Posted by Penny on June 07, 2008 at 14:29:36:
It affects the landlords even more for gross leases than NNN. Not surprising, it does devalue the property when you run the numbers according to how you would operate the property because it is an expense increase. It gets back to Ray’s article where you have to determine how you would operate the property and the expected expenses you would incur as a new buyer.
In a nutshell, I crunch how it will affect my profitability and use it as part of determining any offer. To do this, you need to look out for a period of several years to see the impact because sometimes it takes a couple of years before the tax increase hits. It is a real impact that affects the NOI, and thus the property value as a result of the sale.
In my state of Minnesota, if I buy a property in 2008, then the tax value assessed in January 2009 for 2010 taxes will be affected by my sales price or improvements made (say I build out an office shell) in 2008. 2009 taxes are based on the previous value, so there is a year’s reprieve. Then, my taxes go up in 2010, and potentially by a lot if there was a big difference between the sales price/improvements value and the previous tax value. Our state has a time window where property owners can dispute the proposed assessment values, so you have to keep an eye on this and speak up for yourself.
I look at this potential hit on every commercial property I consider for purchase. Currently I’m evaluating an office building where the asking price is 40% higher than the tax value. Since the leases are gross, you can bet that it will affect what I may be willing to offer.
I explain to the seller/seller’s agent how the tax increase would affect the profitability and tenant stability and how I’ve considered it in my offer. Then they can consider whether to negotiate with me or wait for another buyer who is clueless on the tax impacts.
I’d rather pass on something than get stung because it is a real cost that you have to consider. I guess it is something that I do just as part of my analysis because my state already socks us pretty good on taxes.
States are looking for more sources of revenue, so I don’t see this changing.
Just my $02.