Why Tax Appeal Fees Should be 5% or Less
The tax appeal opportunity

Commercial real estate (CRE) owners and asset managers of all property types typically review annually and appeal, when warranted, real estate taxes by challenging the value assessed by local governments – so CRE owners are well versed with this opportunity of lowering real estate taxes.

Historical fee arrangements

The typical fee charged for a tax appeal is 20-25% of the tax savings in low tax (e.g., 1% tax rate) jurisdictions and 10-15% in high tax (e.g., 2%+ tax rate) jurisdictions. Fee percentages have remained at these levels for decades.

Tax appeal consultants and law firms alike have not been the best at applying technology to squeeze out inefficiencies in the tax appeal paradigm. And if they have, they certainly have not demonstrated any willingness to pass on that savings to their clients – this is known because fee arrangements have not come down significantly.

Applying technology to re-invent the appeal fee paradigm

The activities and workflow for the tax appeal business can be categorized into two buckets: administrative and valuation. The valuation bucket could also be considered the evidence development.

Software can be trained to understand all of the government appeal related rules, so a software application instructs humans on what needs to be done and when. For example, the application alerts humans on impending filing deadlines. For each element of administrative tasks, the application could auto generate letters, forms, evidence packages, and so on.

Likewise, technology can be used to automate the valuation work. Auto valuation software can auto-ingest income statements, rent rolls, comparable sale transaction data, and other market data. Auto valuation software can auto produce income approach evidence that can be used for the tax appeal submission.

By utilizing technology, the hours incurred by humans involved in the tax appeal business could be greatly reduced – without sacrificing the quality of evidence development or achievement of obtaining lower values.

It is estimated that the amortized hours per property over a large (e.g., 50 or more) portfolio of properties is twelve hours. With the adoption of technology, the twelve hours could be reduced to four hours. Using this increase in productivity, a 15% fee could be reduced to a 5% fee. There are further productivity gains achieved from year to year, which puts a 2.5% fee in sight.

Meaningful financial savings

It is not uncommon to pay five and six figure appeal fees. A 20% value reduction on a $100 million value with a 2% tax rate would result in a $60,000 appeal fee using a fee equal to 15% of the tax savings. A 5% fee would reduce the fee from $60,000 to $20,000; a 2.5% fee would reduce the fee to $10,000.

Imagine a portfolio of one hundred properties experiencing fee savings of $50,000 per property (i.e., an 83% reduction) each year for five years. That could equate to a capitalized increase in portfolio value of $400 million.

CREyield is leading the way
CRE owners should embrace those tax appeal companies that are driving dramatic fee compression via technology adoption – CREyield is leading the way. By doing so, CRE owners could bring appeal fees down to acceptable levels – eliminating the excess. Increasing efficiencies and reducing operating costs are what great owners and asset managers do.