Many appraisal districts across the country will re-start the appraisal process on all properties in their respective locations at the start of the new year.
A vast majority of these appraisers are trained to value the most common property types in their jurisdictions such as office, multi-family, retail, etc.; however, the seniors living valuation methodologies are not part of the appraisal district’s strong suit.
Inaccurate property valuations result when districts are unfamiliar with the senior housing market overall. The more services offered at these facilities unrelated to real estate often yields a larger difference in valuation techniques.
With an array of seniors housing facilities — including independent living, assisted living, memory care and skilled nursing — laws generally dictate that property taxes are levied only on tangible, income-producing property. This leads to a valuation on both the real estate value as well as the business personal property.
Valuation of the business personal property coupled with the operation/business value of a facility can lead to double taxation or other inaccuracies in the tax assessments. This can result in the over-payment of property taxes, which is already one of the largest expense items on the profit and loss (P&L) statement. Owners must take it upon themselves to ensure they are not double assessed.
Here are a few tips and scenarios owners should take note of when property tax time comes around.
1. Identify Location and Deadlines
The first step in this process is identifying where the asset is located and what is statutorily being assessed for property taxes. Depending on the state, there may be a requirement to report the business personal property tax assets. Typically there is a deadline to file.
Non-compliance in reporting can result in significant late penalties, and more importantly, it could limit the availability for any protest in valuation.
In addition to understanding the reporting deadlines, it is just as important to understand the deadlines for valuation appeals. These vary state by state and can also vary in the filing requirements.
Once an appeal is filed, there is typically a period of time valuation issues can be resolved informally. If there is no remedy made informally, most states have a formal process in which the taxpayer can state their case for the valuation issues. Once the formal remedy has been exhausted, further appeal typically would require a lawsuit, which can be costly both monetarily and in time.
2. New Construction
If the asset is in the new construction phase, county appraisers will typically assess the property based on a percentage of completion as of the assessment date. Construction cost valuation will typically be utilized until the asset is fully stabilized.
Construction cost valuation does not always indicate the true valuation of the real estate, especially if there are any tax credits that have provided beneficial financing the income cannot fully support.
Remember, appraisal districts should only be making valuations on income-producing property.Typically, the cost to construct property is supported by the income the property can generate.Since the income is supplemented by tax credits, the income does not support the high costs of a seniors living facility.
3. Real Estate vs. Operational Value
When reviewing property valuations, ensure the real estate value is separate from the operational/business value. For instance, the revenue generated from a senior living development is based on three major components: rental income and income from both food and beverage services and care services. However, property valuations should only be derived from rental income and not on income that is generated from food and beverage and care services.
4. Property Acquisition
If the asset was recently acquired, it is important to appropriately allocate all aspects of the acquisition costs.
In most states, the purchase price is disclosed, but the appraisal may not be adjusted for business value or personal property taxes from the accounts, which would result in double taxation. Consideration for goodwill should also be considered in the allocation for the real estate value.
Regardless if the property was recently acquired or constructed, most states specifically enumerate an equity analysis for valuation. In Texas and many other states, this valuation can provide a significant benefit by ensuring owners of these properties are not taxed unfairly compared to their closest competitors.
However, the equity valuation in senior living can prove difficult with the large variations in size, location, age and service offerings among senior living properties.
Similar to the sales comparison approach to valuation, adjustments must be made based on these variations from comparables to ensure the property has been valued appropriately. The appraisal district should only be creating a property valuation comparison based on similar senior living properties in the area that is derived from rental income only and does not include the other property’s income that is generated from food and beverage and care services.
Unfortunately it is nearly impossible to decipher what percentage of the revenue comes from the rental aspect, which is where professional help comes into play.
As the supply continues to increase across the country, it is anticipated that many of the larger appraisal districts in the primary markets will become more familiar with the appropriate valuations on senior living facilities.
A majority of this education is gained through the property owners or representatives appealing the properties and explaining the complexity of the industry as it relates to valuation techniques. This continued process will help to ensure that the assets are not being double taxed and/or over-valued for tax purposes.