Investors ignore property taxes at their peril

Commercial real estate investors often fail to factor in property assessments, taxation

Terry Bishop, Altus Group: “the return on investment through reviews of commercial real estate portfolios is typically in the range of 500% to 1,000%” | Altus Group

Many commercial real estate owners are “leaving money on the table” by not applying the same scrutiny to property taxes as they do to other expenses, according to Terry Bishop, Altus Group Ltd.’s president of property tax for Canada.

A new Altus Group survey, Tax as the New Strategic Driver, revealed that only 25% of senior industry executives in Canada and the U.S. incorporate property tax management into their investment strategy and decision-making.

“With real estate taxes being the single largest operating expense, the result is an increased risk of portfolio and asset-level underperformance,” the Altus study concluded.

Altus Group provides commercial real estate services, software and data solutions to the global commercial real estate industry.

In Canada, more than $9 billion worth of commercial real estate assets are at risk of underperforming due to reactive property tax management, the study states.

Not keeping your eye on property taxes can be costly in Canada, Bishop noted, because property assessments – on which property taxes are based – can change quickly.

In Vancouver, for example, some retail property assessment values jumped by more than 200% in 2017 compared with a year earlier.

B.C. assessments are calculated on July 1 of each year and applied to taxes on the following year.

Many companies view their property tax expenses as a fixed cost and are therefore reluctant to invest the required resources to manage the expense “unless they get into a crisis situation such as a property with a really high assessment,” Bishop said.

“Those firms that are focused more on cost rather than return on investment, in our opinion, are leaving money on the table by not proactively reviewing the property tax assessments for their portfolio.”

Paul Sullivan, an appraiser who specializes in property tax consulting with Burgess Cawley Sullivan in Vancouver, said only 1% of B.C. property owners appeal their assessments each year.

Yet, Sullivan noted, his company saved clients more than $2 million in property taxes in 2015, either through assessment reduction or by having property reclassified.

Altus noted that investors who leverage tax planning strategically can unlock even greater asset value beyond property tax savings.

“Not managing your property tax expenses leads to downward pressure on net rents and results in reduced valuation,” Bishop cautioned.

Fifty-two per cent of Altus survey respondents said they lack the tools to analyze property tax information, and 44% said they lack the expertise and resources to identify property tax data sources.

Many firms haven’t invested in the tools and resources needed to produce accurate forecasting of property taxes.

“A lot of them are into bidding situations on properties and they’re not sure that they’re going to be successful, so they’re cautious about how much they invest in the initial due diligence phase,” said Bishop.

Forty-one per cent of survey respondents said they periodically review property tax assessments only to identify appeal opportunities.

But firms might not be aware of how potentially lucrative successful appeals can be.

“Our experience is that the return on investment through reviews of commercial real estate portfolios is typically in the range of 500% to 1,000%. Oftentimes it’s higher than that, so it’s definitely worth the expense that goes into it,” Bishop said.

He said smaller or new commercial investors should take three basic steps to make sure they have a handle on their property tax exposure.

First, outsource the tax consulting and appeals to experts. Second, owners should make sure they react promptly to requests for information from assessment authorities, and, third, make sure that the tax clauses in their leases provide for 100% recovery of property taxes from their commercial tenants.