Suneet Singal on property taxes in underwriting

Suneet Singal has a published background in real estate and corporate finance, and property tax is one of the largest lines that background trains a reader to reopen. Filings on this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. Those records do not state an assessed value. A property tax bill is an operating expense, and it is also a local legal computation: an assessed value times a rate, plus special items the bill lists. In some places a sale moves the assessed value. In others it does not. This entry shows a labeled hypothetical in which using the seller's bill would overstate income, and it tells you what the bill itself should contain. It is not tax advice for any parcel.

What the bill is made of

A tax bill is built from pieces you can name. The assessor assigns an assessed value, which may or may not equal a market price. A rate is applied to that value. The rate may be expressed as a percent or as a millage. A mill is one dollar of tax per one thousand dollars of assessed value, so 10 mills on a hypothetical assessed value of $1,000,000 is $10,000. Exemptions can reduce the value that is taxed. Special assessments can add a charge for a local improvement. An abatement can reduce the bill for a stated number of years. Each of those pieces can change without the building changing. The underwriting file should contain the pieces, not only last year's total.

Assessed value is not an appraisal, and it is not the price you are negotiating. It is the figure the taxing authority uses. A hypothetical assessed value of $2,000,000 beside a contract price of $5,000,000 means the two systems are looking at different numbers. That gap is not, by itself, evidence of a bargain or of an error. It is a prompt to ask what happens to the assessed value after a transfer. The answer is local. This page will not invent a national rule, because there is not one rule that covers every county.

The seller's bill is evidence of what the seller was charged. It is not automatically the buyer's budget. If the jurisdiction reassesses on a change of ownership, the buyer may be taxed on something closer to the sale price. If the jurisdiction limits annual increases and a sale does not reset the value, the seller's bill may be a better guide, and a model that jumps the tax to the sale price will understate income. The first question in the file is which rule applies to this parcel. The second question is the arithmetic under that rule. Skipping to a "tax load" you have used in another state is how files get confidently wrong.

A labeled hypothetical reset

Use numbers that divide cleanly, and keep them hypothetical. The seller's assessed value is $2,000,000. The hypothetical tax rate is 1.5 percent. The seller's annual tax is $30,000. The contract price is $5,000,000. If this hypothetical jurisdiction resets assessed value to the sale price, the buyer's tax at the same 1.5 percent rate is $75,000. The difference is $45,000 a year. That $45,000 is operating expense. It reduces net operating income by $45,000 if nothing else changes.

Put that income gap into a capitalization so you can see the scale. At a hypothetical 6 percent cap rate, $45,000 of income is $45,000 divided by 0.06, or $750,000 of value. Using the seller's $30,000 tax in a model of a property that will be reassessed to $5,000,000 overstates NOI by $45,000 and, at that rate, overstates value by $750,000. This is not an appraisal of any real sale. It is a demonstration that the tax line can move the price discussion by more than a rounding error. If the jurisdiction does not reassess on sale, the $75,000 figure is the wrong adjustment, and the $750,000 illustration should be thrown out. The rule comes first. The multiplication comes second.

You can also show a partial reset, because some systems move the assessed value toward the sale price without equaling it, or phase the change in over years. Suppose the hypothetical buyer's assessed value becomes $4,000,000, not the full $5,000,000 price. Tax at 1.5 percent is $60,000, which is $30,000 more than the seller's bill. At a 6 percent cap rate that $30,000 is $500,000 of value. The point of running two sketches is to stop a file from treating "reassessment" as a single national dollar. Write the assessed value you assumed, the rate you assumed, and the phrase "hypothetical jurisdiction" on the page. Then replace the assumption with the local rule when you learn it.

Abatements, appeals, and special assessments

An abatement is a reduction that expires. A trailing statement that includes the abatement will show a tax that is too low for the year after expiration. The file should say when the abatement ends, whether it survives a sale, and whether it follows the owner or the parcel. If you do not know, the budget should show a case without the abatement. A hypothetical abatement of $20,000 a year that ends in year two is a $20,000 expense increase in year three. That increase belongs in the holding-period model, not in a footnote that the yearly budget never picks up.

An appeal can lower an assessment, and a refund can arrive as cash. A refund is not a recurring reduction unless the lower assessment continues. If last year's other income includes a hypothetical $15,000 refund, remove it from the run rate and keep the lower assessment only if the new bill supports it. A pending appeal is not a lower bill. You can note it as an upside case. You should not underwrite the refund before the authority grants it. The same discipline applies to a seller who says "we always get this reduced." Ask for the last three bills and the appeal orders. The story is not the bill.

Special assessments are easy to miss because they may sit on a different bill from the general tax. They can be for a road, a district, or a utility, and they can run for a fixed term. A buyer who capitalizes NOI after a general tax and ignores a $12,000 hypothetical annual assessment has missed $12,000 of expense. At a 6 percent cap rate that is $200,000 of value in the same illustrative arithmetic. Ask the title report and the tax collector whether assessments exist. Do not assume the main bill is the whole public charge on the parcel.

What the file should contain

Collect the bills, not a broker's typed line. You want the parcel number, the assessed value, the rate, exemptions, special assessments, and the period the bill covers. Two or three years of bills show whether last year was odd. The purchase contract's price belongs beside the assessed value so the reset question is visible. Any abatement agreement belongs in the file with its end date. If a tax service or an attorney gives you a local-rule memo, keep the memo. Your hypothetical rate does not outrank it.

The underwriting page should then show three figures side by side: the trailing tax, the tax you are using for year one, and a sentence that states the rule you applied. "We used the seller's bill because counsel told us this jurisdiction does not reassess on sale, memo dated [date]" is a complete sentence. "We used 1.5 percent of the contract price because we assume a reset" is a complete sentence for a hypothetical, and it should be replaced when the real rule is known. "Taxes: $30,000" with no sentence is not complete, even if $30,000 is what the seller paid.

If the loan will escrow taxes, the escrow is a cash-flow timing item. The lender collects monthly and pays the bill. The economic expense is still the bill. Do not omit the tax from NOI because "the lender pays it." The lender pays it with the borrower's money. Do not add the escrow on top of the expense either, or you will double count. One expense in NOI, and a separate note if monthly deposits change cash during the year, is enough.

How the tax line meets the rest of the model

Because tax is part of operating expenses, a changed tax changes NOI, debt-service coverage, and any cap rate you compute on that NOI. In the reset sketch, NOI falls by $45,000. If the senior loan payment is a hypothetical $200,000 and NOI before the tax adjustment was $400,000, coverage falls from 2.00 to $355,000 divided by $200,000, or 1.78. The loan did not change. The public bill did. A lender who underwrites the seller's tax and a buyer who underwrites the reset are not looking at the same coverage. Say which bill is in the numerator.

The exit case needs a tax assumption too. A buyer at your exit will ask the same reset question about your sale. If you capitalize year-five NOI using a tax that has not been updated for the price you claim the property will fetch, you have used a high price and a low tax together. That combination is generous. A simple test is to recompute tax at your hypothetical exit price under the same rule you used at entry, and to show NOI both ways. You may decide the rule does not work that way. The test forces the decision into the open.

Leases can push the tax onto tenants. A net lease that requires the tenant to pay tax increases does not make the tax irrelevant. It makes the tenant's obligation the relevant fact, and it raises the question of what happens when the lease ends or when the tenant cannot pay. Show the tax expense and the recovery as two lines, the same way the operating expense entry shows other recoveries. A dark tenant does not reimburse a bill. The landlord's budget should be able to survive that year, or the risk should be explicit.

Usual mix-ups

People divide last year's tax by last year's assessed value, get a rate, and apply it to a future price without asking whether the system reassesses. Sometimes that is roughly right. Sometimes the assessed value is a fraction of market by law, and applying a rate to the full price double-counts. Sometimes exemptions disappear on sale. The mix-up is not the multiplication. It is the multiplication before the rule. Write the rule in words. Then compute.

People treat a lower tax as a feature of the building rather than as a feature of the current assessment. A long-held property can have a low bill because the assessment lagged, not because the services are cheap or the rate is low. A buyer who pays a full price may be the event that ends the lag. Buying the lag, and then losing it at closing, is an underwriting error, not bad luck. The seller's low bill can still be real. It is real for the seller. Your budget is for the owner who will exist after the deed.

People also confuse the tax escrow on a closing statement with the annual expense. A closing proration settles the current period between buyer and seller. It is not next year's bill. A credit at closing for the seller's share of the current tax does not reduce the buyer's ongoing NOI. Put the proration in the sources and uses. Put the ongoing bill in the operating statement. Mixing them makes the first year look artificially cheap or expensive depending on the calendar.

What the tax line cannot prove

The tax line in a model cannot prove what the assessor will ultimately enroll. Assessors have methods, appeals exist, and timing varies. Your figure is an underwriting estimate until a bill arrives with the buyer's name on it. Show it as an estimate when that is what it is. Do not let a pro forma format, with no asterisks, promote the estimate into a fact. The appraisal is a different opinion of value and may not match the assessed value either. Three numbers can coexist: price, appraised value, and assessed value. They answer three questions.

The line cannot prove that a cap rate built on the seller's expenses is comparable to a cap rate built on a reassessed buyer's expenses. A 6 percent rate on income that still enjoys a lagged assessment is not the same claim as a 6 percent rate on income after a reset. If you compare properties, match the tax treatment or disclose the mismatch. Otherwise the property with the older assessment looks cheaper to operate and richer in income for a reason that may not survive the closing.

The line cannot prove anything about a person's taxes. This hypothetical jurisdiction is not a claim about where Suneet Singal lives or what he pays. The site does not publish a residence or a parcel for him. The career record is limited to dated roles. Use the method on the bill for the parcel you are underwriting. If you do not have the bill, you do not yet have the expense. You have a placeholder, and the placeholder should say so.

What this entry does not claim

Suneet Singal’s published professional background is in real estate and corporate finance. Company filings linked from this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. The Suneet Singal Scholarship, Grant and Giving websites describe him as the founder of those programs. This entry explains a general subject. It is not a private track record, a current job title, an investment result, or a quote.

This page is a reference, not investment advice. Taxes are one line inside operating expenses in a property budget, and the value an assessor is not trying to appraise is explained in appraisal, price and value.