FIRE: Assessors and real estate taxes

Like most owners, I am sure that I pay way too much in real estate taxes. I know that I pay too much to consultants who write a few letters, make a few calls, and magically come back with a reduction and a healthy fee.

For those who think I’m overly cynical, I will mention that I spent my formative real estate years in Manhattan. Everyone knew, but didn’t say, that if you paid a certain consultant an obscene amount of money, he would make sure former coworkers in the assessor’s office adjusted the valuation of your asset to an outrageous but 50% less obscene number. Summary or Full History.

To cite another example, Indiana and its disastrous real estate assessment process has provided significant wealth to suppliers of heartburn medication. For those unaware, malfeasance was discovered in the assessment offices a few years ago. Multiple scandals and a budget meltdown later, every property in Indiana was reassessed, usually by a third party assessor. They did not come close to getting the job done. To cite one within my own portfolio, a 160-unit property in Indianapolis assessed at X in 2005, but valued at 2X (118% increase) in 2006 based on replacement cost. Income stagnated during that period so an income valuation or sales comparable methods would have revealed no increase in value. The third party assessor simply ran an estimated cost of replacement for the property and used that as the final value.

Anyway, into these newly straitened times comes NREI with a helpful checklist of how to make sure you’re not wrong-footed by an assessor. The title should indicate which way they come down on the issue:
“How Assessors Can Veer Off Course”. The takeaway line is well worth writing down: “In a declining market, taxpayers must challenge property tax assessment based on contract rents. Unless your assessment is based on market rents, a tax appeal should be the next step.”

Appraisals (and assessments) typically look at replacement cost, income valuation, and comparable sales. It is my general misfortune that my LIHTC properties frequently suffer from either the replacement cost valuation or some mis-interpretation of the other two methods for a ‘taxable value’. Because the assessors generally fail to account for maximum rents or Extended Use Agreements, they value properties by comparisons to conventional assets. Conventional assets can pass through tax increases to residents (or cut services) in ways that LIHTC properties cannot. This failure to understand that LIHTC rents are statutorily capped means that LIHTC properties are not comparable to market rate properties. I have had counties reply that because I chose to develop affordable housing, I should accept the tax assessment as delivered and be grateful. Usually this happens on the same day that some county board member bemoans the lack of housing for teachers and firefighters. I’m looking at you, Fairfax County, Virginia.

This is all a long way of saying that you should retain someone to appeal your tax assessments on a regular basis. Pay a regular retainer rather than a % of savings wherever possible. The larger issue must be addressed by affordable housing groups at the state and national level: it is not unreasonable to expect a proportionate and equitable real estate tax assessment when providing a public service such as affordable housing.