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Your Competitor Just Reduced Your Property's Value!
Posted 2/4/2015
Author Ben Vestal
Link www.argus-selfstorage.com/property_pdfs/1455873685.pdf
 
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Your Competitor Just Reduced Your Property’s Value!

by Ben Vestal

 

Today’s real estate climate offers real opportunities for experienced self-storage owners to pick up some nicely priced, quality built, well-occupied properties, earn a handsome cash on cash return, and yet have significant upside potential as the market continues to enjoy strong supply and demand fundamentals.  However, it is not a time for amateurs.  You really need to understand the self-storage business to be sure the underlying business value is there. For those owners who are not sellers today, you might be surprised at what may be affecting your value. 

The good news is your competitor sold for a very high price, the bad news is you have to pay for it in higher property taxes and reduced value for your own self storage property. Unfortunately, those still in the business are faced with the after-shock of increased property assessments because your real estate taxes could take a significant jump due to recent sales of other self-storage properties.  Just as your cash flow is impaired by a new competitor, an increase in real estate taxes has the same effect.  Higher real estate taxes reduce the value of your project by about $10 for each $1 of tax increase.

Many owners believe that they can’t fight city hall and will just accept the assessor’s valuation. While this is certainly the easiest approach it can have a significant impact on your income and value of your property.  Tax assessors, as a general rule, now have a better understanding of how to value different property types including self-storage.  However, many of them are still buried in a bureaucratic and political world without a connection to reality.  There are three ways to appraise the value of real estate: the sales comparison approach, the cost approach, and the income approach. In the REAL market, buyer and sellers tend to focus on the income approach, while assessors tend to look at the sale comparison approach. 

 

Approach

Definition

Considerations

Sales Comparison Approach

Compares subject property to comparables that have recently sold. 

Location, size, condition, quality, time of sale.

Income Approach

Takes into consideration how much income the property would produce if it were rented and capitalizes the rent to a value.

Current market rents, vacancy rates, operating expenses, taxes, insurance, maintenance costs, expected rate of return.

Cost Approach

Estimates how much money it would take to replace the property with a similar one.

Value of land, depreciation.

 

Here are a few steps to find out if your property taxes are in line with those of other self-storage properties and their true values.  Your Argus broker is available to help you through this process and provide you with comparable sales and answer your questions.

1.      Review recent comparable sales in your market!  Your Argus broker can provide you with this information and compare them with your current assessed value.  If there is a major disconnect you should start preparing.

2.      You should know how your property’s taxes relate to the assessment of other properties in your market. You can locate this information from the county tax records. A review of this material on a square footage basis will give you a good idea of how, or if, your property is out of line with other self-storage facilities.  Combined with knowing what your property is really worth and the relative value to other assessed properties, you can determine the proper strategy in protesting the tax assessment.

3.      You should know the best way to prosecute an appeal.  This is generally depends on how well organized and prepared you are in your argument and unless you have lots of facts and a very clear presentation, the appeal is not going to be very successful.  You may want to hire a tax consultant to help you at this stage.  Local appraisers also provide this service on a routine basis and have useful relationships at the assessor’s office.

It is also worth noting that the high prices being paid for self-storage properties will inevitably drive your real estate taxes higher and will also create a greater likelihood of a new competitor.  This “double whammy” is created when there are high prices being paid, solid yields and strong fundamentals as there are always developers chomping at the bit to break ground on a new development.  We have all learned that the financial institutions that finance new developments rely heavily on sales comps to make new construction loans and are not always focused on the supply and demand in the market.  This can lead to a situation where your real estate taxes are increasing all while you’re competing for tenants with a new state of the art property with all the bells and whistles.  Obviously, this can leave a long time owner/operator in a rather uncomfortable situation.  So word to the wise, take the necessary steps to protect your investment and understand that all investments have a life of their own.  It is important to realize that there is a start and finish to all investments and their success is directly related to the steps you take to maximize your investment’s profitability.

In closing, I leave you with two other points about property taxes. While it is always good to have a low property tax (relative to other similar properties), a potential buyer may want to adjust the income (lower the price) to reflect a more realistic real estate tax level.  Also remember that it is always easier to argue against a tax increase than to argue a reduction for the existing tax levels.  Therefore, you must act quickly as soon as the assessment is made.

Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self-storage buyers and sellers. For more information, call 800.55.STORE; e-mail bvestal@argus-realestate.com; visit www.argus-selfstorage.com.


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