appeal (assuming one is warranted). This approach allows owners to hedge and tweak their own budgets accordingly and provides a true estimate year to year with more realistic trends based on actual market knowledge.

We know this approach works because we often revisit our budgets for clients in a post-mortem each year and find that the deviation in actual assessments issued versus our own estimates is well within an acceptable range. It isn’t rocket science but it does require a commitment to “the process.”

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