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Add One Step to Your CRE Closing to Boost Year-1 NOI

Pictured: ToddD. Jones, MAI, CRE, FRICS, Principal at RealAdvice
Pictured: ToddD. Jones, MAI, CRE, FRICS, Principal at RealAdvice

In a complex market in which commercial property owners feel the pressure of higher operating costs, no one wants to leave money on the table. However, that is exactly what has been happening for decades.

Why do owners pay taxes they don’t legally owe? The answer might surprise you. Even the most sophisticated investors are generally unaware that intangible assets are not taxable at the state and local level in most states. Thus, the industry has traditionally shouldered the burden of property and transfer taxes on their intangible assets, accepting it as an unavoidable cost of transacting commercial real estate. However, this cost and its financial performance ramifications can now easily be avoided.

RealAdvice, a tax advisory firm that leverages fintech resources to deliver a unique approach to valuation, tackles that problem head-on as part of the CRE owner’s transaction closing process. Effectively, the firm dissects the nontaxable business value and other personal property from the total contract price, ensuring that owners’ state and local taxes are only levied on the value of the taxable property.

“Very few market participants, from investors to lawyers and accountants, have taken into account the impact of separating federal tax reporting standards from state and local,” says Todd D. Jones, MAI, CRE, FRICS, Principal at RealAdvice. “So, this focus is what makes our approach unique.” Federal tax reporting is what everybody concentrates on; nobody wants to be audited by the IRS with a negative outcome. But Jones indicates that state and local statutes differ from federal law, which is grounded in the Internal Revenue Code, and the reporting for each is independent.

Implementing its proactive approach across 37 states to date, RealAdvice has ensured proper tax reporting for over $60 billion of commercial real estate transactions to date. RealAdvice‘s Senior Managing Director Christy Bastian described the firm’s system as “the better mousetrap” on the Innovation Stage at this year’s South Florida Forum, where she and RealAdvice‘s Stephen King gave audiences the inside scoop on the firm’s methods and track record.

RealAdvice validated its methodology in a particularly noteworthy achievement. As an expert witness on behalf of Walt Disney Parks and Resorts US, Inc., Jones helped secure a 2020 Florida Court of Appeals decision that gained international attention and set the tone for a significant paradigm shift for the CRE industry; the ruling resulted in millions of savings for the iconic Disney Yacht and Beach Club resort. “High-profile case law changes the lens through which the major players view, and our phones have been ringing ever since,” remarked Jones.

Navigating state and local tax laws is no easy task. Every state’s laws differ, in some ways substantially, from the Federal Internal Revenue Code. RealAdvice has a deep bench of experienced experts to help navigate market complexities. The firm has developed a fintech platform known as “WarpCore” that captures and analyzes data across property types, jurisdictions, and time periods. WarpCore learns from every new appraisal, enabling RealAdvice appraisal and accounting experts to focus on what they do best while the system generates a level of sophistication, consistency, and financial reconciliation higher than that available from any other platform.

“We infuse our technology with decades of professional expertise in the marketplace to produce a focus that maximizes results at the industry’s highest standard of accuracy for our clients,”

notes CTO, Guy Hagen.

Identifying Business Value

Identifying and quantifying non-taxable property value has a significant financial impact. Over the last ten years, RealAdvice has found that, on average, roughly one-third of a typical contract price is not subject to state and local taxation. For example, in the case mentioned above, Disney sued the Orange County Appraiser, who had proposed a $340 million value for Disney’s Yacht Club Resort. Jones was the expert witness who proved that only $210 million was taxable real estate under Florida law, with the rest of the resort’s value being properly attributed to intangible assets, including items like Disney’s workforce, copyrights, and trademarks.

Whereas property valuation has historically relied on real estate appraisers, RealAdvice merges its team of highly experienced certified appraisers (MAIs) with its panel of equally qualified certified public accountants/accredited business valuation experts (CPAs/ABVs) who then, together, identify and quantify the various components of a commercial real estate transaction. These experts separate value into three categories: 1) real estate, 2) business intangibles, and 3) tangible personal property. This assures that tax is paid only on the taxable components.

For instance, a hotel has multiple components contributing to its market value beyond bricks and mortar, such as a large staff of people providing niche services, brand identity, proprietary systems, and intellectual property involving customer service and training, all of which contribute to overall revenues and profitability. “An easy way to think about this is to compare a fully operational asset to a similar property with no revenue, management, or market presence. You wouldn’t pay the same price for both,” says Jones.

In Florida and many other states, the deed (or value affidavit) indicates the amount of transfer tax paid at closing. Commonly, the reported transfer tax payment reflects the total contract price, permitting county assessors to tax elements of an asset that are not supposed to be taxable. As part of its tax advisory services, RealAdvice provides an appraisal certified by two MAI appraisers and two CPA/ABV experts that defines the appropriate taxable value based only on the real estate. This is no simple task because the two professions speak very different languages; Jones urges caution in using unproven providers. “The amount of transfer tax paid at the closing ensures the parties do not inadvertently commit tax fraud,” says Jones.

Florida, for example, applies a documentary stamp tax, unlike many transfer-based taxes in other states.

“From a Florida documentary stamp tax perspective, an allocation of values is the best way to accurately reflect what is being paid on the real property, tangible property, and intangible property,” adds French Brown, a Florida state and local tax lawyer with more than a dozen years of experience practicing both with and before the Department of Revenue.

“This also results in a minimization of the taxes lawfully due, as the Florida documentary stamp tax applies only to the consideration paid for the real property. The key determination is the agreement between the buyer and seller on the values in the allocation for Florida documentary stamp tax purposes before the transfer occurs,” he says.

“We fix that problem for our clients and make sure that they don’t over- or under-stamp a deed,” says Jones.

Proactive Allocations Drive Substantial Savings.

Identifying nontaxable intangible value has a significant financial impact. Nationwide, RealAdvice data shows that proper allocation of intangibles can result in a dramatic increase in first-year Net Operating Income and that impact can continue with each year the property is carried.

French Brown believes that the RealAdvice approach of distinguishing real estate value from the overall purchase price will gain momentum in the commercial real estate industry. “This approach isn’t for every transfer of real property. However, when the buyer and seller are willing to agree to the allocation amounts before the transfer of the property, then they should be paying the transfer taxes only on the agreed amount of the real property. Paying taxes on any higher value is overpaying the state,” explains French.

Reducing taxable property values results in both direct and indirect benefits for property owners. After properties trade, new owners are often forced to pass through higher property taxes to tenants. However, establishing a lower tax basis reduces the overall gross rent for a tenant, which can create a competitive advantage in the marketplace for those owners who apply a strategic approach to acquisitions. Although apartment owners typically cannot pass property taxes directly to tenants like other asset classes do, taxes do factor into rent increases. Eliminating some of the tax burden for apartment owners can reduce the need to raise rents to offset expenses, ultimately helping to keep housing affordable for renters.

“’Real Estate Taxes’ are usually the largest expense line item for most income-producing commercial real estate properties and can be one of the largest hurdles in getting a deal to pencil from an underwriting perspective,”

says COO, Alexis Vennes, who worked in multifamily private equity prior to joining RealAdvice.

“In the current environment where everybody’s looking for ways to save on operating expenses, we are increasingly part of solving that problem,” says Jones. “We can help take a lot of pressure off other rising expense line items, such as debt and insurance costs.”

RealAdvice’s achievements underscore its commitment to reshaping conventional approaches to commercial real estate transactions, continuing as a thought leader, and setting the stage for owners to enhance underwriting certainty. As such, most clients involve RealAdvice as soon as an offering memorandum is rendered.

Amid the present economic challenges, RealAdvice is helping deals pencil that otherwise would not. Increased transaction activity increases state and local tax revenues. In states with assessment caps, like Florida and California, tax revenue increases are significant. Literally, everybody wins. The proper recognition and reporting of taxable values eliminates underwriting uncertainty and lessens bid/ask spreads. Moreover, the societal benefits of minimizing a commercial property owner’s largest operating expense are multifold. Local economies are supported as sixty job functions are required to effectuate a transaction. Transactions generate revenue for state and local government taxing authorities, especially in states with statutory assessment caps. Also, buyers are not forced to raise rents and re-tenant multifamily communities. Keeping housing affordable means those residents don’t have to move further away from employment centers. That, in turn, reduces commute times, traffic congestion, and strains on roadway infrastructure.

In addition to the myriad financial benefits, owners now have the option to alleviate various socio-environmental pressures, building a holistic approach toward sustainable and mutually beneficial urban development.

Contact the the team today at to learn more.