Property Tax Resources

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Being Forearmed: Information Self-Storage Owners Can Use to Combat Inflated Property-Tax Assessments

Tax assessors are quick to increase self-storage property valuations when market conditions are strong, but they're much slower to adapt to factors that negatively impact an appraisal. Here are some items to understand and present as evidence when making the case to lower your tax assessment.

Until recently, many self-storage owners had grown accustomed to strong market conditions that resulted in steady increases to their property-tax assessments. However, now that industry fundamentals have begun to cool nationwide, they're finding that assessors don't recognize a downturn in property valuation nearly as quickly. To help defend against excessive valuations, you need to educate yourself on market trends and the impact of rental rates, capitalization (cap) rates and sales transactions on facility value.

For a decade or more, the self-storage industry has seen exponential growth in demand that ushered double-digit increases in rental rates and decreases in vacancies. Tax assessors were quick to account for this growth, pushing facility valuations higher. But now the major metropolitan markets are starting to report stagnant rates and mounting vacancy. At the same time, interest rates are rising, which depresses real estate prices and property values. Assessors should—but may not—recognize these conditions when calculating a market value.

In anticipation of an assessor's unrealistic interpretation of market conditions, self-storage owners should be ready to combat inflated assessments. You can prepare by learning your local assessment date and arming yourself with market data relevant to the valuation period.

When to Press the Assessor

Assessors use various tools to determine a property's market value, but there's subjectivity in how these resources can be used. Self-storage properties are traditionally evaluated based on their income-producing potential via a pro forma. An analysis begins with a study of market rental rates, typically derived from surveys and commercial real estate publications. Assessors will then estimate potential income using financials at comparable properties, or draw quoted rental rates from a facility's website.

As a taxpayer, you should vigilantly analyze an assessor's income-based valuation, specifically regarding the initial rental rate used. Assessors often overestimate potential income based on inaccurate survey information or by applying a rental rate that's associated with an inappropriate property classification. For example, they may classify a property as "superior" based on its location or perceived quality of construction. In reality, the facility could be "average" based on the actual rents achieved.

Potential vs. effective income is an important distinction property owners should be quick to flag. Assessors often overestimate potential rent and fail to recognize a proper vacancy factor. If helpful, you can present profit-and-loss statements as well as rent rolls to provide a true understanding of your asset's actual performance in contrast to assumed figures from unreliable sources. Doing this can lead to a substantially lower income-based assessment.

The assessor's final step in an income-based valuation is to apply a cap rate to net operating income. A cap rate is the initial, annual rate of return a buyer would receive on a property's purchase price. It measures risk and is tied to market dynamics in an ever-evolving economy. The lower the cap rate applied in an income pro forma, the higher the indicated value will be.

Assessors will always err on the side of aggressiveness by choosing low cap rates from the market. In fact, they usually derive these rates from market sales and secondary surveys, using data that often goes unvetted or is simply inaccurate. You should press appraisers to show support for the cap rates they use. Scrutinize sale data and highlight differences between your facility and the property that sold.

Be prepared to combat superficial survey information with real-world examples of how rising interest rates, inflation and other economic factors increase the risk associated with acquiring a self-storage property. Perhaps the most effective strategy for achieving a reduced assessment is to fight an assessor's aggressive cap rate with data that reflects the true risk associated with your property.

Market Value and Timing

In most jurisdictions, "market value" is tied to the concept of a willing buyer and seller. Self-storage owners should be mindful of how a purchase price will affect their valuation, as assessors will always assume that purchase price equals market value. Some states mandate sale-price disclosure to the assessor's office while others abide by non-disclosure rules. Regardless, assessors will adamantly pursue a property's sale price to support a tax assessment.

The timing of the purchase is important in relation to the assessment date. For example, if the state or county valuation date is Jan. 1, a sale subsequent to that date may not influence the valuation for that assessment period. Conversely, the basis for the assessor's valuation will likely be a sale or sales that occurred prior to the assessment.

You need to remind assessors that a sale price doesn't always represent a property's true market value. Examples of this are 1031-exchange transactions or portfolio acquisitions with prices allocated to component properties.

Remember, too, that assessors are typically tasked with finding a property's fee-simple market value. Facility purchases often include business value that is intangible and not taxable to the fee-simple estate. So, be prepared to describe the nuances associated with a sale to any assessor who makes value assumptions based on recent purchase prices.

Appraisals aren't an exact science, and assessors often turn the subjectivity inherent in the valuation process to the taxpayer's detriment. Self-storage owners and investors should be vigilant in monitoring the marketplace, their property's economic performance and transactions within their jurisdiction. This will arm them with the relevant data needed to combat aggressive valuations.

Travis Williams is a Senior Property Tax Consultant at Austin, Texas, law firm Popp Hutcheson PLLC. Popp Hutcheson, which focuses its practice on property tax disputes, is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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