Looking at a Park for sale with a current assessed value based on a 10MM valuation. Sale price is north of 25MM at a 5 Cap.
If the assessed value in now based on this new purchase price, this will affectively raise tax bill by $500K, which computes to a $20MM Deduction in value, using the marketed cap rate of a 5 Cap.
The same situation keeps coming up on deals we’re looking at, where the park hasn’t sold in the last 20+ years and the new appraised value based on purchase price will effectively cause the taxes to rise between 3 to 10 times the existing bill.
This is irrelevant of wether or not the adjustment happens year of purchase or 2 years later.(Some brokers like to use this as justification for not accounting for this in their OM Proforma)
Wondering if anyone has experience with this kind of thing and how to underwrite for this scenario?
Obviously the solutions will vary from county to county based on how aggressive the assessors (or school boards) are.
You all must come across this on a pretty regular basis, and would love your approach.
At $25mm*5% cap rate your pro forma NOI is $1.25mm. An increase of $500k in expenses will certainly drive down the capitalized value.
But it works out to $10MM “deduction” in capitalized value at a 5 cap. Not sure where you’re getting $20mm from.
Still, you have the right idea. You have to figure the pro forma return based on the newly assessed value, which will take into account your purchase price when the tax office gets around to reassessing it.
Break down the purchase into land,real property, and goodwill but you will still be on the hook for increases in taxes no matter what. You are correct to value this into the deal. Not sure what your competitors are doing but it’s a real issue for all of us out there.
I spend a significant amount of time every week researching how each municipality handles reassessments upon sales. Have you talked directly with the property assessor to understand exactly how they will reassess? Is is a percentage of the purchase price, how is goodwill handled, are there park owned homes and how much value can you assign to those, what value is assigned to the land, etc. While you don’t disclose the location of this property, a $500k increase in taxes on a property does seem very heavy.
PM me, I’m happy to discuss this privately in more detail.
I take a similar approach to @Jim_Fletcher. A quick search through the assessor’s website should show how reassessments are handled. Usually a call to their office can reveal a lot of valuable information - max % tax increase YoY, how to appeal (and success rate), real vs personal property. Some counties are willing to provide a tax break depending on the capex you are looking to pour into the community.