A Taxing Situation – Appealing Property Taxes.

By Ira Krumholz
President of NAI Daus Property Management
ikrumholz@naidaus.com

A few months ago, most property owners received a letter from their county auditor that revealed their new 2015 re-assessment. Every six years, the Ohio Revised Code requires each county to reappraise all of their respective taxing parcels. These reappraisals are updated every three years, a triennial update. In 2015, all of the parcels in Cuyahoga, Lake, Lorain and Portage counties were updated. Mistakes can sometimes happen, especially considering these four counties include the re-assessment of approximately 800,000 parcels. In this month’s column, we are going to discuss some nuances associated with the appeal process, as not every property owner may agree with the new value that was determined as a result of this re-assessment.

Considering most of the readers of this column are likely to be very familiar with the legal aspects of a tax appeal, the focus of this column will be on real estate related aspects. These generally fall into a few categories – true market value, timing and sale comparables being among the primary topics.

True Market Value (Valuation)
These days, it is commonplace for the property owner and the taxing district to each engage the services of a real estate professional to provide an appraisal or opinion of value for a property. There are many different types of value, but for taxing purposes, the goal is to determine the true market value. This is the price that a property would achieve in a competitive and open market under all conditions associated with a fair sale. Although this seems straight forward to determine, for many properties it can be anything but. For example, suppose a property is located at a very busy intersection in a desirable community. It includes a small, older building occupied by a barber shop situated on a two-acre lot. The property was valued at $200,000 but upon re-assessment, the new value is estimated to be four times greater than the former value. Further, assume that one of the properties located at the opposite corner has a similar size lot and transferred within the last couple years. The existing structure was torn down and replaced with a new drug store and the transfer price for that parcel was $1.5 million. This is a classic example of a dramatic difference between value-in-use and true market value. There is no way that a small, older barber shop could quadruple in value. However, the market data certainly suggests that the value of the underlying real estate has clearly increased. That is the goal of an appraisal or opinion of value – to determine the true market value. Click here for to read entire article.

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2016 Predictions for Cleveland Commercial Real Estate Market

By Ira Krumholz
President, NAI Daus Property Management Division
ikrumholz@naidaus.com

Momentum was certainly a key word last year. At the top of the list was the great positive momentum associated with Cleveland’s multifamily sector. Much of this was associated with Cleveland’s central business district, which grabbed most of the headlines. During 2015, nearly 500 new units were completed in the downtown area, but despite this additional inventory, occupancy rates continued to hover near 100 percent. There are approximately 275 units under construction with another 4,000 in various stages of planning. While new apartment construction outside of downtown has been limited, occupancy rates are also strong across the region averaging in the mid-90 percentile for most areas.

The industrial sector also had a strong year, as illustrated not only by high occupancy rates and increasing rents, but also with nearly 1 million square feet of speculative construction underway. Examples include new warehouse facilities in Euclid, Twinsburg and Stow – all of which were started without substantial leasing commitments in place.

The retail sector has also recovered nicely with several new retail developments underway. These include projects such as Pinecrest in Orange, Costco and Bass Pro Shops in Boston Heights and Cabela’s, Menards and Meijer in Avon.

The fourth primary commercial sector, the office sector, is the only one that has been a mixed bag. On the positive side, the overall level of leasing activity has picked up and certain traditional office corridors are performing well. However, there is still a substantial amount of vacant office space in the market and overall job growth in the office sector has been sluggish.

Looking ahead, a key word for 2016 is – cautiously optimistic. The commercial real estate market is approximately 24 months into this current expansion. Considering the depth and breadth of the most recent historic downturn, it is reasonable to think that the expansion will continue for at least another 12 to 24 months. This isn’t to say that sale prices and lease rates will increase at the same pace that has been illustrated over the last few years. In general, the velocity for both leasing and sales activity should remain solid throughout 2016.

Each commercial real estate sector is at a different place and each faces some risks. The multifamily sector is clearly the furthest along in terms of recovery and, as such, poses some potentially significant challenges. One of the largest is the threat of over-building, especially in the downtown area. While the demand has outpaced the supply, the projects that are in the development pipeline are more complex and thus, more expensive. There is a clear danger, not only that supply will start to exceed demand, but also that the rental rate needed to support these newest projects will be higher than the market can support. Click here to download the entire article.

Rent to Own, Part 2

Last month, we introduced a discussion that compared leasing real estate versus owning. The focus of that article was on some of the primary advantages and disadvantages of each and included at least some degree of subjectivity. This month, we are going to look at a much more objective measure.

There are actually two different analytical measurements that can be used. One utilized the net present value (NPV) of each alternative while the other utilizes the IRR of the differential between the two alternatives. We will focus on the NPV measurement in this month’s article, as it’s a little simpler and more intuitive. I’ll save the IRR method for a future article, when I’m franticly scrambling for a topic. The NPV method uses the aftertax opportunity cost to compare the purchase and lease alternatives. It is important that all of the components in this analysis are after-tax, as taxation has a different impact on leasing versus owning. Also, I am going to use a simple example but will point out where additional considerations may be needed.

Let’s look at the lease alternative first. We first need to calculate the annual cash flows after tax from leasing for each year of the projected occupancy period. To calculate after-tax cash flows, we determine the tax reduction by multiplying the annual lease cost by the tenant’s tax bracket. We then subtract the tax reduction from the annual lease cost. Putting these words into action, suppose a company is considering a lease alternative as follows: a 15-year lease term with a flat $120,000 net rental rate throughout the term and a 34% ordinary income tax rate. We will also assume that the company has an after-tax opportunity cost equal to 7%. This means that their internal margin or profit rate is 7%, after tax. Click here to download entire article.

Rent To Own

Growing up as a child in the 1970s meant that I watched a lot of television. I was a car freak at a very early age and would always pay particular attention any time a commercial aired for a new car. Looking back at this now, two things stand out. First, aside from Ricardo Montalban touting the rich Corinthian leather of the new Chrysler Cordoba, I can’t recall all that many auto commercials actually airing – certainly not to the extent that they air today. And second, I don’t ever recall seeing any commercials focused on leasing. In fact, I never even heard of an auto lease until the mid-1980s.

This month, we are going to start a two-part series on leasing versus owning, not with a focus on automobiles but rather on real estate. In this month’s column, we will focus on some of the subjective factors involved in this decision, while next month we will focus on a more objective way to evaluate these alternatives.

Leasing is a means of obtaining the physical and partial economic use of a property for a specified period without having to obtain an ownership interest. In exchange for this right to use the property for a specific period of time and under specific conditions, the tenant agrees to pay rent. As with any other business decision, there are certain advantages and disadvantages to leasing.

Advantages of leasing
Availability of cash – Lease arrangements usually have fewer restrictions as compared to loan agreements and thus provide a form of flexible financing. They also help a business owner avoid a large initial capital outlay that could otherwise be used to invest in their core business. Click here to read the entire article.

 

Prepare Your Property for The Winter

As the Starks Would Say, Winter is Coming

By Ira Krumholz, President of NAI Daus Property Management Division
ikrumholz@naidaus.com

The 2015-16 edition of the Farmers’ Almanac includes a good news/bad news weather forecast for Ohio. The good news is that the fall is expected to be longer and milder than normal. But the bad news is that the winter is expected to be similar to last year – in the publication’s words, “snowfilled and frigid.”

I’m sure that you will recall how last year’s harsh winter impacted real estate, including ice dams, frozen pipes and a seemingly continuous battle to keep drives and sidewalks clear of ice and snow. This month, we will discuss some of the things that can be done now to help minimize properly-related issues in the months ahead.

Parking Lots & Sidewalks
Winter weather is especially hard on walk ways and parking lots. Not only do these areas have to endure continual freezing and thawing but also scraping and corrosive chemicals. Before the snow and ice starts to fly, take some time to thoroughly clean these areas, paying particular attention to drains and catch basins, and inspect the entire area for damages. Any smaller cracks and crevices should be filled and any larger issues should be repaired or replaced. Take some time to secure contracts for snow clearing early and prepare any snow removal equipment for the upcoming season. Finally, fall is a great time to stock up on salt or ice melt, before demand drives the prices up.

Landscaping
Although nature certainly takes its course with plants and landscaping during the winter, there are some things we can do to help things along. Inspect and prune plants and prepare them for winter by fertilizing, keeping in mind to protect from any potential salt or chemical exposure. Similarly, prepare lawns for winter by aerating and fertilizing. Fall is considered the best time to reseed or replant a lawn but be sure to do this early enough to allow for germination. Mark any areas that are exposed to snow plows with flags or poles. Finally, repair and winterize any irrigation systems that may be in place.

Roof and Structure
Similar to parking lots and sidewalks, the exterior envelop is also subject to the full brunt of winter. Take some time to inspect all areas, paying particular attention to exterior window and door frames, the gutter system and valleys and penetrations in the roofing system. Caulk, fill or otherwise repair any gaps, cracks or damaged areas, keeping in mind that water and ice can work their way into all sorts of areas. Any areas of bare wood should be painted, treated or otherwise covered. Finally, remove any built up leaves or debris from the roof and gutter system. Click here for full article.