Multifamily Under Contract - Potential Property Tax Increase?

Question

Hello everyone, this is my question for the community.

I have a multifamily property under contract and I am in the due diligence phase. This is my first deal larger than a 4-unit property (this one is 26 units) and I have found a potential issue with the property taxes and how they fit into the financial analysis. The annual taxes for the property that I was given prior to going under contract was based on a very low county assessment - the property had been owned by a family for years and there was a lot of deferred maintenance. They recently put several hundred thousand dollars into the property just before putting it up for sale, however, the taxes have not been reassessed since then.

My first question is this: if I purchase the property for significantly higher amount than the basis for the current tax assessment, what can I expect my property tax bill to be on a go forward basis? Could the taxes double? I plan to call the county tax assessor to get an idea of what might happen. Do you have any experience with this, and what happened to your tax bill after purchasing a property for significantly higher price than the current assessment? Are there any rules of thumb for this, or better yet - how would you deal with it?

My second question is: if it seems likely that the taxes will increase significantly, is this something you would go back to the seller and point out, and negotiate a price reduction?

Thanks in advance for your advice!

Matt Kvalheim · Answer

Thanks @Joel Owens and @Kathy Stewart, I appreciate your input. It seems that the Seller is open to negotiating this point, so I lucked out there.

Joel, thanks for the heads up on the insurance and utilities! I talked with insurance already and since I have a couple properties with them, they quoted me a decent rate. However, I had not thought about the utilities deposit issue - that's huge!

Ronald Perich · Answer

@Matt Kvalheim, it can also the work the opposite way. I recently closed on a nine-unit and was able to challenge my assessment down to the purchase price. I'll save about 50% on taxes as a result.

I will say, though, that my underwriting of the deal had me paying full taxes just in case my appeal wasn't won. So this is going to work out even better than my conservative numbers.

Joel Owens · Answer

Matt another item overlooked in insurance on the building. Seller might have 6,000 for a policy but that is because they own multiple properties and reached a policy limit and to insure one more is just a little bit extra. You on the other hand with a first larger property might get sticker shock on how much more the annual policy will cost you. I have seen double or more sometimes.

Another item is if landlord paid utility. If the current owner is local and you are not I have seen in the past where the out of town owner is required to place substantial deposits to get service turned on. A client of mine bought a 60 unit and had to put up 20,000 to the city as they handled water,power,trash etc. This was a suburban area in GA.

Another item if you pay utility is watching out for water usage increases even with no leaks from the city or county raising the water & sewer per gallon usage rates. Also make sure rent control is not coming for your area.

I have some clients doing 1031 exchanges and selling their buildings and have gotten wind of rent control proposals down the pike from the annual rental increases being so large.

Matt Kvalheim · Answer

Everyone, thank you for the feedback. I will call tomorrow to find out how that jurisdiction calculated the tax, as Ryan suggests, and then see if my numbers still work using the new purchase price.

Matt Mason · Answer

CA property tax is roughly 1.25% of purchase price give or take a little depending of the locality. With Prop. 13 the seller could be paying just a fraction of what the new tax is going to be and has no bearing on what the tax is going to be for you. No seller is going to give you any type of rebate or price reduction for this. They are going to expect you just know this. Sorry.

Ken Quagliata · Answer

I'm sure there have been increases over the years that the assessors office made to keep up with growing value. I know for sure once you alert them they may want to come in and do walk through of the entire property to see what kind of improvements were made over the years that weren't taken into consideration. I wouldn't waken that giant. But once you apply for permits they may, (like they are about to do to me) take advantage of the opportunity. Some of my neighbors tell me that they have been throwing out their letters (requesting a wakthrough) for years. Each municipality will be different but I would just let nature take its course and take it as it comes.

Ryan Gillette · Answer

I would use your city's tax rate times your purchase price. Some cities only tax 70% of value. If that's the case you would take (purchase price) x (70%) x (property tax rate %). Your closing attorney would definitely give you a quick answer on the latter two points. But know as soon as it's reassessed, the city's appraiser is going to likely come in very very close to the recent sale price, possibly higher if you're buying below fair market value.

General rule of thumb is 2%.

Seller won't care and if you've already agreed on a price, it's not a negotiable point now. Most investors use the anticipated tax amount before they make an offer. If you say "Well I didn't think about that before", they'll be upset. But you should care. If your numbers don't work for you any more, re-negotiate but be prepared to walk away.

Multifamily Under Contract - Potential Property Tax Increase?

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