Very odd property tax situation?

[Robert Plumpe]

Hey all:

Got some information on a building I'm trying to evaluate and was shocked by some of the numbers...specifically the property tax.  The owner is getting up in years and is looking to sell out & retire to the North country.  He admitted that he should have contested the tax situation years ago but never did.  Now it has grown  into something totally CRAZY.

The building is a 5k sq. ft. brick, single story office building in the Detroit suburbs.  It is in good condition.  It is leased at about 2/3 occupancy with rents approximately at market rate.  Rents are definitely not the cheapest, but nowhere near the highest....could they go higher?  Maybe, but not much more.

The current rent roll is about $38k a year (2/3 occupancy).   Asking price is $345k.

Now here is where it gets crazy...property taxes are just over $19k a year!  

Who is really the owner here?  The title holder or the local government?  The city is taking almost 1/2 of the revenue generated by the property!!!!!!

I am sure the owner has the building outright, no mortgage/liens....so it is cash flow positive for him.  He also uses a very small amount of space in the building, so he gets that as a benefit too.

HOWEVER, anybody buying this building would probably be cash flow neutral/in the red?  This is assuming a 6% mortgage.

To get any type of return...you would either have to get to 100% occupancy OR get the taxes SUBSTANTIALLY reduced or some combination of the two.

I have seen many properties in the Detroit market where property taxes are simply not even close to what economic realities are.  I suspect the municipalities are desperate for cash and are putting the squeeze to property owners.  HOWEVER, this has got to be wreaking havoc with the real estate market.  Who would buy at that level of taxation?  The taxes are so high, properties have to be substantially discounted.

Anybody else encounter this in other parts of the country?