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
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Tax as the New Strategic Driver
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