The tax man still cometh. But in some states, he might not be asking for quite as much money this year.
After seeing real estate taxes rise as property values jumped through the roof over the past couple of years, REIT executives reported on their second-quarter conference calls that they’re finally finding some relief, which is helping moderate expense increases.
For instance, Chicago-based Equity Residential lowered its same-store expense guidance by 25 basis points to 4.25%. “This reduction is driven by expectations of continued low real estate tax growth due to modest rate increases and successful appeals activity, as well as significantly lower expectations for commodity prices, which are muting utility expense growth,” EQR’s CFO Robert Garechana said on the company Q2 earnings call.
Appealing property valuations to government agencies for tax relief has been a tried-and-true way that apartment owners have reduced costs over the years. But that isn’t the only thing driving down costs. Texas has taken steps to reduce the tax burdens on apartment owners.
Texas legislation
In early July, Texas Gov. Greg Abbott signed an $18 billion tax relief bill. On Nov. 7, voters will be asked to add the tax cuts to the state constitution, a likely scenario, according to The Texas Tribune. If approved, the changes would be applied to 2023 tax bills due in January.
Though the bill cuts property taxes by more than 40% for roughly 5.7 million Texas homeowners, it also gives apartment owners relief (although legislators declined to provide direct benefits to renters).
For Memphis, Tennessee-based REIT MAA, which has a portfolio in Texas and had previously anticipated rate rollbacks in the state, the new legislation would lower its overall same-store real estate tax growth rate for the year by 50 basis points to 5.5% at the midpoint, according to CFO Al Campbell.
Houston-based Camden, which has a sizable portfolio in its home state, expects taxes to fall 4.8% on its properties in the state due to the new law. “We have assumed some rate rollbacks in Texas in our prior guidance, so this reduction is not dollar-for-dollar to the bottom line,” CFO Alex Jessett said on the REIT’s earnings call.
Although some municipalities in Texas have offered rate rollbacks as property valuations have risen in the state, the new law provides more permanent relief. “They're permanently reducing that rate… by legislation,” Campbell said. “Now the other side of that is in the future. If the economy in Texas is different, they could undo it. But this should have a permanent ongoing impact that's pretty significant.”
Texas isn’t the only place REITs could see lower taxes this year. Barb Pak, CFO for Essex Property Trust, which owns properties on the West Coast, noted that a reduction in property taxes in Washington state allowed the Palo Alto, California-based REIT to reduce its same-store property operating expenses in the state by 100 basis points to 4%.
“Property taxes in Washington declined 1% year over year,” Pak said. “The assessed values went up 15%. So when we were budgeting, the assessed values were up quite a bit, but millage rates came down. So that's what drove the favorable year-over-year reduction in taxes.”
