Your Guide to Property Tax Forecasting

Property tax forecasting is a dynamic process that has implications for company-wide tax-planning activities. Because property taxes are typically one of the largest operating expenses for real estate companies, your annual tax liability has a significant impact on corporate profits, resource planning and allocation, and business strategy.

But how do you develop an accurate property tax forecast, particularly when you’re resource-strapped and swimming in data? In this article, we share the two forecasting methods typically used by property tax teams and when you might opt for each approach.  

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Two Approaches to Property Tax Forecasting

Regardless of which method you use, real estate tax teams will simply refer to their internal process as “forecasting.” Here at Rethink, we refer to the forecasts based on what input(s) you rely on: taxes and/or assessments.

Tax-Based Forecasting

A tax-based forecast is reliant on a single variable: last year’s taxes. Completing your forecasts this way is a relatively simple concept: you take last year’s tax and trend it by some percentage or amount to get this year’s tax. Multiple years can be trended year over year by adjusting this one variable.

But how do you decide what percentage or amount to trend your taxes by? While this varies by company, you’ll typically rely on data from:

• Historical trends within the jurisdiction. By reviewing the percentage change in the jurisdiction in previous years, you may make assumptions about the projected change for the upcoming year.  ‍
• Jurisdiction-level nuances or one-offs. Things like incentives, abatements, and pre-negotiations can all factor into your anticipated tax forecast in a jurisdiction. Some jurisdictions are also more active from a property tax perspective, perhaps deciding (for example) to raise the rates in a given year. ‍
• Your own knowledge of properties in your portfolio. When forecasting, you’ll pull in knowledge of ongoing or upcoming construction, demolitions, and renovations, as well as your specific corporate strategy (such as a focus on certain markets or property types).  ‍
• Advice you receive from consultants or third parties. Consultants often have relationships with local assessors and other stakeholders with the jurisdiction. Together with their own internal methodologies or trends within their dataset, third parties can often provide strategic advice in developing forecasts.
  

A common use case for tax-based forecasts is if you’re completing forecasts for non ad valorem taxes. A non ad valorem (or NAV) tax is charge on your property tax bill for services or infrastructure that affect or are used by the property, such as waste disposal, water, or other local improvement levies. NAV taxes don’t have an associated tax rate as they are consumption or usage based. Here at Rethink, we typically see clients using the tax-based approach when forecasting NAV taxes.

Assessment-Based Forecasting

Unlike the tax-based method, an assessment-based forecast is a two-variable forecast. With an assessment-based forecast, you’re trending based on both a value and a rate and each can be trended differently. Like the tax-based method, your assumptions here will follow historical data, jurisdictional or property nuance, or advice from your third parties/consultants.  

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When to use the tax vs assessment method for property pax forecasts

Your decision to use one method or the other will likely depend on internal accounting practices and portfolio nuances.  

On the surface, the assessment approach is preferable for property tax forecasts if you have multiple bills based on a single value. Consider a scenario where you receive multiple tax bills, one for each a city, county, and school. Each has a different rate but all are based on the same assessment. To come up with the most accurate and detailed property tax forecast, adjusting both the value and the rate will be the best method.  

We typically see companies leaning toward a certain method based on their geographical location. In our experience, Canadian companies are more likely to use tax-based forecasting, while U.S. clients are more likely to use assessment-based. But for many companies, it makes sense to use a combination of both methods: a U.S. company, for instance, may employ the assessment-based approach for their property tax forecasting, combined with the tax-based method to calculate their NAVs.  

Optimizing property tax forecasting using technology

Of course, forecasting is a complex process and most property tax systems aren’t powerful enough to help you develop robust, accurate property tax trends. When we developed itamlink, we worked with property tax teams to develop the best possible system for creating forecasts. As such, we’ve developed internal tools to support your forecasting processes, regardless of the method you prefer. But we’ve also ensured it’s simple enough to complete the more complex (and more accurate) assessment-based forecasts.  

Whatever tools and systems you use to complete your forecasts, having an up-to-date system of historical data will be one of your most important assets. For more support in developing your property tax forecasts, check out the other articles in this series:

• 3 Challenges of Creating Property Tax Forecasts and Budgets ‍
• Streamline Property Tax Budgeting and Forecasting with Software ‍
• Cash vs Accrual Tax Accounting for Property Tax

This article was written by Samir AlSalah, Customer Success Team Lead at Rethink Solutions.

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