Tax Appeal on Apartments - Using a Loaded Cap Rate

[JDahl]

Hey all,

I am working on a tax appeal of an apartment portfolio. I have done a ton of apartments in this market and am qualified to take the assignment, but don't do tax appeal. I would like to pose a question to those who do who have done tax appeal work, particularly about loading a cap rate.

So, my understanding is when doing tax appeal work for a property like this one option is to load the cap rate. Obviously, plugging in scheduled taxes into a stabilized for an appraisal where you are challenging them does not make sense. I want to make sure I am getting this right.

These are market rate apartments where the tenants pay for electricity, and the owner pays for everything else. So my understanding is you would estimate all operating expenses as anyone would for non-tax appeal work, and then leave the real estate taxes out of the stabilized but "load the cap rate" by selecting a market cap rate and then adding the effective tax rate on top? Is that correct?

For instance, in my market for the year that is being challenged a market cap rate of 5.0% is reasonable. The effective tax rate for the year being challenged is 1.88%. So, is the appropriate "loaded cap rate" 6.88%? My understanding that using the loaded cap rate together with leaving taxes out of the stabilized operating statement will develop a credible opinion of value for these purposes?

Any insight that the experts on this forum could provide would be greatly appreciated.

Thanks in advance.

 

[Gobears81]

It sounds like you have it figured out. 5% cap rate plus effective tax rate of 1.88% = 6.88% and not showing RE taxes as an expense on the income statement.

My understanding that using the loaded cap rate together with leaving taxes out of the stabilized operating statement will develop a credible opinion of value for these purposes?

For a market-rate apartment property, there isn't really an dispute from either side that this method would result in a credible value opinion, provided that your other inputs (market rent, vacancy, operating expenses, cap rate) are well-supported. Ideally, your comparable sales are assessed consistently, as I have encountered locations where most of the properties remain under-assessed, which could potentially create an equity argument (in IL, at least).

 

[Artemis Fowl]

I do tax appeal work in Michigan as an assessor. You are correct.
You don't want the actual taxes included as an expense in the NOI calcs as they are likely based on the value being disputed. Converting to a percentage added to cap properly handles the tax expense for a differing value opinion.