Cutting Costs in 2011 Part 5: Real Estate Tax Strategy

It's been over a month since Cost Cutting in 2011 launched, and I hope all of you avid cost cutters out there have enjoyed reading the series so far.  This week I'm going to take a break from your utility bill, and switch the focus to another significant cost: Property Taxes.

First, let's review exactly how commercial property taxes are calculated.  According to About.com, “Property taxes in Pennsylvania are based on millage rates set by individual municipalities and school districts. In other words, property taxes in Pennsylvania vary from one county to another, and even from one town to the next. The amount of property tax you will owe is based on a combination of your assessed property value (as determined by the county assessment office) and the millage rates of the municipality and school district in which you live.”

Once this millage rate is set, your local government will apply the rate to your property value, which is determined by a public appraiser.  However, these appraisals often occur once every three or more years.  These two premises form a relevant conclusion: the property value on which you're being taxed may be outdated, still valued at the real estate market's peak in 2005 and 2006.

Let's say you own an office building taxed at 3% annually currently valued at $50 million, but four years ago the market valued the property at $80 million.  Theoretically you could be paying $2.4 mm ($80 mm * 3%) a year, when you should be paying $1.5 mm ($50 mm * 3%) a year in today's market.  $900,000 in savings is nothing to overlook!  I'm not going to recreate the wheel here, as moneycentral.msn.com has written a thorough article on how to appeal your property tax assessment that I would highly recommend to all real estate owners.  However, I'll comment on an unconventional way to raise capital facilitated through tax strategy.

Owners looking to raise capital:
Let's say you have a non-profit tenant in one of your office parks that occupies an entire building.  Since they have a 501(c)3 status, they are exempt from property taxes.  However, since they don't own the building (you do), you are still obligated to pay (gross), or pass on (NNN) the monthly real estate taxes.  Put together a pro-forma that analyzes not only the long-term savings the non-profit tenant can realize from owning the building as opposed to leasing, but that highlights the monthly savings associated with avoiding local real estate taxes.  There are distinct opportunities for mutual gain in these types of transactions, so putting in the effort to underwrite a lease-purchase arrangement and effectively communicate it to your tenant could result in profit for you and savings for them.

Thanks for tuning in… See you next week to discuss strategies that will breakdown the fundamental concepts behind property insurance, and strategies to help you save money on your annual policy!