Report Alleges CRE Firms Not Managing Property Taxes Properly

Only 25 percent of CRE executives said their firms incorporate property tax management into their investment strategy, which increases underperformance risk at both asset and portfolio levels, said Altus Group LTD, Toronto.

Real estate taxes represent the single largest operating expense most commercial real estate firms have.

Nearly one-third of the C-level and senior property tax and finance executives surveyed by Altus Group said property tax exposure has “very little impact” on their firm’s underwriting assumptions. But with $515 billion in asset investment sales last year in the U.S. and Canada, up to $165 billion of commercial real estate assets could underperform due to insufficient strategic property tax planning, the Tax as the New Strategic Driver report said.

“With hundreds of billions of dollars in commercial real estate asset value transacted each year…the risk is real,” said Altus Group Global President of Property Tax Jim Derbyshire. “At the same time, the upside from the potential to enhance leasing capabilities, lessen recovery shortfalls and increase earnings is substantial.”

Derbyshire noted most executives surveyed reported seeing a “significant opportunity” for property tax to play a more strategic role in driving investment decision-making.

“Approaching tax management strategically is crucial to proactively managing risk and aggressively driving shareholder value,” said Anthony Chang, Vice President of Asset Management with Washington Real Estate Investment Trust, which owns 50 office, retail and multifamily properties in metro Washington, D.C. “One of the biggest impacts of having good tax intelligence when we underwrite new opportunities is the strength it brings to our negotiating position.”

But three-quarters of survey respondents described their firm’s current property tax management as “reactive” and purely or largely “operational and cost-reduction oriented,” the report said. More than half of CRE firms do not incorporate property tax refunds into their ongoing valuations, 32 percent said property tax exposure has very little impact on their underwriting assumptions and only 21 percent indicated their firms use enhanced tax analysis including tax benchmarking to identify exposure of portfolios to the market.

Altus Group said the results indicated “growing recognition” of the role property tax plays in asset management and portfolio strategy. Nearly three-quarters of respondents said improved tax planning and analysis would lead to better decision making.

“Firms realize the strategic and operational benefit, but the investment in solutions and processes to harness the industry’s valuable real estate tax data is not being leveraged to its potential,” the report said. “With the right investments in process and technology to provide better visibility into tax growth, risk and savings, there is a significant opportunity for owner and investor firms to incorporate property tax more extensively into their investment strategy.”