Property Taxes After Acquisition of Retail Commercial

[Jae Kim]

Hello - I'm looking at a commercial retail deal where the real property taxes shown on the operating expenses are super low in comparison to the purchase price of the building. I know after the purchase, the tax expense may significantly go up (5X) as currently listed. The leases have NNN reimbursements by the tenants, but there will be significant sticker shock when the tax bill comes out or when the new NNN charges are set. I think Seller will say that Tenant have to pay for this so this is not an issue. But I feel like this disparity in the historical property taxes and future taxes will be a risk factor and warrant an adjustment on the purchase price. Anyone have experience in dealing with this issue and can give advise? The property is in Texas and taxes are usually assessed based on value derived from rent stream and with cap rate determined by county applied to it.

Thanks.

[Joel Owens]

Hi Jae,

I have a lot of clients in Texas. I know the tax scene well there.

Some of my clients own centers from 3 million in price to 25 million.

If the owner has owned the property for a very long time then generally yes the tax basis will be very low. Upon resale the taxes could go up substantially. If leases are NNN and not gross then tenants usually reimburse. The total CAM per sq ft above base rents would rise.

If most of tenants are mom and pop versus national the tax shock could cause many tenant defaults in the center. When my clients buy a center we negotiate reserves as credits from the seller. These tend to include a roof credit, parking lot and reseal credit, and a property tax credit when it is expected taxes are to rise.

Even if Texas is a non-disclosure state when you talk to a property tax attorney there they will tell you there are ways that the county and city can find out about sales. So although it might happen that you keep the sale quiet from them it is not something I would bank on in my underwriting of a property. Instead I would go the other way that they would find out and plan accordingly.

What usually happens is when costs rise with big increases even if tenants are obligated they cannot shoulder the cost immediately and all at once so the landlord ends up putting up the money and then slowly gets it back over the years spread out.

This is why I want seller paying for that cost with a reserve credit to buyer at closing to account for these items so I do not put undue pressure on my tenants. I want them to flourish and not to wither and go out of business from CAM pressures. Tenants in older malls see this where the asset gets really old and management lumps really high cam increases on the tenants. The tenants then look to move from the mall to freestanding centers where cam costs are lower.

Says you are in Austin. I know that area with taxes. When a reassessment happens you need to get a property tax attorney and appeal. There is a process to go through and it can take up to a year sometimes. While the appeal is ongoing sometimes they require a certain percentage of the new assessment to be paid.

I help clients out nationally all the time. Do you currently have a great commercial buyers broker helping you with your purchases?

No legal advice given.