Property Tax

[Anonymous]

Property tax is a derivative of the property assessed value (usually recent sale).
Calculating it as a % of the final value will result in a circular error.
Is there a way to somehow bypass it by using excel?
Thanks,

[Spencer Burton]

Hi Noam,

Thanks for the question. A variation on this question was asked in our Anatomy of the DCF course. That answer might also be helpful.

https://www.adventuresincre.com/academy/forums/topic/reversion-sales-price-property-tax/

In terms of your question as to how to handle the iterative nature of property tax calculation in your analysis. There are a couple of options.

The first is to use Excel’s iterative calculation feature (File>Options>Formulas>Enable Iterative Calculation) and write a circular reference. But as I discuss in the linked thread above, I don’t recommend that.

The second is to do a side calculation to determined assessed value. This is what I do in practice as it’s the closest to what actually happens in the real world. Also, I prefer this method as it makes me think through the tax assessment rather than purely relying on the model’s built in calculation.

The third is to use the previous year’s NOI to calculate the tax assessment in the current year. I haven’t used this method yet in any of my models, but if you’re looking to make the property tax calculation fully dynamic, this would do it. And since property tax assessments lag the real value, basing the assessment off the previous year’s valuation makes sense. The only downside I see is that implementing this in a DCF would require tracking the property value at the end of each year.

Thanks again for the question, and please let me know if you have any others.

Spencer

[Anonymous]

Thank you, Spencer, for the detailed answer.

[Author]

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