By Jerry Heaton
When working in commercial real estate or property tax appeals, you are likely to encounter a situation where a property is in the process of being sold and there is a pending, unresolved property tax dispute. But what is the solution to this issue?
The most common answer is a property tax appeal addendum. A property tax appeal is mutually beneficial to both the buyer and seller and should be continued during the process of the sale. A property tax appeal addendum is good way to handle this dilemma and the language below is a very brief, but concise example of a way to ensure proper accounting when selling any real estate that has a property tax appeal in progress.
“Purchaser acknowledges that Seller is appealing the valuation of the Property and Purchaser agrees that the Seller is entitled at Seller’s cost and expense to pursue the appeal through completion and to receive any tax refunds or reductions attributed to the years prior to the year of the Closing and to receive any refunds or reductions attributed to the year of the Closing and said benefits and expenses shall be prorated between the Seller and Purchaser after deducting (or Crediting Seller, as applicable) any expenses including attorney fees and property tax consulting fees related to the property tax appeal effort. If the appeal results in a refund that is sent to the Seller, the Seller shall send Purchaser their prorated net benefit within 10 days of receipt. If the appeal effort results in a refund that is sent to the Purchaser, the Purchaser shall send the prorated net benefit of the refund to the Seller.”
The following example provides more clarity to this Tax Proration Addendum:
Property Sale Price $1,000,000
Total annual property tax $20,000
Sale date: July 1
Days Owned by Seller 183 (50% of the year owned by Seller)
Days Owned by Buyer 183 (50% of the year owned by Buyer)
Tax Appeal Results $10,000 in tax savings
Cost of appeal 25% of savings $2,500
Net Benefit of Tax Appeal $7,500
Net Benefit to Buyer = 50% $7,500 @50% = $3,750
Net Benefit to Seller = 50% $7,500 @ 50% = $3,750
As a side note, the Seller’s reduction of the property helps to increase the Net Operating Income (NOI) of the property.
If capitalized at a 5% cap rate, the “added value” of the tax appeal is $7,500/.05 = $150,000.
This means that a tax appeal does not only reduce taxes but it also adds value to a property. This, in turn, benefits the seller of a property and as well as the buyer of the property because they will have lower expenses and higher NOI on the property.
DISCLAIMER: Please note that this is not a legal opinion or legal advice but is only intended as guidance from an Asset Manager perspective.