Why is Real Property tax Appeal so Important?

It’s a mystery why virtually every commercial property owner is not filing (or at least considering) a real property tax appeal. While there may be some nominal expenses involved in the bringing of such an appeal and an appeal must be carefully evaluated before it is initiated, the benefits significantly out weigh the risk. In states such as New York, the only consequence of a real property tax appeal is beneficial. Essentially, the only thing that can happen – even in those few cases where there is no merit – is that the appeal is either abandoned or withdrawn. In the many of circumstances, reductions in assessment, as well as substantial refunds, can be achieved.

Real property tax appeals are traditionally done by law firms and done on a contingency fee basis. This means that there is effectively no cost to the client. The only fee that is paid is where there is a benefit (reduction in property tax) and, in most circumstance, the fee comes out of the refund received by the client.

What exactly are these benefits? The obvious is that in most cases a tax appeal produces an actual cash refund, a substantial fee that has a solid commission. These, however, are not the only benefits of the tax appeal and, in some ways, can actually be viewed as almost the secondary benefits.

Taxes are the real money –real cash flow –real out-of-pocket expense. For every dollar of taxes saved by a reduction in assessment (which usually by law must be carried forward), goes directly to the bottom line. Roughly speaking, every dollar in additional cash flow translates into approximately $10 in real estate market value. For example, at a 10% capitalization rate, a parcel of real property which has a net operating income (NOI) of $100,000 could theoretically command between $900,000 to $1,000,000 in the marketplace. Assume that the reduction in the assessment results in a savings per year of $20,000, thereby increasing the cash flow to $120,000 per year. At the same capitalization rate, your client has now seen an increase in his market value of between $150,000 and $200,000.

As every accountant, property owner and financial consultant is well aware, the lending institution’s almost sole concern is the cash flow of the property and its NOI. How much debt can the property reasonably sustain? Again, the rough estimation comes from a simple capitalization approach. At a 10% interest rate and loan constant, a typical mortgage – let’s say a 15 year mortgage (level amortization) payable on a monthly basis on $1,000,000 principal amount would require $10,750 per month of free cash flow to support it (i.e., $153,000 per annum). Simply stated, to the mortgage lender, a property must comfortably show an available $10,750 per month in cash flow to support a $1,000,000 mortgage.

Now, take the example, and increase the available cash flow by $20,000 per annum to $173,000. The same property, now having obtained tax relief, has a mortgage potential to support an increase of $300,000 with the same mortgage constant.

Of course, these are very rough examples, but as you can see the more cash flow a property has available, or can generate, the more its market value and mortgagability potential.

Of course, bringing the taxes to a reasonable level also makes the property more competitive from a leasing viewpoint.

This article has been provided by Saul Fenchel, Partner of the firm Siegel, Fenchel & Peddy, a member of the National Network of Accountants Preferred Provider Network. Siegel, Fenchel & Peddy is a law firm concentrating in property valuation (real property tax review and condemnation) issues on a statewide basis. For additional information about the firm go nytaxappeal.com, linked below or call (516) 294-8880.

The National Network of Accountants is a leader in the training and development for accountants in the field of personal financial planning. For additional information about the National Network of Accountants go to nnaplan.com, linked below, or call (800) 234-PLAN.


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