In general, the higher the assessed valued of a self-storage facility, the more youll pay in property tax. In addition, the higher the appraised value, the greater the borrowing capability. What most self-storage owners want is a low assessed value for tax purposes but a high appraised value for refinancing purposes. In my experience, you cant usually have it both ways. The answer to the value question really lies in the concept of fairness.
Property-Tax Background
Normally, property owners receive an annual property-tax bill. Most dont contest it, which is perfectly acceptable, although there are instances when they should. The property tax is based on an assessment value provided by the local taxing authority. Your local taxing authority, usually the county tax assessor, has a tax-identification card for each parcel of property in that particular county, including your self-storage store. The value placed on your site by the assessor multiplied by the tax rate yields the annual tax bill (though sometimes this calculation is a bit more complex).
Every three to eight years, the county tax assessor will revalue all the parcels in the county, normally to account for an increase in value. Most counties or municipalities derive anywhere from 50 percent to 75 percent of their annual operating budget from property taxes, so its a very important source of revenue. Although you can challenge an assessors value each year, you normally have a more forgiving set of procedural rules in a revaluation year.
If your self-storage store is in a large county with many tax parcels, your new value may be based on the application of a mathematical formula, not on an individual appraisal. Its simply impossible to individually revalue hundreds of thousands of parcels in a particular county in a short period of time (normally one year) with limited resources. This can lead to inherent inaccuracies in the valuation of individual parcels, even though statistical safeguards are applied to the formulas.
What all this means is you need to double check the tax value of your self-storage store, especially during a revaluation year. You should be checking for errors, inaccuracies and inequities. Remember, we all just want to be treated in a fair, accurate and equitable manner. Here are three items you need to evaluate as a self-storage owner to see if your self-storage property has an accurate and fair value for tax purposes.
The Property-Tax Card
First, is the property-tax card accurate? You can normally look at this on your countys website. Does the tax card reflect the correct net leasable square footage, proper acreage, type of construction, type of use and any improvements (or lack thereof)? Does your site have any inherent issues like power lines, right-of-way easements, wetlands or other site challenges that may significantly change the value? Is the self-storage store listed as a retail building, which potentially carries a much higher value?
Assuming youre in a revaluation year and you discover inaccuracies, youll want to file a written notice of protest as described by the county assessors office. You may consider hiring an independent third party, such as an attorney or commercial appraiser specializing in self-storage valuations, to represent you; however, this article assumes youll represent yourself.
Request an informal meeting with the assessor or the county appraiser assigned to your self-storage store. In the informal meeting, point out any inaccuracies in the property-tax card. Be professional and courteous during this meeting. Remember, the county employee wants to get the value right as well. This may correct the value issue, or it may require further action and discussion.
An Appropriate Capitalization Rate
If the tax card is correct, does the value still look wrong because of the application of inaccurate appraisal techniques? In other words, did the county appraiser use the wrong capitalization (cap) rate for your self-storage store? Assuming you gave the county assessor your actual income and expense statements, did he apply a fair cap rate based on the age, size and level of competition for your property?
Cap rates can be applied arbitrarily, and a small change can mean a huge difference in value. We could spend a great deal of time discussing cap rates, but in essence, make sure the appraiser for the local taxing authority used a cap rate for self-storage and not, say, for a single-tenant structure such as a drug store. The latter would tend to have a rate more like 6 percent as opposed to self-storage, which would be closer to 8 percent.
For example, a property with a net operating income of $300,000 would have a value of $3.75 million at an 8 percent cap rate. At a 6 percent cap rate, the value would be $5 million. Thus, the incorrect application of a cap rate in this case would result in a $1.25 million over-value of your self-storage store. You can see from this example how important it is to have the correct cap rate applied.
Equity and Other Matters
Finally, is your property taxed and valued equitably? In essence, is it taxed and valued like other self-storage properties in your market? In other words, if there are other stores that are similar in terms of size, age, type of construction and income, look at the property-tax cards for those stores to make sure theyre in line. If not, your store is not being treated equitably and a correction should be made to the value.
Check for the application of standard per-square-foot values and cost values. Look for reasonable comparisons for your property. You may consider having an appraisal performed by a member of the Appraisal Institute on your self-storage store prior to meeting with the county assessor or appraiser. You need facts and research here to make sure your property is being treated equitably in your market for tax and value purposes.
Fair and Equitable Taxes
Im of the opinion that, in the end, we all just want to be treated fairly and equitably. We want the Goldilocks valuenot too big, not too small, but one that is just right. This is true whether the valuation is for property-tax purposes or financing.
Self-storage is a unique animal in the world of commercial propertynot really industrial warehouse and not quite retail. We have to double check to ensure the tax assessor has listed our use correctly, has the correct cost and cap-rate values, and has treated all similar facilities the same.
Remember, be professional in your discussions with the local county appraiser. Ive seen firsthand that belittling, bullying and yelling do not work well and actually end up going the wrong way for the taxpayer. Rely on the facts, make sure you do your homework on the value issue, and youll come away with a fair and accurate value.
Jeffrey B. Turnbull is the president of Kodiak Mini Storage LLC. He has been involved in the self-storage business as a developer, owner and operator for more than 18 years, and currently owns three stores in the Charlotte, N.C. market. Hes a licensed attorney in North Carolina, a licensed real estate broker in North and South Carolina, and a past president of the North Carolina Self Storage Association. He's also a frequent contributor to Inside Self-Storage and a speaker on various industry issues. He can be reached at [email protected] .
