Patrick G. Price is a Director of Property Tax for DuCharme, McMillen & Associates, Inc. (DMA). DMA is a leading state and local tax consulting firm, and Mr. Price works in the Atlanta, GA office.
DuCharme, McMillen & Associates, Inc.
There is an ample supply of information distributed on a daily basis about managing the “operational costs” of your data center, or about the evolution in design/construction, the latest advances in cooling technology, and so on. Certainly, managers of data centers focus a lot of attention on energy efficiency, PUE’s, redundancy, security, etc. But who’s properly managing their property tax expense?
Aside from the most obvious, like energy, the property tax can be one of the higher annually-recurring operating expenses of your facility. Yet it seems very little attention is given to this topic; at least little written information is distributed to owners. I’d like to address this briefly in this article.
Assessors Not Familiar with Data Centers
To the uninitiated, the property tax can seem somewhat mysterious and arbitrary – and beyond your influence or control. However, in its simplest form the tax is supposed to be based on the property’s “fair market value” (FMV). This is a straightforward concept when it comes to the “normal” types of commercial & industrial properties like office buildings, retail centers, or distribution warehouses. But the fact is that those charged with the task of establishing these valuations – tax assessors – are often less aware of the nuances or specialization of the data center facilities you own.
The reality is that the assessor may only have one or two such properties in their jurisdiction, he/she may have never seen one sale in that area, and they aren’t likely exposed to the larger “world” of the national data center market. So to that end, we’d like to address a few items that you should be sure to explore in considering whether your tax assessment valuation has been thoroughly and properly considered by the assessor:
Cost ≠ Value. Too many assessments of new data centers are based simply on the initial cost of development. However, this will often capture non-value-added expenses or intangible costs that aren’t subject to ad valorem taxation. Moreover, once you’ve established the proper “cost”, this does not mean the property could be resold at that same price (FMV). Unlike most types of commercial property, there are some asset types that depreciate rapidly or suffer from obsolescence, and tend to sell for less than initial construction cost. An example to consider is manufacturing – these buildings virtually always sell for less than original cost. So don’t accept your construction cost as the basis of tax assessments without at least some additional scrutiny and confirmation.
Depreciation Rate. Most assessors use some form of the cost approach in their assessment process – a method whereby “replacement cost” is estimated on a current basis, and depreciation is deducted. The problem is that their depreciation schedules are most likely representative of the more “typical” types of commercial & industrial property – which may have a much longer economic lifespan than data centers. A simple illustration of this facet is to think of the allocation to mechanical and electrical components, which are short-lived items (compared to a building’s structural components). In typical construction projects, these components might represent roughly 20% of total building cost. In a data center project, however, you’re aware that these components can easily represent 50 percent or more of total cost. As such, the annual depreciation schedule used by the assessor on these unique building types must be accelerated from normal assessment practice.
Obsolescence. As mentioned, most other property types don’t change or evolve as rapidly as data centers. Those in this industry have witnessed the dramatic changes in preferred design, the gains in efficiency, and the influence of technological advancements…all of which will undoubtedly continue. Therefore, it is highly probable that the data center you construct today will not be the “preferred design” ten years from now. It most likely will not incorporate all of the features, technology or efficiencies of that future ideal product. Thus, one must explore the possibility that the building exhibits additional depreciation in the form of functional obsolescence. Likewise, a property can suffer from external or economic obsolescence – perhaps excess capacity or, more likely, energy costs that rise to the extent that your particular location isn’t as competitive in the DC market as it once was, at the time of construction. Likewise, many states are aggressively pursuing data centers with extensive incentive packages and favorable tax treatment. This can diminish the resale value (FMV) of an existing data center if such incentives aren’t available to the hypothetical prospective purchaser. Remember, although your property may not be for sale, this “hypothetical sale transaction” is supposed to be the basis for the tax assessor’s valuation of your property.
Double-Taxation. Because of their special-purpose nature, and the close integration of both asset categories, it is easy for a taxpayer to be assessed twice on the same components. You may be filing returns and paying tax on the “Personal Property”, while the assessor is valuing the “Real Property” at a value so high that it inherently includes the contribution of many of those items of tangible personal property. While some of this can be subjective and a little cloudy at first, we have seen many explicit examples where the same individual asset was specifically listed on both the Personal and Real Property assessments. You could be paying part of the tax twice.
All of the above issues, and many more, need to be considered to determine whether your property tax assessment valuation is fair and equitable – and thus, if you are paying only your “fair share” of the tax burden. It would be impractical to try and cover all such material in a brief article such as this one. That said, given the magnitude of the property taxes on these facilities (and the likelihood that property tax rates will only continue to rise), this is an area of your annual operating expenses on which you should continually focus in the future.
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