Apartment Property Taxes to Rise by John Rebchook (CREJ Article)

Rebchook: Apartment Property Taxes to Rise

AUGUST 2014 — Apartment Property Taxes to Rise, by John Rebchook (as appeared in the Colorado Real Estate Journal)

A little more than a year ago, the phone lines of veteran apartment brokers Greg Johnson and Kyle Malnati began ringing off the hook. But the calls were coming from owners of apartment buildings, not from investors who wanted to buy apartment buildings to take advantage of Denver’s hot market. “We had dozens of owners contact us, many of them past clients,” when they received their property assessment notices in May 2013, said Johnson, a broker with Madison Commercial Properties. “They couldn’t believe that their assessments had gone up 20 percent, 30 percent or 40 percent,” Johnson said. He expects the same kind of sticker shock when Denver apartment owners receive their property assessment notices in May 2015 – only more so.

Johnson and Malnati, a principal and co-owner of Madison & Co., parent of Madison Commercial Properties, studied data for all multifamily property sales in Denver’s core neighborhoods in 2013. They found prices have increased an average of 89 percent over the past two years. Under Colorado law, all real property (land, buildings, improvements, etc.) must be re-appraised every two years. This occurs in each odd-numbered year. The Assessment Division studies the prices of properties that sold during the 24-month period ending June 30 of the year prior to the reappraisal. In other words, new 2015 values will be based on properties that sold between July 1, 2012, and June 30, 2014.

“We analyzed the data for apartment buildings with 10 or more units, focusing on the Capitol Hill, Washington Park, Congress Park, Uptown and Mayfair neighborhoods,” Johnson said. “In the first half of 2014 there have been 38 transactions, representing just over 1,000 apartment units,” he said. “The average price this year has been $138,980 per unit,” Johnson said. By contrast, in the first six months of 2012, there were just 12 transactions, and the average price of those was just $73,459. “The market has nearly doubled in the past two years,” Malnati said. “Denver hasn’t seen this type of growth in over 15 years,” he said. Increasing prices have been fueled by rising rents, growing investor demand and building owners that have improved the physical condition of their properties prior to sale, according to Johnson and Malnati.

The recent sales will be used by the assessor’s office to calculate new property values next spring, Johnson said. “We heard from a large number of clients upset by the increased tax assessments they received in 2013,” he said. “Next year it’s going to be crazy,” Johnson said. The exact increase apartment owners will experience is impossible to determine until the mill levy is set, he said. However, given how hot the apartment market has been, it likely will be more difficult than ever to protest their assessments, he and Malnati said. “June 30, 2014, is the statutory date for property assessments in the next cycle, and the sales we’ve seen this spring and summer will give the tax authorities plenty of ammunition to drive values up,” Malnati said.

The good news is that in most cases, owners will be able to raise their rents to cover the increases in property taxes. “A lot of owners are charging below-market-rate rents,” Johnson said. “They could raise rents and they should raise rents.” Johnson said he doesn’t think the prospect of rising taxes will cool the market. However, higher taxes may increase the number of sellers, he said. “Folks that have owned their buildings for six-plus years, who have become accustomed to lower property values and therefore lower property taxes – they might decide they would rather sell their buildings than pay the ever-increasing taxes year after year,” Johnson said. “That is especially true for owners that might not have been willing or able to raise their rents,” he said.

Johnson said he knows that all apartment values haven’t risen as much in core Denver neighborhoods. At the request of CREJ, Cary Bruteig, principal of Apartment Appraisers & Consultants, crunched the numbers and looked at how much, on average, apartment values have risen in this latest appraisal period from the one calculated in 2013. He calculated that all apartment buildings in the metro area of 100 or more units have risen in value, on average, around 24 percent or 25 percent. There has been a commensurate increase in rents, he said. An increase in rent typically will exceed the cost of business expenses, such as property taxes, he said. For example, imagine if an owner is receiving $1 per square foot for a property and has 50 cents in expense, thus nets 50 cents per sf in profit, he said. If the owner raises the rent by 5 percent, so is now receiving $1.05 per sf, and the expenses stay the same, the owner is receiving basically a 10 percent return from the 5 percent rent increase, he said. “The truth is, expenses usually go up, too, just not as much the rent increase,” Bruteig said. Most sophisticated apartment investors probably won’t suffer a great deal of sticker shock when their property taxes go up next year, he said. “I think if they have been paying attention, they will know the market has been very strong, and continues to be quite strong, so I don’t think this will be a huge surprise,” Bruteig said.

You can read more of John Rebchook’s articles on the Colorado Real Estate Journal blog – https://www.crej.com/blog/author/john-rebchook