Publication XII

By Michael McCune
Argus Self Storage Sales Network

Do You Know Where Your Property Taxes Are? In the past we have encouraged self-storage owners to become more proactive in examining their property tax assessments if for no other reason than it is a good, sound practice of real estate ownership. In today's self-storage market it is even more imperative that owners be aware of what may become a double-edged sword. We believe in many areas of the country that assessments for self-storage are going to be going up dramatically, in large part because of the increased value as shown by recent sales comparables. The good news is your competitor sold for a high price, the bad news is you have to pay for it in higher taxes and reduced value for your own property!

Many owners, of course, believe that you can't fight City Hall and just accept the assessor's valuation. While this is certainly the easiest approach, it can have a significant impact on your income and the value of your property. For example, based on national averages, a 20% increase in real estate taxes would drop the over-all value of your facility by well over $50,000, not to mention the actual expense of having to pay more taxes each year.

Tax assessors as a general rule are becoming a lot smarter and have a better understanding of how to value different property types. However, many remain buried in a bureaucratic or political world without connection to reality. Like everyone else, assessors are becoming more aware of the virtues of our industry, and thus, many are beginning to value self-storage in a more sophisticated way. There are three ways to appraise the value of all real estate: the cost approach, the comparative sales approach and the income approach. In the real market, buyers and sellers tend to put more emphasis on the income approach. The net result is that your property may or may not be fairly valued. The trick of course is to know whether you are correctly valued, over-valued or under-valued. Your location and the competency of the local assessor have a great deal to do with which category you fall into.

Here are a few simple steps to use to find out if your property taxes are in line with those of other self-storage properties and their true values. A couple of hours spent reviewing the value of your property can be very helpful in your examination not only of real estate taxes, but of the overall perspective of your facility as well.

First, you should have a good idea what your property is really worth. We find that many owners do not have a very sound basis for determining the value of their property. The intuitive value they have in their head can be off in either direction, by huge proportions. This can impact an array of planning issues other than property taxes such as financing and estate preparations. Through a thorough analysis of operating statements and comparisons to recent self-storage transactions, a good real estate broker can give you a reasonable estimated range of value.

Second, you should know how your property's real estate taxes relate to the assessments of other properties in the area. You can locate this information from the county tax records. A review of this material on a square footage basis will give you a good idea of how, or if, your property is out of line with other self-storage facilities. Combined with knowing what your property is really worth and the relative value to other assessed properties, you can determine the proper strategy in protesting the tax assessment if necessary. Talking the strategy over with a real estate expert whom has knowledge of local assessments and self-storage properties should help in determining the right course.

Third, planning the strategy is a little more complex than it may at first seem. For example, if your property is assessed at a value that is well over the other relative assessments, but well under the actual market value, tax appeal may raise questions that might suggest to the assessor that a much higher value may be appropriate for the coming year. Your strategy should also include timing as the appeal process in most jurisdictions has very strict rules and a narrow time frame for the appeal.

Last, what is the best way to prosecute an appeal? This generally depends on how well organized and prepared you are in your argument. It is a given in the appraisal process that unless you have lots of facts and a very clear presentation, the appeal is not going to be very successful. You may want to hire a tax consultant to help you at this stage. A good friend of ours and a member of the Self Storage Association, Michael Donahue at Coopers and Lybrand, LLP does this for a living. He can be reached at (703) 918-3124. Often times when the assessor realizes that he is dealing with a well-prepared professional they become more reasonable.

A couple of other points about property taxes. While it is always good to have a low property tax (relative to other similar properties), a buyer may want to adjust the income (lower the price) to reflect a more realistic real estate tax level. Also, remember that it is always easier to argue against a raise of taxes than to argue a reduction from existing levels. Thus, apart from the obvious economics, the time to act is as soon as the assessment is made. The reality of it is that it may be a once in a lifetime opportunity to save some money and also increase the future value of the property.