WASHINGTON, DC–It has become a cliche that the commercial real estate community is ten years behind in its tech adoption compared to the rest of the industry. A cliche that nonetheless still manages to surprise when certain data points become available — such as the finding that almost one-third (32%) of over 200 C-level and senior CRE property tax and finance executives surveyed by Altus Group report that property tax exposure has very little impact on their firm's underwriting assumptions. This is a percentage that translates into $165 billion of CRE assets (based on the $515 billion of asset investment sales last year in the US and Canada) that are at risk of underperformance due to the lack of strategic property tax planning.
This is shocking for a number of reasons, perhaps most of all because it is unnecessary.
These property owners ignore, or possibly haven't even realized, that there is an immense amount of data available that could be harnessed to make proactive strategic decisions across a portfolio, Ross Litkenhous, senior director of the tax practice, tells GlobeSt.com. Instead many rely on the forecasting techniques of a previous era where models assumed a 3% increase every year over a ten-year hold period.
Now, with the advent of the era of big data, firms can use analytics to predict far more precise future costs.
The right investments in process and technology can provide better visibility into tax growth, risk and savings, the report concluded.
“Missing the mark on property tax forecasting during underwriting can erode an anticipated return,” Litkenhous says. “The need to dig very deep and find value enablers and mitigate the property rate is more important than ever because of lowering returns and cap rates.”
Single Largest Operating Expense
Even without that consideration, the lack of strategic planning is still surprising given that real estate taxes are the single largest operating expense, according to Litkenhous, perhaps as much as 40% to 50%.
The report, however, describes a very passive environment when it comes to property tax risk mitigation. It found that 75% of respondents say their property tax management is reactive and purely or largely operational and cost reduction oriented. In addition, 56% do not incorporate property tax refunds into their ongoing valuations. Eighty-three percent believe their firm has enough property tax information, while 52% said they lack the tools to analyze this data, and 44% said they lack the expertise and resources to identify property tax data sources.
Only 21% indicated their firms use enhanced tax analysis including tax benchmarking to identify exposure of portfolios to the market.
A Strong Negotiating Position
Besides mitigating risk — a simplistic example would be a company deciding to lease out one property instead of another because of a forecasted increase in the property tax — there are other benefits to using tech to address this risk. “The upside from the potential to enhance leasing capabilities, lessen recovery shortfalls and increase earnings is substantial,” said Jim Derbyshire, president of Property Tax at Altus Group.
And then there is this observation by Anthony Chang, vice president of Asset Management at Washington REIT: “One of the biggest impacts of having good tax intelligence when we underwrite new opportunities is the strength it brings to our negotiating position,” he said in a prepared statement.
WASHINGTON, DC–It has become a cliche that the commercial real estate community is ten years behind in its tech adoption compared to the rest of the industry. A cliche that nonetheless still manages to surprise when certain data points become available — such as the finding that almost one-third (32%) of over 200 C-level and senior CRE property tax and finance executives surveyed by Altus Group report that property tax exposure has very little impact on their firm's underwriting assumptions. This is a percentage that translates into $165 billion of CRE assets (based on the $515 billion of asset investment sales last year in the US and Canada) that are at risk of underperformance due to the lack of strategic property tax planning.
This is shocking for a number of reasons, perhaps most of all because it is unnecessary.
These property owners ignore, or possibly haven't even realized, that there is an immense amount of data available that could be harnessed to make proactive strategic decisions across a portfolio, Ross Litkenhous, senior director of the tax practice, tells GlobeSt.com. Instead many rely on the forecasting techniques of a previous era where models assumed a 3% increase every year over a ten-year hold period.
Now, with the advent of the era of big data, firms can use analytics to predict far more precise future costs.
The right investments in process and technology can provide better visibility into tax growth, risk and savings, the report concluded.
“Missing the mark on property tax forecasting during underwriting can erode an anticipated return,” Litkenhous says. “The need to dig very deep and find value enablers and mitigate the property rate is more important than ever because of lowering returns and cap rates.”
Single Largest Operating Expense
Even without that consideration, the lack of strategic planning is still surprising given that real estate taxes are the single largest operating expense, according to Litkenhous, perhaps as much as 40% to 50%.
The report, however, describes a very passive environment when it comes to property tax risk mitigation. It found that 75% of respondents say their property tax management is reactive and purely or largely operational and cost reduction oriented. In addition, 56% do not incorporate property tax refunds into their ongoing valuations. Eighty-three percent believe their firm has enough property tax information, while 52% said they lack the tools to analyze this data, and 44% said they lack the expertise and resources to identify property tax data sources.
Only 21% indicated their firms use enhanced tax analysis including tax benchmarking to identify exposure of portfolios to the market.
A Strong Negotiating Position
Besides mitigating risk — a simplistic example would be a company deciding to lease out one property instead of another because of a forecasted increase in the property tax — there are other benefits to using tech to address this risk. “The upside from the potential to enhance leasing capabilities, lessen recovery shortfalls and increase earnings is substantial,” said Jim Derbyshire, president of Property Tax at Altus Group.
And then there is this observation by Anthony Chang, vice president of Asset Management at Washington REIT: “One of the biggest impacts of having good tax intelligence when we underwrite new opportunities is the strength it brings to our negotiating position,” he said in a prepared statement.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
