Estimating Real Estate Taxes

By: Wendy S. Cell and Robert J. Strachota

As the commercial real estate market continues to recover, developers and investors are taking strategic positions in sought-after markets. Estimating real estate taxes is an important component during the due diligence phase of new construction or following the purchase of a property. Shenehon’s unique combination of real estate and business valuation expertise allows us to assist clients in estimating real estate taxes by valuing taxable and non-taxable components.

Real estate taxes vary widely throughout the Twin Cities for many reasons. The primary factors that determine property taxes are the tax levies of the district the property is in, the value of the property relative to the value of all other property in the district, and the use of the property. Real estate taxes are calculated based upon the market value of the property. The market value of the property is determined by the assessor and, quite often, differences are due to their opinions.

When there is a sale of the property in close proximity to the assessment date, the assessor often places great weight on the sale price to determine market value. However, sometimes the sale price is not equal to the market value for assessment purposes. Oftentimes, there are components of the sale price that are not taxable as real estate. For instance, equipment and personal property, financing (favorable or unfavorable), assembled management, tax increment financing, tax-free exchange incentives, eminent domain influences, lease or rent guarantees, and representations and warranties are not real estate. The assessor may not be aware of the various non-real estate components making up the sale price.

We recommend that the components be identified on the certificate of real estate value (CRV). The sale (as it is reported on the CRV) is the foundation for the analysis an assessor conducts on the local market. The CRV includes a place to state the purchase price, itemize personal property and its value, identify the method of financing, and opine and comment on the sale price. Buyers can also include an attachment with additional information. Any adjustments made to the sale price for personal property or business rights should be well-documented. Regardless, there is no guarantee the assessor will deduct the various non-real estate components for property tax purposes. Taxable market value is an assessor’s opinion of market value, and the tax rates are subject to change. If the buyer disagrees with the assessor’s opinion of value, it may be necessary to pursue informal or formal measures. A recent sale is not conclusive of market value, especially where other evidence demonstrates the sale price is above or below market value. Estimating or forecasting real estate taxes is not a mathematical calculation; it is as much an art as it is a science.