Understanding Different Nuances Of Taxing Jurisdictions

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How do you manage your time and resources efficiently in order to meet the demands of your growing business Ross shares his insights on how Taxonics plans to scale its business as it enters new markets ensuring that its product is user-friendly and providing the necessary information for those who need it Ross is a commercial real estate professional with 20 years of experience building and leading successful teams that create value for the real estate industry Delivering solutions through innovative technology smart people and sheer grit and determination Mentor trainer and always looking to hire someone who will help inspire the next great idea An occasional elected official avid public speaker and lover of all things offered on a raw bar menu 00 00 – 06 32 Opening Segment Ross is the CEO and founder of Taxonics They provide real estate tax tools and information to solve real estate tax problems He is also the co-founder and managing partner of cavalry real estate advisors a boutique real estate tax consulting firm Ross has spent 20 years in commercial real estate and is focused on real estate taxes 06 33 – 12 48 Taxonics The Solution for Scaling Commercial Properties The different types of real estate taxes a property owner may face Ross talks about how important it is to have a platform that provides property owners with information and data on real estate taxes making better decisions for their businesses The need for real estate tax consultants to have access to technology so they can provide their clients with self-appeal options and help them save money on taxes 12 49 – 19 02 A Platform to Help Investors Navigate Complex Tax Systems The biggest challenges for the startup were data and user interface issues in building a platform that could be used by real estate professionals The startup plans to solve for all 3 100 taxing jurisdictions with their product The startup is currently scaling to 12 jurisdictions 19 03 – 23 00 Closing Segment Reach out to Ross Litkenhouse Links Below Final Words —————————————————————————– Tweetable Quotes Getting a good accurate real estate tax forecast and thinking more creatively about how you can reduce real estate taxes before you buy and build – Ross Litkenhouse Connect with Ross Litkenhouse by following her on LinkedIn or you may visit their website at cavalryCRE com and taxonics com to know more Connect with me I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook LinkedIn Like subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts or whatever platform you listen on Thank you for tuning in Email me sam brickeninvestmentgroup com Want to read the full show notes of the episode Check it out below 00 00 52 Sam Wilson Ross Licken house is the CEO and founder of taxon They are a prop tech platform that provides real estate tax tools and information that solve real estate tax problems He s also the co-founder and managing partner of cavalry real estate advisors They are a boutique real estate tax consulting firm Ross 00 01 07 Ross Litkenhous Welcome to the show Sam Thanks for having 00 01 10 Sam Wilson me I appreciate it Hey man the pleasure s mine Ross There s three questions I ask every guest who comes on the show in 90 seconds or last can you tell me where did you start Where are you now And how 00 01 19 Ross Litkenhous did you get there Yeah well first of all let me start with this I ve spent 20 years in commercial real estate working as a property tax professional and that s probably 20 years longer than I expected to work as a property tax professional I got started when I moved to Washington DC from the great state of Alabama So Southern roots there just like you Sam from Memphis So I moved to Washington DC went to grad school My first job I kind of fell backwards into property tax working for a law Fast forward over that time period kind of the following 19 years or so joined a small regional grew to national CPA consulting firm built a real estate tax practice and then eventually through an acquisition joined a large global property tax practice and grew that as well And then after about five years Decided to take a break for a bit and then went out and launched my own practice So I could build a company in a real estate firm the way that I wanted And then beyond that realizing that there are some opportunities in the market to productize some of the services that we provided decided to launch a tech platform as well So yeah I m running two things in parallel both in the same space both in property tax which again has been my 00 02 27 Sam Wilson That s wild So a property tax professional like yeah What does a property tax professional do I mean I 00 02 35 Ross Litkenhous don t even know what that means Yeah Well similar to the opening that you made I mean our job is to help real estate owners investors managers developers Understand control and reduce real estate taxes And so my career has really been focused on and actually let me put this out there because for folks that may be listening in when they think of property tax or a number of property taxes out there you ve got personal property tax real property tax that falls under the umbrella of what we call state and local taxes which are sales and use gross receipts I mean you can start throwing acronyms left and right My focus has been on real estate tax And so I represent real estate owners primarily co When you get a real estate assessment if you want an office building or a shopping center a jurisdiction a taxing jurisdiction s gonna put a value on it And then they re gonna apply generally a tax rate or a millage rate And that s your property tax bill My job is helping navigate that right What am my taxes going to be if I m gonna buy or build a property What am I need to budget my taxes to be for a property that I operate And then if I get a real estate assessment and I don t like that assessment cause it s gonna result in a higher tax bill I m gonna hire you to help me control and reduce that And so it s all around managing understanding and reducing real estate Taxe 00 03 45 Sam Wilson That s absolutely wild I think it s unfortunate We have to have an industry completely designed around keeping the tax man out of our back pocket but that s just the way that 00 03 54 Ross Litkenhous I think if it was simple I wouldn t be in this business but it is unnecessarily complex in some cases it really 00 04 00 Sam Wilson truly is And we ve seen certainly everyone is seen their property tax bills especially as valuations especially in multi-family properties valuations On sky high And so if you underwrote your five year plan in 2016 or 2015 in 2020 you re paying a heck of a lot more in tax or now in 2022 versus 2017 then you were in 20 or 20 22 versus 2017 So whatever that winds 00 04 25 Ross Litkenhous up being and that s it s interesting You mentioned that Sam because I think it s important too for folks to understand that when you mention multi-family those real estate taxes dropped to the bottom line So if you re an investor And you mess up and you ve estimated real estate taxes over that 10 year period of your DCF And that base year is wrong and those assumptions are wrong You re going to eat that You re gonna eat that pain and that s painful cuz you re not passing it through to the tenant I d say office property owners retail owners they re able to pass some of those taxes or most of those taxes due to their tenants but multi-family if you re wrong you re gonna feel it That s 00 04 56 Sam Wilson absolutely right I think that s a really it s a challenging spot to be where you say okay how do I estimate maybe that s a question I have for you Is how do you underwrite and estimate where taxes will be in year five of your ownership Cuz again they re using these valuations based on comparable sales I think most of the time where it s like oh Hey cool Ross you own the 150 unit next door to mine And so since you sold yours for 20 million and Sam you bought yours for 10 looks like yours is worth 20 now Sam So how do I as an investor even 00 05 23 Ross Litkenhous underwrite that Oh my gosh If we had hours days of a podcast to go through this let me start with this There are 3 100 different taxing jurisdictions in United States of America and each one of them assesses and tax and taxes real estate slightly differently Right Generally speaking All of those assessments when you receive your assessment it s supposed to be based on fair market value That is kind of the that s the start And it trickles down into different ratios and tax rates and milit rates and taxable value versus non-taxable value But generally speaking the value of real estate s supposed to be based on fair market value So your comment about a comparable sale or a transaction oriented environment is correct However For commercial real estate generally speaking if it s an investment real estate it s going to be based on the income that the property generates And so when you break it down to how am I going to forecast my real estate taxes You re taking a look at a couple different things One what happens when I buy the property Are they going to chase that sale After they chase that sale or after they peg it close to the sale After the assessment following the transaction you re really looking at an income valuation and it almost always distills down to a very simple direct capitalization analysis So your rents your vacancy your expenses replacement reserves capitalization rate loaded with the tax rate you get that direct cap So when in terms of estimating those real estate taxes you d mentioned year five your fir your best bet is say okay well how does this jurisdiction treat a property That s just been acquired right That s gonna be your year one Right after that transaction takes place And then down the road you ve gotta understand the nuances and the methodology And in most cases that s going through an exercise of determining the valuation based on some income approach That s the vast majority of it As I mentioned before thousands of different taxing jurisdictions understanding those nuances are important And that s one of the things that we ve tried to productize is part of our taxon platform because it is confusing right A lot of 00 07 14 Sam Wilson It really is And I think that the deeper you get into a market I would think the easier it becomes to kind of project where things are cuz you get to know kind of how the taxing authorities work in that particular area I know that certainly we ve passed On deals just because of what we figured out we hired somebody similar to yourself where we said Hey you know what We re looking to make this acquisition in a certain location And they just said look you guys once you acquire this is where your taxes are going And this is not an area where they re gonna be very favorable to even changing any of it So you re about to get hosted and actually it turned the deal upside down We had to walk I said you just we just can t 00 07 50 Ross Litkenhous buy it Look And you know this Sam I mean real estate taxes are your single largest operating Most people think of them as fixed expense That s what I was taught when I was in business school It is a fixed expense Meaning generally unless your property s exempted you got some abatement credit that type of thing You re going to be paying those taxes However it is variable in that sense meaning you could be higher than what you think it is and frankly you could lower it lower than what you think it s going to be So there is some there s some fluctuation there and understanding that is absolutely critical when you re 00 08 17 Sam Wilson underwriting a Talk to me about tax ons What is the problem in the marketplace that you are solving with this platform 00 08 27 Ross Litkenhous So generally speaking the industry that I work in is property tax professionals but which by the way you will never see listed on jobs com muster com classified ads You Don even a job doesn t even like hit the radar when you re in school That industry interestingly enough Is really very human capital intensive highly paid professionals typically working on contingency fee to appeal your assessments In a lot of cases highly fragmented I d mentioned there s thousands of different taxing jurisdiction There are probably that many firms across the country that maybe Specialize in a particular locale You ve also got some global and national Here s the thing There is no centralized resource for property owners and your podcast is all about scale right So you re going for maybe a small property that you own in one particular jurisdiction or one particular MSA and you re scaling larger assets more jurisdiction in order to kind of get a one stop shop meaning you re trying to kind of just Sniff around scratch the surface for some real estate tax assumptions During underwriting there is no central location for you to go meaning a technology a platform for you to be able to answer those questions A lot of the questions that we just covered a moment ago also There is no self appeal option Generally you re going to hire somebody like me Those fees are expensive in some cases are not accessible And in most cases this type of work is done on contingency So if I m a contingency based contingency fee based provider you come to me with a 5 million asset I m gonna charge you 20 in savings cavalry my consulting company we charge 15 which is towards the lower end of that range nationally but the lower the asset the lower the taxes the lower the potential fee And so in some cases you ve got this You ve got this vast kind of silent majority of commercial property owners out there That own properties that are under 5 million that in some cases can t even get the access to a consultant that they want because the juice isn t worth the squeeze for that consultant So taxon is really the Genesis for that Was to provide a centralized platform for real estate tax information and data So people can make better decisions themselves We want to empower the landlords empower the owners empower the developers to make those decisions themselves And part of that platform for those individuals who may be scaling who can t get the attention Of a tax consultant a provider don t know where to go We give them a self appeal option Meaning I give you all the tools as a professional the platform the evidence the applications the documentation for you to analyze your property Am I paying too much If I am what do I do about it What do I say How do I proceed And we feed you with that information And here s one distinction that I wanna draw because This usually this analogy or this comparison makes sense We re cavalry My consulting practice is kind of like your CPA for income tax returns Okay That s how the vast majority of real estate tax professionals operate tax ons is like your turbo tax version Right So as you scale you may move from a tax ons up to a more complicated portfolio where you need high touch white glove service We found a need in that particular segment of the market to give them the tools in a tech platform And frankly our industry as a whole is 10 20 years behind everybody else And so the time is right The data s there the tools there the technology is available We felt that we could productize our services and service segment of the commercial real estate industry Better Then they ve been served leading up to this point 00 11 38 Sam Wilson That s really cool I want to hear more about that but you brought up a really interesting point that I hadn t thought about which is that you re right Some and again this is why you built the platform So I m just repeating your you in some regards but it s like it s not 5 million Well I m reinforcing the idea Yeah Which is that sub 5 million bucks It s probably it s one it s cost prohibitive For the people that own properties of that size to hire the right people to come on And then the people that you need to hire don t wanna do it either Cuz like you said the Jew didn t worth the squeeze 00 12 08 Ross Litkenhous That s exactly right And here s an interesting statistic Okay There are 11 million commercial buildings in the United States Prized of approximately 55 million real estate tax parcels If you look at the bell curve of value associated with those 11 million buildings and 55 million tax parcel 80 of those are slightly more actually valued at under 5 million Right And so most of the work that we ve done traditionally as real estate tax consultants we focus on the institutional folks The properties that you read about in the business journal the ones that everybody talks about in transaction newsletters nobody s talking about the vast kind of silent majority of individuals out there that own properties that are meaningful for them Right But aren t necessarily being served or meaningful for folks in that kind of traditional consulting environment And so that was the problem that we wanted to solve That was the niche that we wanted to 00 12 58 Sam Wilson Right No that s really that s really fascinating I love that What were some of the challenges both from either a data perspective or from a user interface perspective in building this out Cuz I imagine there was a lot of variables Especially like you said I can t remember how many jurisdictions taxing jurisdiction too many Yeah You said talk to us about that a little 00 13 19 Ross Litkenhous bit Yeah Let me be clear We have not solved for all 3 100 different taxing jurisdictions At this point we plan on it right We wanna be the most trusted and trafficked platform for real estate tax information tools I mean at that scale like co-star level scale We think that we can solve for that So that s taken the grand vision The biggest challenges that we have frankly like take the technology challenges out of it Take the data challenges out of it What are the biggest challenges we have of launching a business remotely in the middle of COVID Right Aggregating the resources aligning vision aligning mission So that that in and of itself is a challenge And we ve overcome that challenge And I think one day I may write a book on launching a startup in the middle of a pandemic which I hope it s one of those stories that was like one of the greatest businesses ever started in a downturn started in a pandemic Right Great story So so that challenge of starting a business in that environment was probably challenge number one challenge Number two Because real estate taxes are so niche and because they can be so confusing right If you ve ever had to go to your tax assessor s website and try to get questions answered you re talking about building a product for millions of people that don t understand how real estate taxes work And so basic questions that need to be answered Not to mention the fact that this is a self-service platform It s not like Sam picking up the phone and calling Ross and say Hey walk me through this You ve got to build a platform so anybody can go to They can walk themselves logically through the process which is find my parcel Give me the information that s connected through our database and our platform help me aggregate that help me analyze my property help me navigate it so I can get the questions and the tools that I need And you have to do it in a logical way that anybody can understand it That s a very real challenge It s a real challenge to be able to build tools for folks in an investment environment that are valuing things But man it s a it s another challenge altogether to take this kind of property tax geek speak and distill it down into something that people can logically move through themselves and do it without handholding from a consultant 00 15 14 Sam Wilson Yeah Go gosh Absolutely Absolutely I look forward to checking that out to tell me is this something that you can use On a pre-buy I mean is this a platform where you can go and kind of use it as a market 00 15 25 Ross Litkenhous research tool Yeah so we launched our first two beta products here in Washington DC and we re scaling to a dozen and a half other jurisdictions as we speak we decided to launch with two products and I spent most of the time talking about this idea of self appeal but we actually launched with a second product So our first product the self appeal is called protect Obviously protect your bottom The second product that we built and that we launched is called inform And that s one that we re actually really excited about because it has an institutional investor application but it also has application for anybody that s looking at buying a property And that initial product tells you everything that you need to know about how a jurisdiction assesses and taxes real estate And we ve got special issue sections in there that cover new acquisitions and develop It goes over the timing the methodology And so if you were to buy that report if you re looking to do a deal in Washington DC everything you need to know to be able to make an informed decision unintended about your deal is gonna be captured in that report And so our goal is to take all of this information that we ve acquired as professional tax consultants over 20 years distill it down with context into products So Big small in the process of scaling can get the questions that they need answered So they don t walk into a property tax landmine So that product is available for DC And again we are quickly scaling to another dozen and a half jurisdictions through more of a subscription based model where maybe some of your listeners Find out that they need to do a deal in a particular jurisdiction or find out that they need information about that jurisdiction that can come to one place get all the questions answered that they need to be able to make an informed real estate tax decision and they don t blow up their deal 00 16 59 Sam Wilson That s really cool I look forward to that going nationwide Tell me this What is one challenge that is holding back and or an obstacle you have to overcome in order to really take this nation 00 17 14 Ross Litkenhous So I I think probably our biggest challenge which we methodically planned this out So it wasn t an unforeseen challenge Well there s really two challenges One because of the nuances associated with every jurisdiction you have to build a process to gather that information and incorporate it into a product So you have to be very methodical about building out that process of information gathering And so it s almost this kind of Industrial engineering exercise And so that was one big challenge When you think about scaling beyond just a couple places the second big challenge which we knew and which we re going through right now before our big sales initiative kicks off in about a week and a half two weeks And that is That is making sure that we get appropriate user feedback which is why you go through kind of a beta test And so when you re building something that is obviously impactful for anybody that owns real estate you also need to get good feedback And so you ve gotta be able to reach out to people and say Hey listen here s what we built What do you think Give me some ideas and then you have to quickly iterate on that And so I wouldn t say it s a challenge that s unique to our business cuz it s a challenge with any tech startup but what is unique is that we re dealing with something that can be fairly nuanced And so in order to get that information that user feedback sometimes you gotta go two or three iterations deep into a conversation and make 00 18 23 Sam Wilson that happen Yeah absolutely I like the word nuance there That s certainly one of the things that we are up against Ross I m looking forward to that product coming out checking that out That is certainly a need that we have in the marketplace And I m not seeing anything else like it obviously which is for why you guys are putting it together That s right 00 18 40 Ross Litkenhous Patent Didn t ready to go man We be the first into the market and we feel that we 00 18 44 Sam Wilson That s awesome I absolutely love it Let s get into some more tactical questions If you don t mind real quick we ll spend a couple minutes here and then wrap up but here s a couple questions I would have for you What do you feel like some of the biggest mistakes property owners are making as it relates to their property taxes 00 19 01 Ross Litkenhous Well oh man A couple things you want the biggest or just a couple whatever 00 19 05 Sam Wilson comes to mind I mean 00 19 06 Ross Litkenhous okay It was all about I think the big I think the biggest probably touches on what we discuss which is proper planning I think if you were to talk to most real estate investors and you were to talk to most real estate professionals that are in the business of acquiring or developing properties I think they would rather plan even if they don t like necessarily what the future holds but at least know how to plan around it than they would Not planning well and then again walking into that tax landmine and being upside down on a property And so I would say that s probably number one not getting a good accurate real estate tax forecast The second I would say is Thinking more creatively about how you can reduce real estate taxes before you buy and build There is an absolute plethora I mean an endless number of real estate tax exemption credit and abatement programs out there I m talking some of the craziest stuff that you ve probably ever or never heard of and getting creative in thinking about those different opportunities where why pay tax if you don t have to And again it goes everything deep down the agricultural exemption brownfield tax credits enterprise empowerment zones I mean there are an endless number of tax credit programs that people can dig into And so I would say that s one area If you re looking to really sharpen the pencil and you re really looking to boost yields and gain a competitive advantage even through the underwriting process before you get to final bids on a proper Thinking about how you can kind of sneak in there reduce your real estate taxes give yourself a little bit more of a competitive advantage and maybe pay a little bit more But knowing that you re gonna get it back when you save that money down the road So I would say those two things kind of specifically are probably overlook to to some degree 00 20 39 Sam Wilson Man That s absolutely fantastic And there s and I hate to say it but I just don t hear that much Talk about it Like when you look at all the shiny deals coming across our desk and all the projections and opportunities like very rarely do you see something in there where they re like Hey by the way we re gonna kick but take names because we ve worked out a really cool rebate program on the taxes and here s how it s gonna come straight 00 21 00 Ross Litkenhous That s exactly right And some of the coolest client interactions I ve had when we ve been able to identify this Lesser known real estate tax credit All of a sudden they go in there guns a blazed knowing that they re gonna be paying 50 lower taxes than anybody else That s bidding because they got an ACE up their sleeve That s a really cool value to 00 21 17 Sam Wilson deliver Yeah very cool Ross I absolutely love it Thank you for taking the time to come on the show today If our listeners wanna get in touch with you and learn more about you and nor the taxon platform what is the best way to 00 21 29 Ross Litkenhous So we got a couple different ways I can go to taxon com or you can reach out to me through LinkedIn I m proliferal on LinkedIn in terms of posting would love to connect with anybody that s interested My information is pretty publicly available out there So you guys reach out to me through taxon or cavalry One thing I would leave you with Sam for your listeners I spend a lot of time writing blogs on our cavalry website under our consulting firm and that s cavalry CRE so C a V a L R Y cre com If you re looking for more kind of interesting tips and tools of the trade wanna know something more about some of these nuance things we re talking about That blog is great Otherwise follow Taxonics we got a big launch coming Here in a few weeks in the DC area we re still in our pre-series a fundraise We re almost closing that out The response has been huge If anybody s interested in talking with us about investing in our platform I d love to chat with them too but otherwise listen I m a property tax nerd I ve built my career around it If you guys ever wanna talk property tax don t hesitate to reach out You ll always find a willing 00 22 28 Sam Wilson ear Awesome Ross thank you again for your time today Certainly appreciate 00 22 32 Ross Litkenhous it 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