Steven  Maislin

Steven Maislin

Broker, Certified Specialist IRES, ABR, SRS, SRES, RENE

RE/MAX Realtron Realty Inc, Brokerage *

Mobile:
416-518-7701
Office:
416-782-8882
Email Me
Steven  Maislin

Steven Maislin

Broker, Certified Specialist IRES, ABR, SRS, SRES, RENE

RE/MAX Realtron Realty Inc, Brokerage *

Mobile:
416-518-7701
Office:
416-782-8882
Email Me

How better commercial property tax management can mitigate risk and strengthen investment performance

02 Introduction

03 Key Findings

04 The Current State of Property Tax Analysis

06 Lack of Tools and Resources Impacting

Underwriting and Investment Strategy

08 Creating Value with Improved Tax Analytics

09 Recommendations

09 Conclusion

 

 

02  Report Themes

1. Unlike most operating costs, taxes cannot be shopped around, negotiated or

lowered through contracts, but there are established processes to manage them.

What does the current approach to property tax management look like?

2. What are the issues surrounding effective management of property tax including

assessment reviews, appeals and benchmarking?

3. How is exposure to property tax being incorporated into underwriting

and investment strategy?

4. Can firms drive yield and asset value through better real estate tax intelligence?

Introduction

The commercial real estate (CRE)

industry is rapidly changing. Now

widely considered the fourth asset class

in the market, CRE continues to become

more institutionalized and is attracting

capital at a record level. As a result,

there is more competition for available

assets, higher asset prices and greater

expectations for their performance.

As values have increased, so too have CRE property

tax assessments and liabilities. Given the pressure

to operate more efficiently, a proactive approach

to property tax management presents a significant

opportunity for firms looking to derive greater

asset value and returns from their portfolios.

Altus Group’s Property Tax Report, “Tax as the New

Strategic Driver,” reveals how firms are currently

managing their property taxes and how owners

and investors can leverage tax planning more

strategically to realize operational and transactional

efficiencies and unlock greater asset value.

As the largest single operating expense, property

tax is an area often overlooked as an opportunity to

drive strategic investment decision-making. In fact,

while many CRE firms believe they have adequate

property tax planning strategies, recent survey

results indicate that few manage their property

tax as they might other operational expenses.

This report is based on a quantitative survey of over

200 CRE C-level and senior executives in property

tax and finance roles who deal with real estate

tax matters at owner-operator and owner-investor

firms in the United States and Canada. All firms

that participated had assets under management

(AUM) of at least $200 million USD at the time

of being surveyed, representing an approximate

total AUM of over $350 billion USD. Altus Group

commissioned leading international research firm

IDC to conduct this survey, which was fielded in

spring 2017, and forms the basis of this report.

3

ALTUS GROUP PROPERTY TAX REPORT

Key Findings

73%

describe their property tax management as reactive

and purely or largely operational and cost reduction oriented

75%

said that property tax exposure has very little impact on their underwriting assumptions,

and 56% do not incorporate property tax refunds into their ongoing valuations

32%

said they lack the tools to analyze property tax information, and 44% said

they lack the expertise and resources to identify property tax data sources

52%

of firms surveyed incorporate property tax management directly

into their investment strategy and decision-making

25%

Tax as the New Strategic Driver

4

The recent upward cycle in the CRE market

has pushed property values to record heights,

resulting in property tax disbursement reaching

historical highs.

However, the survey revealed that the majority

of firms take a reactionary approach to property

tax management. Seventy-five percent (75%)

of executive respondents describe property tax

management at their firms as purely or largely

operational and cost reduction oriented.

When asked how their firm is managing property

tax exposure within its portfolio:

The Current State

of Property Tax

Analysis

32%

said that property tax exposure

has very little impact on their

underwriting assumptions

$515 Billion

USD of asset

investment sales

in 2016 in the

US and Canada

$165

BILLION

USD of CRE

assets at risk of

underperformance

41%

said they only periodically

review assessments to identify

appeal opportunities

21%

said they use enhanced real estate tax

analysis that includes tax benchmarking

to identify exposure of their portfolio

compared to the market

$156

BILLION

US

$9

BILLION

Canada

Source: RCA and CBRE 2016

ALTUS GROUP PROPERTY TAX REPORT

5

Firms appear to apply

limited analysis of the

variables that impact

tax liability calculations.

While the frequency and comprehensiveness of

assessment reviews to identify appeal opportunities

varies among firms, efforts to understand a

portfolio’s tax liability versus a competitive or

comparable set of properties within the market

are less common. In essence, reducing property

tax liability is a common and important objective

for owner operators and investors — but the

appeal pursuit alone does not provide the

critical insights on current and future investment

performance that can come

from benchmarked tax

information.

It is important for owners

to know where their

property stands in

comparison to competing

properties for leasing and

disposition purposes. Remaining competitive and

providing a “lower real estate tax cost” to potential

tenants or buyers can drive very real and tangible

value. Underwriting assumptions typically span

10 years and the ability to predict real estate

tax costs throughout an investment time horizon

can increase returns through higher net operating

income (NOI).

Taking a proactive approach to tax analysis

and management can provide firms with a highly

strategic benefit to their investment decisionmaking

and directly contribute to what, where,

when and how assets are bought, sold and

managed. Yet only 25% of respondents said their

firm incorporates property tax management directly

into their investment strategy and decision-making.

The result is an increased risk of portfolio

and asset-level underperformance.

When compared to the CRE industry’s level

of analysis typically applied to the review and

control of property management costs the limited

attention paid to the tax line item becomes more

pronounced.

Historically, the real estate industry has viewed

taxes as a fixed expense, driven by market and

government assumptions. The lack of analysis

of historical or benchmarked tax data has led

to an industry standard of

applying a static growth rate

to the property tax liability for

budgeting and underwriting

purposes.

Typically a growth factor of

3% is applied, but an overall

assessment of past industry

underwriting and transactions

shows that most property tax growth assumptions

are inaccurate. This carries with it a significant risk

of portfolio underperformance.

Many additional considerations underscore

the importance of a deeper understanding of

the implication of property tax dynamics. From

significant year-over-year assessment value

increases and fluctuations, to the complexities of

the appeals process, designation of property for

current or future development, and variations of

purchase prices relative to assessment values, there

are a vast array of factors that can directly impact

property tax expense.

Tax as the New Strategic Driver

6

44% 39%

Lack of Tools

and Resources

Impacting

Underwriting

and Investment

Strategy

It is clear there is a huge opportunity

to better leverage available market

and asset-level information:

While a lack of granular or rigorous tax

management processes seem to be one of the

major issues inhibiting a more strategic approach

to the management of property tax, having access

to and utilizing the right tax data and analytics is

also a critical factor. The vast majority (83%) of

respondents think their firms have enough property

tax information and/or the right tax metrics

necessary to optimize their underwriting decisions

and investment strategy. So why aren’t they?

While most said their firms have enough data and

metrics, respondents were also asked to identify the

main barriers preventing the collection or utilization

of property tax data.

said they lack the tools to assist

with property tax data capture

and analysis

said they lack internal expertise

or resources to identify

property tax data sources

said that a lack of normalized

formats inhibit them from

utilizing property tax data

52%

ALTUS GROUP PROPERTY TAX REPORT

7

Tax data needs to be collected from a variety of

sources. Assessed values and tax rates are received

from taxing authorities, capitalization rates are

pulled from research reports and market data

subscriptions, and valuation variables are obtained

from consultants and industry peers. Typically

this information is fragmented and incomplete,

or arrives as raw data. For it to be useful, the data

must be properly aggregated, vetted and analyzed

to derive trends and growth factors that can

assist decision makers in budgeting real estate

tax expenses across their portfolios.

A lack of skilled and innovative tax professionals

is not the problem in and of itself. Every single

firm responded that they have in-house expertise

and/or external advisers managing property

tax. However, over half said they lack the tools

to properly capture and analyze pertinent data,

almost half acknowledge that their tax managers

struggle to identify data sources, and nearly

40% find it challenging to use the data they have

due to inconsistencies in formats and reporting.

32%

52%

AANANDAN

THIYAGARAJAH

Vice President, Finance,

Eastern Region at

Bentall Kennedy

(Canada) LP

Property tax is

one of the biggest

ticket items in both

operations and

investments. Proactive

management of taxes

is critical to add value

to the investment.

Benchmarking helps us

understand where we

are in comparison to

our competitors and

gives us the insight to

strategize.

Tax as the New Strategic Driver

8

Creating Value

with Improved

Tax Analytics

Although the industry is rapidly accelerating

its investment in technology and embracing

the benefits of data, there are still gaps in

understanding and leveraging this data for strategic

use. With real estate taxes being the single largest

operating expense, tangible value can be created

through better property tax intelligence.

Despite indicating better tax intelligence may

create material value in the underwriting process,

many firms have not yet invested in the tools and

resources to produce accurate forecasting at the

transactional or operational level.

Given the volume of real estate tax data available

and with the proper technology-related tools,

CRE firms can drive greater value by accurately

pinpointing year-over-year trends as related to

specific deals, properties and markets. Using

variables such as property size, asset type and/

or taxing jurisdiction to create the right predictive

analytics, owner and investor firms can achieve

substantial operational savings, but more

importantly, preserve yield across

entire portfolios.

ANTHONY CHANG

Vice President,

Asset Management

at Washington REIT

Property tax planning

is critical and the

dollars involved

are significant.

Approaching tax

management

strategically is

crucial to proactively

managing risk and

aggressively driving

shareholder value.

One of the biggest

impacts of having

good tax intelligence

when we underwrite

new opportunities is

the strength it brings

to our negotiating

position.

9

ALTUS GROUP PROPERTY TAX REPORT

The findings of the survey indicate four

necessary and immediate steps for firms.

IMPLEMENT PROACTIVE FORECASTING

As property values continue to rise, so too do

tax assessments, which means that even a small

percentage change in the tax bill equals big dollars.

If firms continue to respond only reactively to

rising or even stable tax assessments with periodic

reviews and appeals, limited to high profile or

heavily impacted properties, the missed savings

opportunities will grow, potentially leaving

portfolios at risk of underperformance. This is

true regardless of asset type, ownership structure

or life cycle stage.

REVIEW ALL ASSESSMENTS

FOR APPEAL OPPORTUNITIES

Ultimately, property tax assessments are

determined by a number of known and uncertain

factors. Maintain an annual review of all new

property assessments, or those mid-cycle

assessments that can be appealed. Each

assessed value must be reviewed for accuracy

of facts, assumptions and equalization.

ADOPT STANDARD REPORTING

ACROSS ASSET TYPES

As the survey indicates, the disparate data

sets required to create tax forecasting models

are a critical barrier to the data’s usefulness.

Although firms often have no initial control

over the information received, adopting standard

models for underwriting and budgeting internally

will aide in the verification of the data.

BEGIN BENCHMARKING

Implement a process for benchmarking a

property against itself and similar assets in the

portfolio. A simple chart of a property’s assessed

value over time compared to the appraised value

and market conditions will allow for trends and

outliers to be spotted more easily. Furthermore,

documenting how assessments changed prior

and subsequent to acquisitions, construction

milestones, certificates of occupancy, or

significant renovations will assist in the underwriting

of similar projects in the same market.

Conclusion

The report’s findings clearly indicate a growing recognition and need for better real estate tax

intelligence and the critical role property tax should play in asset performance and portfolio

strategy. In fact, 73% of respondents firmly acknowledged that improvements to their tax planning

analysis would help with better decision-making. While the collective majority of executives affirm

its significance, enhanced real estate tax management and analytics at both the operational and

transactional level are still underutilized. With the right investments in process and technology

to provide better visibility into tax growth, risk and savings, the opportunity for property

tax to play a more strategic role in investment decision-making is significant.

Recommendations

Corporate Headquarters: 33 Yonge Street, Suite 500 Toronto, Canada | 416.641.9500

altusgroup.com

Altus Group is a leading provider of independent advisory services, software, and data solutions to the global

commercial real estate industry. Our businesses, Altus Analytics and Altus Expert Services, reflect decades of

experience, a range of expertise, and technology-enabled capabilities. Our solutions empower clients to analyze,

gain market insight and recognize value on their real estate investments. Headquartered in Canada, we have

approximately 2,300 employees around the world, with operations in North America, Europe and Asia Pacific.

IDC is the premier global provider of market intelligence, advisory services, and events for the information

technology, telecommunications and consumer technology markets. IDC helps IT professionals, business executives,

and the investment community make fact-based decisions on technology purchases and business strategy. More

than 1,100 IDC analysts provide global, regional, and local expertise on technology and industry opportunities

and trends in over 110 countries worldwide. For 50 years, IDC has provided strategic insights to help our clients

achieve their key business objectives. IDC is a subsidiary of IDG, the world’s leading technology media, research,

and events company.

Research Survey

Conducted by:

Tax as the New Strategic Driver

Copiyiright© 2017 Altus Group Limited

All Rights Reserved

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