Property Tax Column Mischaracterizes Real Estate Investment Trusts

In suggesting that prices paid by real estate investment trusts are to blame for inflated property taxes, Mark Hutcheson, author of the Tax Notes column “How Assessors Unfairly Penalize REITs” (June 2004), has completely mischaracterized the state of today's publicly traded REIT market.

To set the record straight, REIT executive compensation is based generally on company performance, not on the number of property acquisitions. A REIT's capital inflow does not necessarily translate into a demand for property. The 75% real estate asset test Mr. Hutcheson refers to has no bearing on the matter because cash and cash items qualify as “good” assets, according to the Internal Revenue Service.

REITs raise capital when they see an opportunity to invest in a particular property, not merely to buy any property. Ultimately, today's publicly traded REITs are among the nation's most disciplined corporations in terms of their acquisition strategies. In fact, executives often lament the pricey state of the market and emphasize how selective they have become in adding to their portfolios.

There is no meaningful evidence that prices paid by REITs for property acquisitions are above market value. The outdated research Mr. Hutcheson referenced, compiled from apartment sales in three cities between 1991 and 1997, is hardly convincing or conclusive; even the authors qualified their work by noting that no premium was evident in one of the cities, and that in the other two there was no reason to believe that such behavior, if it were to exist, would persist.

One can always make the point that taxes are too high. But this reader found wading through Mr. Hutcheson's twisted logic far more taxing.

Jay Hyde
Vice President, Communications
National Association of Real Estate Investment Trusts (NAREIT)

Editor's Note: The purpose of the article was to provide REITs with some additional tools for negotiating their property tax appraisals. The article outlines several factors that may explain why REIT transactions can result in lower cap rates than non-REIT sales. The factors discussed were derived from articles in peer review publications directed at the appraisal industry. These articles were authored by senior MAI (Member of the Appraisal Institute) appraisers. Whether one agrees or disagrees with the premise that REITs pay a premium for real property, the ability to utilize appraisal research to distinguish below-market cap rates, in instances where that occurs, should prove to be very helpful when negotiating property tax appraisals.

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