In a prior post, I’ve discussed the benefit of real estate tax appeals, but I have not spent much time on consultants and contractors. AFT provides a useful corrective with these recommendations:

• Analyze all of your contracts and compare them to current market rates
• Make sure you’ve got the ability to terminate the contract
• Don’t limit your efforts to construction, maintenance, and service-oriented jobs

This is good but somewhat limited advice. Probably because I hate sale retrades and because service providers like painters, landscapers, and others were usually contractors and residents in my affordable portfolio, I’m tend not to hammer contractors too heavily on price. Instead, I ask for more frequent service, better materials, or some other benefit to the property. Maintaining a good client at a current price matters to small businesses because it supports existing revenue projections and allows them to compete on something other than price. (Note: I usually find Seth Godin to be flip and lacking in both reflection and detail. However, even the blind pig finds an acorn, and this is a usefully concise summation of my point.) Maintaining a good contractor should matter to you because moving from price to service reduces the perception of your negotiations as zero sum.

On the other hand, I think consultants (attorneys, engineers, and accountants) probably should be roughed up on price or rebid. I’ve seen some egregious overcharges on standard affordable housing work by a national real estate accounting firm and I’ve had lawyers bill and call for so many expert witnesses that we eventually paid 2x in legal than we did for the settlement.

In the interest of moving the discussion forward, here’s what I’ve negotiated in the past:

• Additional flower planting or upgraded landscaping
• Additional security hours or upgrade in patrol method
• Custom accent wall painting on unit turnover
• Full roof redecking on replacement
• Lot restriping, signage, or snow plows from tow companies

In most cases, your road to financial health is not found via cost reductions, but value additions. Approach negotiations with this in mind, and most contractors will eagerly respond. Those that don’t, you never wanted anyway.

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.

It works wonders on-site as well. Local curfews, breed restrictions, auto registrations, many localities provide owners and managers with a full kit of tools to improve the appearance of the property and the behavior of residents. In one particularly difficult property in Atlanta, we enforced a curfew to encourage younger residents to quit looking for trouble. Robust enforcement, parental notification, and frequent reminders helped reduce vandalism costs by 85% in 60 days. We went from 4 police calls per night to 0.75 over the same period.

In the summer.

Various Internet marketing schemes are reducing the cost and most of my management company partners claim that traffic through their own site drives much of the traffic. Presumably they have identified the appropriate keywords and provide multiple links to and from their property websites to pay for the SEO (search engine optimization) consultant.

With budget season upon me, we are moving even more strongly toward Internet advertising via national (r*nt.com, a*artments.com, e.g.) and more localized methods (c*aigslist, local media). All properties are down to one book and that is increasingly one of the group ads produced by the management company. Although I eschew broadcast media, I actually do use a radio spot in a rural market, which seems to have paid off. Having been victimized by a $1mm owner-directed campaign in 2003 that exhausted budgets and produced no gain in occupancy, finding a campaign that worked was probably my biggest surprise for the first half of 2008.

The lesson for us: it’s worthwhile to speak to the local constables and look through websites that track released felons in your area.

By looking at each unit with a critical eye at the appliances, rough estimate of turn costs, and any general maintenance items, the service manager and property manager are able to better forecast turn costs and appliance replacements.

Items preceded by ‘FIRE’ or tagged with same, should speak to timeless issues in multifamily.