One of the largest line items on any self-storage P&L is “property tax”. But there are tricks you can use to minimize this burden – which will only be expanding as counties nationwide strive to find more ways to pay their bloating bills. In this Self-Storage University podcast we’re going to review the playbook to keeping your storage facility’s property taxes as low as possible.
Episode 54: The Taxman Cometh Transcript
They say there are only two givens in life, death and taxes. Well, I can't really deal with the death aspect, but let's talk for a minute about property tax and Self Storage facilities. This is Frank Rolfe, the Self Storage University Podcast. We're gonna talk about the fact that annually, you are going to get something in the mail, which you are going to dread, and that is your assessment for your property for that given tax year. And what do you do when you get that property tax assessment? Well, let's talk first, what is a Property Tax Assessment? Whenever you own real estate in the United States, you're going to get something annually in your county from The County Tax Assessor, and it's going to tell you how much property tax you have to pay based on the value of your property, it's no mystery. The tax rate is based on a multiplier of your assessed value, so as your assessed value goes up, given the fact that tax rates have never come down to my knowledge in America, your tax continually tends to go up. So what do you do when you get the tax bill, what are the steps, how do you try and minimize your tax burden?
Well, you know what you paid for the property on the front end when you bought it, and let's just use in this example, let's say you bought a self-storage facility in a suburban market for $1 million. Now when you bought it, the tax assessment on that storage facility was only $400,000. Why was that? Well, because the taxing official back in the day probably was a friend of the guy that owned the self-storage or possibly he didn't know how to value them, and so he just threw this number out there and it's been kind of sticking around like a myth or a legend for a long time now, and no one's ever questioned it. But when you buy that facility, what happens is it notifies the tax assessor there's been a sale, so now they're awfully suspicious on what you paid because of course, all cities in America are broke, and they need as much tax as they can get. Now, you need to know if you are in a full disclosure or non-disclosure state, if you're in a non-disclosure state such as Texas, you'll get a letter from the tax assessor saying, "Hey, what did you pay?" And you can just throw it in the trash, at least to my knowledge that's what you can do, but you better check it out. If you're in a state like Louisiana, which is a full disclosure state, you have to then tell them what you actually paid.
Again, check on that with your own tax professional, but that's based on my knowledge, so if that is the case then, if you are in a full disclosure state, there's not much you can do to minimize your tax burden, so if they say, "What did you pay?" And you paid $1 million, you'd have to say, I paid $1 million," and therefore they were going to re-adjust the taxes. Now, there is one loophole in that, which is called goodwill, you can claim that part of your transaction's price is based on goodwill and not the asset itself, but you won't be able to get a huge reduction or deduction even then, but if you're in a non-disclosure state, that's where the strategy gets more complicated, so you get the assessment and let's assume you paid $1 million and the assessment comes in at $600,000, what do you do? Well, two things, you could do nothing because it's so far less than what you paid, it might be the smart move, or if you want, you could go in and try and do a casual informal discussion with the tax assessor. Most state and county tax assessors allow you to do two ways to fight your tax assessment, number one, informally have a discussion with them, or B, file to formally dispute the amount of the tax.
Now, on these informal sessions, you basically go to the tax assessor and you sit in a chair and you wait for about four to five hours before they'll see you, that's your punishment. When you go in, you tell them, "Hey, I think your evaluation is far too high," and just to get you out of their office yet not waste the court system with filing a grievance, they will then say, "Okay, well, what do you think? What are you really after?" And they'll typically take some amount of money off just to get you to shut up and leave, how much? Depends on the county. $10,000 off, $50,000 off. Now, bear mind if you're in Missouri and I drop your tax by $50,000, all you're saving is $500 annually.
And if you then say, "Well, gosh, I was in here, it took me 10 hours to do this with travel time and sitting in the office, etcetera, well then, that came up to $50 an hour," which may or may not be a good amount for you, but typically on the informal sessions, you're not going to get a giant reduction, if you want a giant reduction, you're gonna have to file to formally dispute in which case you'll probably be before the Tax Board of Adjustment, who will listen to your claims as to why it's valued too high, but they'll also listen to the tax assessor's claims, well, maybe it's not valued high enough. And the problem is, when you do that is, they can go either direction, it isn't just the limit being what they sent you and you try and get it down, when you put it in a formal process, it can go in either direction, it can go to what they assessed or it can go higher than what they assessed, that is your punishment for taking it to such a formal matter. Now, there are groups that will do this for you, there are groups like Pop and iCard out of Texas, that can go ahead and do all the steps I'm talking about on your behalf, but they're not free, if they do that, typically they get half of whatever the tax savings are.
But the key item, I would say, when you are buying a self-storage property is, when you're doing your budgeting, make sure to use not the property tax that the seller has been paying all this time, but what yours will probably be, and that would be based on the full amount that you're paying. Why is that fair? Well, because that's logically where it might end up, typically, if you go to a formal proceeding, the number one bit of evidence of Exhibit A as to the value is what you just paid. Taxing authority is gonna say, "Well, gosh, there's actually no greater idea what something's worth than what someone just wrote a check for," but that will then put it at what you paid, which basically puts you right where you were if you were in a full disclosure state. So instead, what happens is, if you put it in the budget, the full amount, and you don't get there, well, then you're happy because you're saving money, so if you paid $1 million and you budgeted property tax based on $1 million, yet they send you the bill, and the bill is only now for $700,000, well, then you're making about a 30% discount over what you budgeted, and that's great, that at least you have extra extra money in the bank. Don't let the seller convince you however that it will not go up.
There are many instances where people buy a self-storage, they budget what mom-and-pop was paying, 'cause they listen to mom-and-pop, and lo and behold, they reassess him the full amount that they paid, and now they're upside down on their budget. Property tax is a very large number based on your state. If you're in Missouri, it's only 1%, but in a state like Texas it's up to 3%. In fact, in some parts of the Chicago area, it's as much as 10%. So the impact of that property tax will vary based on the market that you're in, but regardless of where you go, it's always a very big number, one of the largest numbers on a self-storage P&L. As a result, you gotta handle it very carefully and very professionally, you would put in more research into buying your car typically than you would the property tax on your storage facility, but the storage facility tax is gonna be a lot more than the value of your car. Remember that based on capitalization rate, every dollar that you pay more in property tax, it's going to filter down to about a multiple of 10 to 15 times that as far as the value when you apply the cap rate.
So it's very, very important you watch over all of your pennies and you budget accordingly, and I don't have any stories of any property that we've bought where the tax went wild. I've never bought a property for $1 million and had the tax assessor jump it to $2 million or $3 million. We have had cases where they jump it up beyond what we paid, then we filed and went in and showed them what we paid, and we got it reduced down, but be very, very careful in how you handle it, one of the early rookie errors of many self-storage buyers is to be too forcefully appealing assessments if they're still lower than what they paid, because many people do not know that it can go either direction. The folks at the County Tax Assessor's Office, they have the same freedom you do, they can go online, they can check values, they can buy books, they all have a rough idea of what income properties are worth, but they rarely wanna push it to the limit because they really don't wanna clog up the system with lots of people appealing their assessments, so they typically are a little more conservative, and that's good for all property owners, but just be very careful in every action that you take, because again, property tax can go in either direction, and if it goes in the wrong direction, you're gonna feel really dumb about fighting it.
This is Frank Rolfe for the Self Storage University Podcast. Hope you enjoyed this, talk to you again soon.