How Commercial Operators Can Squeeze Expenses in 2024 - What We're Seeing

We’ve been talking with commercial real estate operators heavily over the past few weeks as we look to 2024, and we are seeing some significant trends that I want to share that have been to the detriment of property owners. First I want to talk about the frustration between where property values and appraisals are today, vs. actuals as of this quarter.

From our seat as your advocate and tax consultant, our primary job in this market is to make your property as valuable as possible. With operators, every expense line item is seemingly up, with insurance and property taxes being the highest. There has been a large frustration between the disconnect of the local appraisal districts opinion of value, and the property owners. Most properties mark to market is 30% off of the highs we saw 2 years ago. This is the reality we face, however, their weren’t enough sales during the 2022 calendar year across all property types to substantiate a “market value” argument as much as what we see using today’s transactions and cap rates.

The reality is that yes, Q3 and Q4 2022 cap rates shifted 100-200 basis points, but the deal velocity was down so much that the appraisal district leaned on the full year’s view of sales to form their (very high) opinion of value.

Today, there is substantial market data that shows cap rates have moved 200-250 basis points really across the board. This will factor into next year’s appraisals and it’s time to buckle up and be aggressive on the property tax appeal front. We’re seeing many transactions UNDER the property tax appraisal value, and this will factor into next year’s appraisals.

However, this is what we’re seeing in the property tax industry that has been frustrating from a property owner’s point of view.

There are a couple large “national” firms that have a large emphasis on cost and expense reduction. Because of this, these firms are spending less time per property, trying to become more profitable as a company. What this translates in to, is the firm not pushing as hard on the tax appeal through both the “informal” negotiation period and the “formal” board hearing. We are seeing many firms go to a formal board hearing without ever talking to the property appraiser. What this leads to is many times a more hostile board hearing as the appraisal district feels that the tax agent didn’t make any attempt to achieve a fair valuation. The agent is rolling the dice at the hearing to have a much lower value (which many times is not occurring).

What this leads to is “well, we have to litigate” and the starting value heading into litigation is problematic for two reasons. And also a large issue we’re seeing in contracts of how they are structured.

1. The property value (and taxes you or your tenant pays) are going to be too high, relative to where the final tax bill ends up for the given year. This affects ownership distributions, and/or having to deal with frustrated tenants that are looking for every dollar to save and a refund check that comes much later
2. The starting value for your property heading into litigation, is much higher than it should be, due to the fact that the tax agent didn’t spend the time in the informal period to work to achieve common ground with the assessor. We always disagree with the assessor, but you have to be willing to work with them to achieve a fair result.
3. Many times (not us), a tax consultant will INCREASE their contingency fees during litigation from the initial period and have that fee uncapped. As one of our clients last week said, “show me the incentive and I’ll show you the reward”. For example, there was an operator we spoke with this week that had a 39% increase in a multi-family property on a $90MM property, where they cut $30,000 off of the initial value. Now, that agent will go to a higher uncapped contingency with the opportunity to theoretically make $80,000. This isn’t right.

We believe in working informally with the assessors, cultivating the relationships that at the end of the day matter for operators. We believe in protecting the properties and owners, to build long term relationships.

We believe in this because we are a fully private company that believes in the things that the best customer service businesses thrive on. We don’t have private equity involved nor do we have a charge to go 10X the company. We just keep doing the things we’re doing and work with great people. Consider these things as you review your contracts and relationships, whether it’s our team or another, there are opportunities for your properties as we head into this tumultuous time of 2024 and beyond.