Commercial Investment Real Estate Summer 2020 | Page 19

Net Effective Tax Rate — Kansas City MSA Market Value/Unit Tax Value/Unit County State Assessment Ratio Mill Levy Effective Tax Rate Average Assessed Valuation as % of Sales Price Net Effective Tax Rate Taxes/Unit $185,000 $83,250 Jackson Missouri 19.00% 79.8730 1.52% 45.00% 0.68% $1,263 $185,000 $174,176 Johnson Kansas 11.50% 120.4732 1.39% 94.15% 1.30% $2,413 by the buyer and corresponding cap rate are reflective of any potential tax increase triggered by the sale. The same methodology must be applied for valuation purposes, even if the property is not actually selling. This approach aligns risk, buyer motivation, and asset value. Several states require real estate taxes to be fair and equitable among comparable properties, which is supported by analyzing tax comparables with a similar geographic location and economic characteristics. Assessed values and mill levies (tax rates) are often county and submarket specific, so it is important to select comparable properties from the same taxing jurisdiction for consistency. For example, in the Kansas City MSA, real estate taxes are influenced by state statute in either Kansas or Missouri. Kansas is a disclosure state, and tax values are near their true market value. Missouri is largely a nondisclosure state, and values are generally below the actual market value. The table above shows various real estate tax metrics for a Class A apartment project located in each state of the Kansas City MSA. Depending on the geographic location of the property, the tax burden can vary significantly, which impacts the asset’s acquisition price and investment returns. Analyzing sale to reassessment ratios within the taxing jurisdiction of the property can mitigate future tax increases. The data indicates that properties in the same taxing jurisdiction are generally taxed between 90 percent and 100 percent of the actual market value. The tax ratio can be confirmed by a ratio study prepared by the state’s department of revenue that analyzes mass appraisal accuracy and level of uniformity. Applying the same methodology to an acquired or refinanced property will result in an alignment of value and risk profile consistent with the market-extracted cap rates obtained from similar sales. Prior to the sale, a property may be undertaxed in relation to its actual market value, which is a benefit that would not transfer to the next owner. The buyer’s exposure to increased taxes can be mitigated by increasing the pro forma tax projection to mirror similar projects (fair and equitable taxation) and the purchase price (ad valorem taxation). Real estate taxes are one of the largest non-controllable operating expenses. Having a deep understanding of local taxing policy is critical in a successful investment strategy. Taxes vary by state, county, and submarket, so accurate data at the local level can help mitigate future reassessment risk. Market value and real estate taxes are not mutually exclusive — rather, they are interrelated in their impact on market-extracted cap rates, asset pricing, and investment returns. Daniel Kann Managing director of multifamily at Valbridge Property Advisors in Kansas City, Mo. Contact him at [email protected]. CCIM Foundation Sponsors Free Commercial Real Estate Education for REALTORS® The CCIM Foundation, under its mission to “support impactful programs and bold initiatives to advance the commercial real estate industry,” partnered with CCIM Institute after the onset of the COVID-19 pandemic to offer free on-demand courses for residential specialists considering a career in commercial real estate. These one-hour CCIM Institute courses were made available to REALTOR® members through NAR’s Center for REALTOR® Development. The REALTORS® community continues to enjoy this opportunity to learn more about the commercial real estate industry with more than 12,000 registrations of these courses to date. To learn more about the CCIM Foundation and its programs, please visit www.ccimef.org. The CCIM Foundation is a 501(c)(3) nonprofit organization. CIREMAGAZINE.COM COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE 17