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Tax Pulse by DMA Canada - Property Tax

by DMA Staff | Jun 23, 2016
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How Does My Property Tax Affect My Valuation?

This is the long standing question that is always debated.  What is the impact of property tax savings on my asset value?

MPAC is introducing a new assessment cycle starting in 2017.  Historically, they have assessed shopping centers, office buildings and certain industrial properties by way of the Direct Capitalization Approach (DCA). New for 2017, the multi-residential property owners in the Province of Ontario will be assessed similarly.

The formula for DCA on the surface appears simple: Value = Net Operating Income (NOI) / Cap Rate 

How to Increase an NOI?
In today’s market with cap rate being compressed to historical figures, the easiest way to increase your value is to increase your NOI. This can be done by increasing your rent or decreasing your operating costs. 

Ideally, you will be increasing your rent while decreasing your operating expenses.

Looking at operating expenses, many fall beyond the ability to reduce because of either provincial or municipal law requirements like elevator maintenance, insurance, and life safety. 

However, one of the line items on an expense statement is property tax, and this is one expense that has many subjectivities in its determination. Your assessed value is based on the subjective opinion of what the assessor sees and then determined by what they have seen.

Shortcomings
What are some of the subjective hiccups?

  • Function: Is my property seen as commercial or industrial? Or some other type of class?

  • Size: Is the size and area of the property correct? Is the number of units in my building correct? Is the split between commercial and residential correct?

  • Expenses: did the assessor interpret my income and expense statements correctly?

  • Income: Is the rental analysis accurate of my property rental appeal?

  • Investigation: did the assessor properly investigate the sales used to determine cap rates or other market factors?

  • Comparability: Are those properties that sold comparable to mine? And how are they comparable?

These are just a few commonly asked questions relating to properties. Even though the valuation process is heavily reliant on market data, we believe it to be objective; however, at times the interpretation of that data may become subjective.

MPAC Change
As in prior assessment cycles, the DCA was limited to shopping centers and office building types of properties; however, in the upcoming assessment cycle, MPAC will use the DCA on all income producing properties.

How Do Lower Taxes Increase Value?
MPAc

Many factors can affect a property’s valuation when using the DCA such as vacancies, parking income, repairs and maintenance just to mention a few. Property Tax is a factor often overlooked because of the “I can’t do anything about it” thought process.

Benefits
The benefits of lower taxes are many. Lower taxes make the carrying of vacant space more bearable, and it also makes your vacant space more competitive in the leasing market as your overall operating costs per square foot are better than the competitor across the street. 

From an investor’s point of view, a 7.2 percent increase in value is significant, as it represents an additional return on top of the income stream generated by the asset. Extrapolating this approach to any portfolio would be interesting but I would prefer to let you do the math and dream.

Please do not hesitate to contact your local DMA office should you have specific questions or requests.