Commercial Investment Real Estate Summer 2020 | Page 18

BRIEFINGS
By Daniel Kann
ASSESSING
MARKET VALUE
Understanding real estate taxes can help minimize risk in
future assessments, even if the calculus can seem arcane.
Capital markets continue to attract
investors seeking the stability of
the U.S. dollar. As capital becomes
globalized and returns in gateway and primary
markets are compressed, commercial
real estate investors are increasingly
looking to secondary and tertiary markets
for yield. These investors can find higher
rates of return in non-core markets, but
increased return comes with additional
uncertainty. A common question from outof-market
investors searching for yield is,
“How are real estate taxes calculated for
multifamily developments?”
In a basic sense, market value is based
on the transfer of a property under specific
conditions set forth in the definition. Because
a transaction or a hypothetical transaction
must occur before an asset has realized value,
market value considers the potential tax
implication for an acquisition and a refinance
as if the property were selling. The method of
financing does not impact the analysis of real
estate tax at the property level. The valuation
process analyzes the potential impact to property
taxes for a recapitalization in a similar
manner to an acquisition because both are
based on exchange value.
Market value presumes a hypothetical
sale, and the valuation for tax purposes
must be analyzed relative to the market or
underwritten value of the property. This analysis
holds especially true in disclosure states
where the sale price is public information
and disclosed to the local taxing authority.
As of June, there are 12 non-disclosure states
in the U.S. The other 38 generally require a
sales disclosure to be submitted to the county
or city.
In the case of a refinance where a
property is not actually selling, the property
owner gets the temporary benefit of
enhanced cash flow but does not benefit
from the increased value due to below market
taxes. A prudent buyer would underwrite
year one taxes to reflect the purchase price of
the property. Because the benefit is temporary
and does not transfer to the next owner,
capitalizing the existing or below market taxes
can overvalue an asset as taxes generally
increase following a sale.
Property value is based on the present
value benefits the buyer anticipates
receiving, which must reflect any potential
tax increase or other special circumstance
what would erode future benefits. This concept
explains why taxes often increase in a
refinance, to mirror the hypothetical buyer’s
anticipated benefits.
Additionally, buyers look at comparable
or substitute sales as an indication of
value for a property and to extract a market-oriented
cap rate. The sales price paid
Market Rate — Johnson County, Kansas*
Project Units Year Built
2018
Valuation
2018
Sale Date
Sale Price
2018 Valuation
% of Sales Price
2019 Valuation
% of Sales Price
ARIUM Overland Park 402 2015 $67,053,000 Dec-18 $73,915,000 90.72% 95.48%
Signature Place 232 1995 $22,968,000 Oct-18 $27,550,000 83.37% 90.93%
The Retreat at Shawnee 342 1984 $18,673,000 Oct-18 $25,000,000 74.69% 92.84%
Pinnacle Pointe 160 1999 $13,741,000 Aug-18 $18,100,000 75.92% 97.47%
Pinecrest Townhomes 144 2002 $20,279,000 Jun-18 $24,125,000 84.06% 92.95%
Pinegate East Apartments 222 1985 $16,847,000 Feb-18 $22,000,000 76.58% 101.28%
Villas at Mur-Len 99 1983 $7,393,000 Feb-18 $8,590,000 86.07% 90.28%
*Representative sample of sales
Minimum 74.69% 90.28%
Maximum 90.72% 101.28%
Median 83.37% 92.95%
Mean 81.63% 94.46%
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE
SUMMER 2020