For the majority of self-storage
facilities, property taxes are the first or second largest expense—despite the
fact that they are typically only owed once a year. Since property taxes are
such an enormous expenditure, it’s in every operators’ best interest to
carefully manage their tax payments.
Unfortunately, there is no single
rule of thumb to follow when it comes to property taxes as each municipality
within the United States has its own unique set of guidelines. To further
complicate matters, operators with multiple storage sites must deal with
numerous taxing authorities as well as various tax regulations, deadlines, and
valuation standards. Moreover, the rules and procedures that determine property
taxes are a moving target, with annual updates and/or additions that can make
the tax appeal process an arduous undertaking.
Aside from the plentiful property
tax nuances, most owners and operators should expect to shell out more cash
this year as the market values for self-storage facilities continue to soar. And
the higher valuations have resulted in an increased awareness of self-storage,
catching the eyes of tax assessors across the nation.
“Property tax is one
of the easiest ways to raise revenue,” says Deron Webb, managing principal of
Phoenix, Ariz.-based Wentworth Webb & Postal, LLC, a group
of specialists who identify, develop, implement, and market state and local tax
solutions and strategies. “And there is pressure on municipalities to do that.”
Ken Nitzberg, chairman and CEO of
Devon Self Storage, concurs. “Counties and school districts live off property
tax,” he says, adding that their budgets are based on property valuations.
“Most look at real estate tax as a giant piggy bank.” In addition, he warns
operators that school districts are usually unwilling to negotiate property tax
While it may seem insensitive to attempt
to cut into their budgets, Webb reminds operators that property tax should be treated
like any other operating cost. “Try to lower it,” he says. “It’s prudent for
operators to make sure that number is being managed. You should pay your fair
share—nothing more, nothing less.”
Be Proactive Although operators can always file an appeal, which is advised and discussed later in this article, the easiest way to pay less property tax is simply to be proactive. According to Drew Hoeven, president of real estate at Westport Properties, Inc., the parent company of US Storage Centers, some states may offer reduced rates for paying property tax ahead of schedule. “In Florida, for example, operators can pay early for three to four percent savings,” he says. “That’s a significant cost savings.”
Besides the potential tax
reduction, Nitzberg sites public knowledge as the reason Devon Self Storage
takes a proactive approach to property taxes. “Don’t wait for the tax bill,” he
says. “Every single year we review every single lien tax. Filing proactive
appeals enables us to deal with just the tax assessor staff and not the public.
When you file reactively, it’s public.”
As an example, Nitzberg recalls a
large financial institution filing a reactive property tax appeal; its hefty
tax reduction, as well as the job losses and budget cuts that would have to occur
to balance the municipality’s reduced finances, made front-page news in the
local newspaper. Obviously, this incident wasn’t good public relations
situation for the bank.
The Valuation Process While tax assessors attempt to make accurate valuations, there are various approaches used to determine property tax and, therefore, varying degrees of accuracy. “Assessed value is kind of like a Ouija board,” says Nitzberg. “It’s all over the place.”
According to Webb, most
valuations in Arizona are determined by market value through a mass appraisal
technique. Also known as the “cost approach,” its fundamental principle is to
conclude how much it would cost to replace a property after accounting for
depreciation. Nitzberg calls this approach “chasing sales” as the assessors
base the valuations on recent comparable sales within the market, which can
result in aggressive—and oftentimes exaggerated—assessments that assume
purchase prices are equivalent to market value. This is frequently the case
with older storage properties as depreciation can be difficult to estimate.
Hoeven believes the income
approach is probably the best valuation analysis, unless it’s a recent sale.
For this approach, assessors use market rent, expenses, and cap rate to
calculate a valuation. However, the income approach is frequently based on
comparable properties as well since tax assessors are unable to visit every
piece of commercial real estate.
This is especially true in larger
counties or municipalities such as Dallas County in Texas. Jay Kanter, managing
partner at Texas-based Realty Tax Consultants, LLC, who represents properties
in New Mexico and Arkansas as well as properties within 54 of Texas’ 254 counties,
provides the following example: While there are roughly 1.8 million people in
Dallas County, there are less than 100 tax assessors. Of those 100 assessors,
30 focus only on commercial real estate. There are approximately 722,000
parcels of property within the county.
“There is not enough manpower to
check them all,” says Kanter, who adds that the trend in Texas is for all
districts to move toward an income approach. “Leased properties are better
valued by income, land by sales comparison, and owner-occupied and restaurants
by cost approach.”
Although the income approach
seems to work for Texas, perhaps because Texas is one of the non-disclosure
states that doesn’t require buyers or sellers to disclose the purchase prices
of real estate properties, it isn’t a viable option for every area.
Ben Vestal, president of Argus
Self Storage, says that the income approach “can’t really be applied as some
operators are better than others.” And Webb tends to agree. “From a government
standpoint, the income value approach is typically jaded or flawed,” he says.
Just as there are several
valuation approaches, there are numerous factors that can influence the
assessed value of a self-storage facility. Some of those influential elements
include construction type and quality, zoning, age, location, market activity,
profitability, unique features, lot size, and facility square footage. Storage operators
should be aware of the criteria used by their local tax assessors to determine
valuations, especially if they wish to file an appeal. In Texas, tax payers
have the right to request all of the information used for their valuations, and
Kanter strongly advises operators to “do that” as the data they provide can
simplify the appeal process.
Plan To Appeal Even before receiving their property tax bills, operators should plan to appeal. “Be prepared to file an appeal automatically,” says Nitzberg, who states that $20,000 off of a tax bill increases a property’s value by approximately $330,000. “You have a right to appeal a valuation. Be mindful to manage the process.”
And the other professionals
interviewed for this article agree with Nitzberg. “There’s no reason not to
file since the outcome could result in a lower tax bill,” says Hoeven. “The
money is better in your pocket than the government’s.”
“Operators should always file an
appeal,” adds Kanter. “You can always recall an appeal, but it’s hard to file
late. You have almost everything to gain and nothing to lose.” Kanter continues
by saying that operators should be prepared to file lawsuits if they are
unhappy with the appeal results. “Most are settled outside of court,” he says,
“since review boards don’t want to spend taxpayer money on legal fees.”
Protocol For Appeals Despite the fact that mill rates, also known simply as tax rates, vary by location, there is one general rule: They cannot be appealed. In Texas the tax rates are determined by county; they are typically set between 2.2 percent and 2.75 percent. “You can’t argue the rates,” says Kanter. “All appeals are based on values.” Similarly, other states, such as California with its Proposition 13, have tax rates that raise by a set percentage each year.
While the mill rates are set and
cannot be appealed, there is a good probability that the property’s valuation
is off. For this reason, it is essential that operators thoroughly review their
property tax bills. “Make certain the information is correct,” Kanter says. “Make
sure what they present is accurate and that you’re not being taxed on property
that isn’t there.”
Indeed, attentiveness is key.
“Take diligent notice,” says Webb. “Review and research the bill to look for
errors.” Webb also reminds operators: Don’t put off tomorrow what you can do
today. For example, tax payers in Arizona receive their property tax bills a
year a half before they are due. However, some operators disregard or misplace
the notices and end up missing the deadline to appeal.
Of course, just about any factor
used to determine the property’s valuation could be erroneous. However, two of
the most common errors involve miscalculations of square footage and unit mix.
Kanter says operators should double check the square footage to see whether it’s
listed as gross or net. The square footage listed for climate-controlled
storage needs to be reviewed for accuracy as well. Basically, any item that has
a numerical value should be verified as you are searching for evidence that you
are being overtaxed.
If your research indicates that
your property’s valuation is wrong, it’s time to start preparing an appeal. “It
needs to be a very concise, thorough, and detailed appeal,” Nitzberg says, “or
it won’t go anywhere.”
In addition, when appealing a
valuation, Vestal suggests that operators first identify how the taxing
entities assessed their properties. “Then address areas where you feel that
they’ve made assumptions that are not in line with the market,” says Vestal.
For example, Devon Self Storage
creates in-depth valuation models to present to the assessor staff when filing
proactive appeals. Monthly occupancy reports, rent rolls, and other financial
information, such as income and expense reports, can be combined into
professional appeal portfolios to help prove your case. Remember: Valuations
should reflect the property’s market and income. They should not be an inflated
As a side note, operators in
Texas can utilize a unique provision that is not applicable in any other state.
According to Kanter, the Texas Constitution provides that taxation shall be
“equal and uniform,” and the Texas Property Tax Code expands on that notion by
stating “A property owner is entitled to relief on the ground that a property
is appraised unequally … if the appraised value of the property exceeds the
median appraised value of a reasonable number of comparable properties appropriately
adjusted.” In essence, properties are compared and adjusted by percentages to
account for variances in age, size, location, amenities, etc.
“Equal and Uniform, also known as
Equity, is an extremely important tool used by owners and property tax consultants
to keep property taxes as fair as possible,” says Kanter. “It is so ‘fair’ that
the larger county appraisal districts are lobbying to have it overturned.
Primarily because Texas, like four other nearby states, is a non-disclosure
state. As such, there is no requirement for buyers and/or sellers to disclose
the transaction price of a piece of real property. The overall benefit of the
constitutional provision is to not put one property at an advantage or a
disadvantage. The provision is so powerful that it will ‘trump’ market value.”
What’s more, Texas is one of the
seven states without state income tax, therefore property tax rates are high as
they are heavily relied upon for revenue. “Property tax accounts for 45 percent
of the taxation within the state,” says Kanter, who adds that some areas, such
as Houston, have no limit on how much a valuation can increase. “They can go up
100 percent,” he says. “The sky is the limit because there is no commercial
Hire An Expert When the burden of property taxes becomes too much to bear, it’s time to hire a professional tax consultant, tax appeal company, or property tax firm. As a matter of fact, Hoeven believes that hiring a property tax consultant is a prudent decision. “Look into retaining a consultant,” he advises, adding that their fees are well worth the money. “Consultants typically charge based on your savings.” This means they are paid a percentage of your savings after the property tax appeal has been approved. Plus, their expertise tends to result in greater property tax reductions. Keep in mind that reducing the property tax increases the net operating income, which, in turn, results in an increased property value.
“Rely on experts,” says Hoeven.
“Seek professional assistance just to make sure all the boxes are checked. Rely
on them, and provide them with as much information as possible.”
And while Webb agrees with
Hoeven, he recommends that operators “find someone who understands the nuances”
of self-storage property taxes.
Stay Informed As this article has mentioned on at least one occasion, the property tax realm is an ever-changing environment. For that reason, it’s imperative to “stay on top of it,” as Webb says. “Don’t get complacent.”
Property tax updates are
typically posted on county and municipality websites. Some even enable users to
sign up to receive updates via email. County websites may also provide detailed
information about how to appeal tax assessments as well as appeal deadlines and
rights by jurisdiction. The American Property Tax Counsel’s website, www.aptcnet.com,
is another great resource, with property tax articles, national updates, and a
property tax representative directory.
In addition, for those who wish
to learn how to properly value properties for taxes, sales, or loans, the Self
Storage Association (SSA) offers an informative class about valuation. “The
Self Storage Valuation & Acquisition Course” provides clarity through
insight and Excel worksheets. The program is typically held every six months at
varying locations across the U.S.
At the end of
the day, the professionals interviewed for this article all agree that taking
the time to manage your property tax is well worth the effort. Although there
is no definitive way to calculate your potential property tax savings prior to
receiving a decision from the panel reviewing the appeal, it’s likely that you will
enjoy a tax break. In fact, according to “Taxing Self Storage: Will Owners Face
An Increase?,” an article published in the May 2015 issue of Messenger, more than 50 percent of taxpayers
who appeal property valuations can expect tax relief in the form of a 10 to 15
percent reduction, which is nothing to sneeze at.
Erica Shatzer is the editor of Mini-Storage Messenger, Self-Storage Now!, and Self-Storage Canada.