Real estate taxes are one of the trickiest aspects of a transaction. Governing laws differ state to state and sometimes even county to county. A transaction’s effect on taxes can “make or break” even the most appealing deal. It has been reported that self storage REITs are anticipating an increase in their year over year expenses due in part to the increase in real estate taxes they are seeing across the county. Self storage has seen record high sales prices in recent years and assessors are becoming more aggressive as they “catch-up” to the prevailing market CAP rates of today.
The first aspect to understand is how assessed value is calculated. Assessors typically use some combination of cost (cost of replacement), income (estimated revenue) and sales (recent sales comparables) approaches. They calculate the assessed value of the property which, in turn, is used to calculate the taxes. Some states use 100% of the assessed value while others use only a percentage of the assessed value as “taxable value”.
Using the income approach, an assessor will use market data to estimate occupancy, rent per square foot, expense ratio and CAP rate. Typically, they receive the data for their calculation (NOI, occupancy %, etc.) voluntarily from owners of self storage in their market. As a result, the information is sparse and often incomplete or inaccurate. Those discrepancies combined with historically higher CAP rates for self storage assets have caused assessors to define CAP rates that are much higher than market CAP rates today. As a result, you are seeing states make a shift to the sales approach or be more aggressive with CAP rates for the income approach. This causes higher property assessments and therefore, higher property taxes. As some larger operators have indicated, this creates some pressure on operating fundamentals.
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