Predicting Property Tax Assessments

DALLAS—As owners and investors go through the due diligence period before closing a deal in 2014, they must consider the underwriting process. Obstacles such as decreased cash flow or increased operating expenses may impact their predictions for property tax assessments. This is due in part to a lack of knowledge and general understanding about property taxes and the underwriting process. During the due diligence period, investors are tasked with vetting out all the revenue and expenses on a given property. At the end of the day, investors are rewarded upon the accuracy of their models. Some line items are more straightforward to predict. For example, rents and occupancies are most often judged by the current rates and the anticipated oncoming supply in the market. Although investors may interpret them differently, the data exist to assist in the analysis.

However, property taxes present a unique set of problems for investors to model. The quick and dirty methodology for most is to apply a percentage of the purchase price for the first year of acquisition, and then subsequently apply a standard 2% to 3% increase on an annual basis thereafter. As you can imagine, this blanket methodology neglects to address many of the nuances of each property and jurisdiction. And, this is not a good strategy due to the simple fact that property taxes are often the largest line item in operating expenses.