Self-storage is starting to become a victim of its own success. Operators are reeling from a double punch—rising tax rates across many jurisdictions along with higher assessed property values.
The specter of rising assessments is coming just as large and small operators alike are expected to face greater competition from new development and decelerating revenue over the months ahead.
“Taxes have always been a very large expense line item and they are becoming the largest very quickly on almost every property as all of these jurisdictions hustle for more money,” said Kenneth Nitzberg, chairman & CEO of Devon Self Storage Holdings in Emeryville, CA.
Devon operates 46 facilities in 15 states and has seen property taxes rise at its facilities all across the country.
The taxman cometh
School districts, counties and other government taxing authorities are always looking for additional revenue.
“It is especially egregious if you buy something that has a low tax basis, because the owners had it awhile, and it really is a bit of a game of Russian roulette as to what the taxes are going to be after you close,” said Nitzberg.
The recessionary resistant nature of the sector, along with the attractive returns, have attracted private equity and institutional money. The robust investment sales market has pushed sale prices steadily higher in recent years, catching the eye of local appraisers.
Nicholas Hunter, principal and regional director for the Midwest at Paradigm Tax Group, said rising rental rates and occupancy rates in self-storage are putting upward pressure on assessed values.
“The demand and performance for self-storage make it more challenging to achieve assessment reductions and mitigate property tax expenses,” Hunter said.
Time to pay
Property tax is very local and driven by local assessing jurisdictions, while value increases depend on the state of ownership and local practices.
In Cook County, for example, the 17 townships in the southern portion of the county are being revalued in 2017. Owners can expect large value increases due to the triennial revaluation cycle, and it would not be uncommon for owners to see spikes as high as 25 percent to 35 percent, Hunter says.
Some jurisdictions go through a routine re-appraisal process, such as every three years or every five years, while others “chase sales” and readjust property valuations based on the sale price, adds Nitzberg. Tax appraisers generally use either the income approach to assess value and others use comparable sales.
“So, you’re constantly trying to outwit the games played by the various assessors’ offices to make sure that they don’t take all of your cash flow,” Nitzberg said.
Big line item
Property taxes can account for 30 percent to 60 percent of an operator’s total expenses, and in most cases, property taxes are the single biggest line item cost for self-storage operators.
Unlike other commercial properties that put the tax burden on the tenant, property taxes are not passed directly through to renters of self-storage units. Although operators can raise rents to offset higher property taxes, ultimately the taxes come out of the owner’s pocket.
One recourse property owners have is to appeal the assessed taxable value of a property, and operators should have their property valuations reviewed annually to identify potential property assessment appeal opportunities.
“We look at every change in the assessed value to determine if there is a case to appeal it,” said Nitzberg.
To appeal or not to appeal
Appeals take time, money and expertise and there is no guarantee that the owner will win in getting a reduction in value. The vast majority of taxpayers don’t appeal assessed values, and when they do, it often is on the back of a cocktail napkin, notes Nitzberg. Being successful in an appeal often requires providing a detailed, well-documented presentation.
“This is a big money situation and you need to do a professional job,” Nitzberg said.
However, the best advice for operators is to be proactive and get in front of a tax appraisal. Try to work with the assessor ahead of an appraisal or reassessment date. Once a value is set, it is more difficult to get it reduced.
“It is much better to do it quietly beforehand if you can and they are willing to negotiate,” said Nitzberg.