Tax Abatement On Value

[Nancy Price]

Just looking for insight on value of a tax abatement on a purchase transaction. If there is 15 yrs abatement left on a condo unit and 2 yrs left on a comparable condo unit is there any additional value to the 15 yr abatement?
These units are not in the same building so no matched pairs.

 

[jay trotta]

keep on searching, searching

what's the market telling you ?? Anyone paying More ? Less ?

 

[Nancy Price]

Insufficient market activity. I can say that buyer believes it is worth more due to tax abatement, however, when abatement expires will it be worth the premium he paid now?

 

[Michael S]

I've appraised several commercial properties where the owner had a long term property tax abatement in place. Generally I would provide the client two values, one with the assumption that the abatement could be transferred to a new owner, the other assuming that it couldn't be. The difference was the value of the abatement. I determined the value by looking at how much they were saving annually on taxes, projecting that into the future with some annual growth (2-3% typically), then discounting it all back to present value. On the last appraisal I did I assumed a 2.5% annual growth in property taxes and used a 7.5% discount rate to determine the present value of the future savings. The assumption is that a buyer is basically prepaying for those future savings and why would you pay say $20,000 up front to save $25,000 in future property taxes when you could simply invest that $20,000 and have $30,000 - $40,000 over the same time frame with a reasonable amount of risk.

In the properties I've worked on the value of the tax abatement is typically hundreds of thousands if not millions. I'm not sure how much a typical residential owner/user would be willing to pay but I can't see somebody just ignoring the fact that one property will save them thousands a year for 15 years and the other will only do it for two years.

 

[Gobears81]

I've appraised several commercial properties where the owner had a long term property tax abatement in place. Generally I would provide the client two values, one with the assumption that the abatement could be transferred to a new owner, the other assuming that it couldn't be. The difference was the value of the abatement. I determined the value by looking at how much they were saving annually on taxes, projecting that into the future with some annual growth (2-3% typically), then discounting it all back to present value. On the last appraisal I did I assumed a 2.5% annual growth in property taxes and used a 7.5% discount rate to determine the present value of the future savings. The assumption is that a buyer is basically prepaying for those future savings and why would you pay say $20,000 up front to save $25,000 in future property taxes when you could simply invest that $20,000 and have $30,000 - $40,000 over the same time frame with a reasonable amount of risk.

That sounds like an appropriate way to analyze the property you were appraising, but I don't see a homebuyer doing a DCF projection incorporating annual growth, etc.

But I agree, two values would be appropriate and if the comparables have a two year tax abatement, that is probably short enough to establish the base value. If they would normally pay $2,400 in RE taxes per year, they could use that savings to prepay their mortgage an additional $200 per month. So yes, I would say it makes a difference in value.

 

[CANative]

Are you including the cost of amortizing over the period?

 

[Gobears81]

Are you including the cost of amortizing over the period?

Who are you asking?

 

[CANative]

You and Michael I think. Maybe that's already a component of your DCF.

 

[Gobears81]

You and Michael I think. Maybe that's already a component of your DCF.

I actually didn't advocate for using DCF as a primary method in this case as I don't anticipate the market is sophisticated enough to do that (not a slight to this market by any means). It might be a decent secondary tool to determine a tax abatement benefit, as more of a common sense check. My mention of $200/ month is just based purely on savings from the taxes, not any scientific calculations, and explaining the rationale. The OP didn't sound sold that the property was worth more because of the tax abatement.