Ron Taylor: Fruitcakes for the Federal Reserve

Ron Taylor

As cities, counties, school districts, and other municipalities have been starved for revenues in the past few years due to the housing bust and decreasing tax revenues, municipalities have aggressively sought to keep up with their-ever increasing expenditures. They’re looking for new revenue sources such as licenses, permits, and fees, and taxing authorities have aggressively pushed the increase in assessed values of real estate assets.

Although it is well documented that multifamily assets have witnessed a run up in values, it should also be noted that these value increases have come about through rental rate improvement coupled with cap rate compression. Capital markets have driven the cost of debt to historic lows, placing downward pressure on cap rates, resulting in increasing sales prices, which are used by taxing authorities to justify the assessed value of property. Although rents have dramatically improved, there is a real risk that revenue improvement may not be able to keep pace with the ever-increasing tax burden.

In other words, there is a risk that assessed property values have and will appreciate at a significantly faster pace than rents; thereby negatively affecting the return on an asset.

Nowhere has this been more evident than a multifamily property in North Dallas, where the assessed value of the property increased in 2012 by 20 percent, while revenue increased at only 4 percent. The tax burden on this property went from 14.1 percent of revenue in 2011 to 16.4 percent in 2012.
Looking at other assets we manage, it is clear that this phenomenon is not unique to North Dallas. We have likewise witnessed similar growth in the tax burden in other rental markets.

As multifamily owners, we are happy to pay our fair share, but are concerned with the burden that is being placed on property operations as a result of the significant increases in the assessed values of the properties we manage. Perhaps it would be fitting for municipalities to send Mr. Bernanke and his other Federal Reserve cohorts a fruitcake at this festive time of the year, in appreciation of their near zero interest rate policy, allowing municipalities to justify inordinate tax increases to multifamily owners.

Ron Taylor is president of Henry S. Miller Realty Management. Contact him at [email protected]


  • Aunt Sammy

    I’m a little confused, dear. Possibly because you are too. Your ire should be directed to the County Assessors office as they decide if your multifamily dwelling is a castle or a slum. We only care about the interest rates that you pay to finance your purchase. Which has been at record lows for the last several years.

    Don’t make me call my boyfriend, Santa, for a delivery of coal in your deep, deep pockets.

  • Bob

    Ron, your anger at the Fed is misdirected. I’m sure you are aware of the ins and outs of challenging the assessed value of these projects. If your valuation doesn’t mesh with reality, there are many firms that will effectively present the facts to the CAD and get the valuation realistic. If however the valuation is accurate, then your project is paying the correct amount of taxes.

    IMO it is more the fact that Texas is a non-disclosure state as it relates to transactions that makes assessed values difficult.

    It’s not the Fed who is establishing the market value, it is the marketplace. While yields a buyer is willing to accept are influenced by the cost of debt, it is the IRR that is likely the determinant, and an all cash buyer isn’t influenced by interest rates.