Post written by Donald Swartz, President and Principal at Swartz + Associates, Inc. | Lover of Chiefs, Royals and golf | Avid “Cruiser” | Poker Enthusiast
If you have school age kids, February seems to be the time of grinding through homework. Winter break is over and Spring Break is still 45+ days away. The weather (at least traditionally) isn’t great and teachers are accused of piling it on! With that in mind, I thought I would go to my lesson book and discuss….. Property Taxes 101.
Johnson County, KS valuation notices are being mailed to taxpayers who own commercial real estate this week (all other properties will be mailed out the last week in February). We believe values should be consistent with the previous year’s values with an exception in the multi-family sector.
The multi-family development continues to be rising across the Kansas City metro area and Johnson County is no exception. As you receive your notices, pay attention to the 3-year history on the notice. Has your valuation increased, remained steady or possibly decreased over the past 3 years? If you’re experiencing steady increases in value, there could be a few reasons for this increase:
- The property may be below market value and an increase is warranted.
- Market rents are increasing, driving the value of the property upward.
- Capitalization rates have decreased over the past few years. When capitalization rates decrease, market valuations increase.
This last point seems counterintuitive – how can a valuation go up when a rate of return goes down? Let’s take a look at this example:
Investor A owns a multi-tenant property producing an annual net income (income remaining after operating expenses) of $100,000. Investor A purchased the property several years ago for $1,000,000. In simplistic terms, the annual return on this investment is 10% (the capitalization rate determined by $100,000 /$1,000,000).
Suppose Investor B approaches Investor A about purchasing the property. In today’s market, Investor B has made the determination an 8.5% return on investment is a good return for this type of property. Based upon the net income of $100,000, Investor B would be willing to pay approximately $1,175,000 ($100,000 Net income / .085) for the property. The lower the rate of return demanded on an income stream, the higher the value of the property. This Income Approach to Value is one of three methods employed by county jurisdictions to determine valuations for property tax purposes.
Speaking of valuation methods……
Last year at this time, I mentioned how the struggles in the energy sector (namely coal) could affect values. Recently, we successfully negotiated a significant reduction for a client in the coal industry. Under the Cost Approach to Value, we met with county and state officials familiar with the properties. Under this approach, the valuation is determined by taking the replacement cost new of an asset, deducting an amount by applying physical depreciation based upon the age, condition and type as normal “wear and tear”. Additional depreciation can be granted based upon economic factors affecting the industry or functional issues affecting the asset itself. These factors create obsolescence and can be deducted from a valuation.
In this situation, we were able to provide information to the county based upon multiple interviews with our client; understanding current and future markets and our expertise in the industry. As a result of our analysis, our client received a double-digit economic obsolescence adjustment to the entire property – big win for our client and a significant reduction in property taxes.
As you begin to receive your 2017 valuation notices, let us put our expertise to use for you. You can reach us at (913) 766-8777. We welcome all opportunities and challenges.