There are two realities in life: death and taxes. And property tax is a part of every self-storage facility budget. But how do you know how much to estimate? And what do you do when the tax assessor thinks the value is more than you do? We’re going to cover these and related topics on this episode of the Self-Storage University podcast. You can’t escape paying taxes, but you can ensure that you plan and pay the correct amount.
Episode 29: Understanding Property Tax Transcript
They say there are only two guarantees in life, death and taxes. And while we don't know everything about death, we certainly know a lot about the science of how tax works. This is Frank Rolfe, the Self Storage University podcast. We're going to try and unlock the mysteries and fully understand property tax and how to work around that with your self storage facility.
First, what is property tax? Well, in America, we have different types of taxes. You've got sales tax, you have income tax, and you have what's called property tax. Property tax is a tax levied against both real and personal property, typically at the county level. So how it starts off is the county tax assessor This is the person responsible for taxation on property in the county. Now, you'll find that the rate of taxation that these tax assessors use is wide ranging based on where you are in America. Where I am here in Missouri is typically about 1%. There are portions of Illinois up near Chicago where it can be as much as 10%. Down in Texas, it's nearly 3%. So there's a pretty big variance. So why that's important to understand is that will have a lot to do with how aggressive you get on property tax. If you're in Texas, obviously, the property tax amount would be roughly three times more than here in Missouri. So as a result, someone in Texas would be a lot more aggressive in trying to make sure they fare in just taxation than I would in Missouri, because the implications are about 300% higher.
Now another thing you need to know is there are what's called disclosure states and non disclosure states. In a disclosure state when you buy property, you have to tell the tax assessor what you paid. In a non disclosure state you do not. Louisiana, for example, is a disclosure state. So when you buy a self storage facility, you'll get a notice from the tax assessor asking you what did you pay. And as you can bet, they're going to probably set your tax rate, your valuation, based on what you say. But just one state over in Texas, it's a non disclosure state. You get the same letter from the tax assessor, but no one ever responds, they throw them in the trash. Then the assessor has to just basically guess at what they paid. The reason in non disclosure states no one tells the tax assessor is they typically bet low, they guess wrong, they always end up a little bit lower than what you paid normally. And in some cases significantly lower.
However, it's very, very important when you budget for property tax on your storage facility, that in your budget, you use the tax rate times the amount you're actually paying. Do not listen to the broker or the seller who will try and convince you that that is not necessary. Of course, they'll say that because there's a 10 for one or greater multiplier with the cap rate over every dollar that's different. So if they can convince you your taxes will be $10,000 less than they truly will be you'll overpay by that property by somewhere between probably $100,000 and $200,000. So you can't go by what they tell you. The truth is that the taxes could very well be what you paid, that would be the actual fair amount, less any goodwill or other non taxable portions you ascribe to the price. So you have to use that in your budget. If you're paying $1.6 million for that storage facility, you need to find out what the tax rate is and use that based on $1.6 million. Now if the tax assessor comes in lower than that, that's fantastic. Good for you. But you don't know how long that will last. If you budget lower than that amount, then you might well end up paying a lot more than you had budgeted.
And let's talk for a minute how that works. So you get your tax notice every year, the assessed value, what the tax assessor says you're going to be taxed on. And you then have three options. Option one, do nothing and pay it. Option two, you can go in and have an informal meeting with the tax assessor typically. Option three you can formally say no this is wrong, and asked to go ahead and have some kind of hearing of what the tax should truly be. Now if you go ahead and take the first route life is simple. You get your tax notice and you send them a check and you're done. Let's talk for a moment though on how you do the in between step of the simple meeting with the tax assessor voluntarily to see if you can get it lowered in an amiable setting with the tax assessor.
In most areas, what you do is you set up that appointment to meet with a tax assessor. Or they tell you they won't do appointments, it's first come first serve, and you have to go to the tax assessor's office and sit and wait. I've done it many times, you can wait a really long time. So if you're going to go in and do that, you better bring other things to do, maybe your laptop, maybe a book to read. I've sat there for as much as two to three hours before, to get my opportunity to talk to the tax assessor. So it's going to be quite a commitment of time, and it's not very much fun. They don't have luxury seating at the old tax assessor's office, and that's deliberate, they don't really want you to come and do it. Then when you meet with the official, you have your right to explain why you thought the tax is too high. You can show them photos that you've shot of the worst possible angles of your property. You can give them the sob story of how things are tough. And more than likely, they'll know your lying because they know what these things go for these days. Like anyone else they can see listings on different websites, Loop Net and such.
But typically, because you took the time and trouble to come down and wait, they will reduce your price down a little. So if you sat there for three or four hours, and you meet with the official, can you get him to back off the price by $25,000? Yeah. $50,000? Yeah, it's possible. Bear in mind in Missouri, if you back it off by $50,000 all you've really saved just $500, and you may say, "Well, that's not even worth my time to spend the entire day do the tax assessor." If you're in Texas, that might be $1,500 and you might say, yeah, that was pretty good use of my time. The informal ones are all good and dandy but we won't get those big concessions in the informal mode. However, if you go to the actual hearing, if you set up to formally oppose your assessed value, which is your legal right, then you'll actually go to some kind of a court like setting hearing, where you'll have your right to explain why you think it's wrong. And the assessor will also have their opportunity to explain why they think it's correct.
The problem with what people do not realize as it can go either direction. They don't have to just go with that price or lower, they can also go with that price and higher. So the problem is sometimes it's like poking a dog with a stick, because you're hoping to get one reaction, but you may get an entirely different one. You may be thinking that this way, you'll get the price reduced, and then you'll be horrified to come out, you end up owing even more money. So typically, if you're going to go to one of those formalized hearings, you better have a real significant reason to do that you better have been assessed far more than you paid. Because at the end of the day, the only thing that really is going to change their opinion on value is for you to produce the contract on what you paid. Then they'll say, "Oh, well, I guess we were wrong. I guess the tax assessor was wrong. It really isn't worth what we thought. It's only worth that much." How come? Because there can't be any better evidence as to the value than what someone just paid.
What it means is I would not do the formal approach, unless is significantly more than you paid because I don't want to go in there and end up with the price even worse than I thought. Now some people say, "Well, I don't really feel like I'm competent enough to do that in any event." Well, if that's true, then you can definitely hire a consultant to do it. There are many groups across America that will go in and they'll go ahead and refute those tax assessments for you. However, they do charge a fee and the fee can be hefty. It can be as much as half of the amount saved. So if you think you can do it yourself, well, then you'll definitely save a lot of money. However, if you don't feel competent enough to do it, then don't do it.
Now, we've been through various tax items over the years and I can tell you from experience that again, these people are fairly smart. You can't go in there and bluff them. You can't tell them, "Yeah, well, I bought this storage facility for $1 million, but it's only worth half a million." You can't go in and say, "Yeah, I bought this storage facility for not much money." Again, they know better. Everyone in America today knows the values of real estate. So this is not something that they are not somewhat experienced in. They can buy the same books you can, look at the same learning tools, they can go and look at the same comps and listings. So don't think your adversary in this case is someone who's not sophisticated that you'll easily win because you probably will not.
However, at the same time, there's many, many cases the tax assessor has to plow through and they don't want to spend that much time on any one. So just to get rid of you, they typically will try and work with you to some degree. We've also found historically that they never really tax you at the full price typically, simply because they don't want you to come in and fight it. They'd be much happier just going ahead and assessing that lower than what you paid even if they think they know what you paid because you really don't want to waste their time clogging up the courts with people saying, "No, no, that isn't the right amount." But I will also tell you that it is absolutely mandatory if you want to be a good self storage buyer to use the full amount of what you assumed the tax assessment would be, which is in fact based on what you pay, that needs to be the number that you put in the line item on your budget. That way you are never disappointed regardless of what that tax assessor notice says when they send you out that annual notice of assessment. This is Frank Rolfe, the Self Storage University podcast. Hope you enjoyed this. Talk to you again soon.