Underwriting question about property tax assessment on sale
Hey RE fam. First year analyst here with a potentially silly question. How do you properly underwrite tax reassessment at exit? It's really circular and confusing to me. F12 NOI (inclusive of taxes) determines my exit price but exit price determines F12 Taxes directly impacting F12 NOI. How do I know my F12 taxes are accurate? Is there a list of steps you use to recalculate taxes upon sale? Am I overthinking it???Any guidance is greatly appreciated.
[{"id": "gm2o25k", "text": "Best advice is to call a consultant as this can vary significantly by property type and jurisdiction. Simple solution is to eliminate tax as an expense and add the effective tax rate to your cap rate but a good consultant (hi!) should be able to keep the taxes below 100% of market value in most jurisdictions.", "replies": [{"id": "gm40bkw", "text": "What jurisdictions do you work in? I use loaded cap rates in Chicago but I have been asked about their legitimacy in Denver. Always surprised to see who uses them and who doesn\u2019t", "replies": [{"id": "gm53fsl", "text": "Legitimacy? It is simple math but it doesn't surprise me people would question it.", "replies": [], "depth": 3}, {"id": "gm6fty6", "text": "I am a partner at the largest property tax firm in the country. I am in San Antonio but deal with clients from all over the world who own property all over the US and Canada. We have over 30 offices though and my local experts recommendation varies by property type and jurisdiction.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gm2p22b", "text": "What city and state is the deal in? Trick is that every state calculates it differently. Some reassess on sale, others reassess annually, and my state does it tri-annually. Once you figure this out take 90% of the reassessed value.  If you want to understand how to estimate the actual taxable amount then multiply this number by your state/county mileage rate. You can google this data. Try googling CBRE 2021 mileage rate for (your state). The CBRE data sheet typically lists any additional fees specific to the property\u2019s location.", "replies": [{"id": "gm2plpf", "text": "It's in Los Angeles. CA reassesses on sale and taxes 100% of the assessed value at ~1%.", "replies": [{"id": "gm2puis", "text": "What property type?", "replies": [{"id": "gm5fgvs", "text": "Multifamily", "replies": [{"id": "gma1xop", "text": "In LA I would advise that 100% of purchase price is prudent with 2% annual escalations.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "gm2q0fw", "text": "Perfect. You are overthinking it. What\u2019s your imputed value at exit? That\u2019s your answer. Your taxes will otherwise increase ~3% until the buyer resets it with a sale, right? What am I missing?", "replies": [{"id": "gm2qbna", "text": "2% unless the economics fall off. Only variable is non-realty value in a going concern (hotel) and that is often taxed in CA.", "replies": [], "depth": 4}], "depth": 3}, {"id": "gm37t6s", "text": "PM me and I can send you a model on how we calculate Prop 13 clauses when we value Californian properties. You are right, it is circular.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gm2z4y2", "text": "Are you able to look at tax bills for similar properties in the area? Is there a risk of post-sale reassessment?", "replies": [{"id": "gm472m8", "text": "I can only speak to one place but in NYC assessments are based primarily on what the city estimates your next year's gross income to be. This is mostly based on the prior year's RPIE filings. Vast oversimplification there but if you're estimating what gross would be at exit you can use prior/current tax bills to back out the formula they're using to get to AV, subtract exemptions then apply what you think the tax rate will be at exit.\n\nThat said I'm on the market research side of things and don't do underwriting. So what I'm saying here might be a highly unorthodox way of doing it.", "replies": [], "depth": 2}], "depth": 1}]