Commercial Tax Administration Is Different
Tax administration is an area that must be professionally managed by all servicers, whether their portfolios are residential, commercial, or both. But for lenders and servicers contemplating a first time move into the commercial arena, tax administration is a little....different. To say the least.
First of all, commercial tax risk can be tremendous. Missed payments can mean penalties ranging from 1.5% to 10%, depending on the jurisdiction. For a $10 million property with a $100,000 tax, that means a missed tax payment could cost a servicer between $1,000 and $10,000.
Also, to get a commercial property set up properly, servicers can run into nagging difficulties trying to get correct or updated legal descriptions, especially for larger commercial properties. Further complicating matters, land and buildings may be subject to multi-year tax abatement programs, special assessments or other governmental programs. Just tracking year after year changes associated with these programs can be a challenge.
Customer service demands are also more intense with commercial property owners. They are often required to present evidence of tax payments to tenants who contractually pay a percentage of the bill. Or to investors as part of financial reporting requirements. They have more detailed questions about tax issues, need receipts and other kinds of documentation more often, and are more likely to require research and additional follow up tasks than residential property owners.
Fortunately, there are sophisticated tools and tax administration professionals available to help servicers manage the special requirements of their commercial portfolio. Whether they elect to establish their own internal tax administration team, or outsource tax management to outside experts, servicers must recognize and evaluate the following critical factors.
Technology is Essential
Regardless of whether tax administration is managed internally or outsourced to a tax management partner, a robust technology solution is essential to any commercial servicing operation. Automated systems can reach out to taxing authorities and 'grab' information, making data readily available to clients. They can automatically track payment requirements by jurisdiction, using business rules and calculation engines to determine the impact of tax liability.
Servicers can use imaging technology to make sure payment receipts and other documentation is readily available to commercial owners. By deploying Web-enabled solutions, they can also provide their borrowers with instant access to tax information. Commercial property owners can determine the tax status of their holdings by simply logging on to the servicer's website, and accessing data provided by outsourced partners.
Ultimately, commercial servicers must identify a technology solution that has been developed by tax administration experts in the field, and compare the features and functionality of that technology with the cost of developing an in-house solution. They must also consider the tools required to access data from vendors or taxing jurisdictions, and determine how best to accomplish this objective.
Customer Service Expertise
Servicers must hire experienced commercial tax administration personnel, train existing personnel about the requirements and nuances of commercial tax, or work with a well-respected outsourced partner in the field. Regardless of the approach, servicers should expect more complex requests and problem-solving demands on their customer service organization.
There are vital skill sets customer service personnel must posses to be knowledgeable and proficient in commercial tax administration. They include:
* The ability to research and understand complex commercial tax issues
* Familiarity with commercial property valuation
* Accurate, detail oriented reporting with appropriate documentation
* Excellent communication and relationship building skills
* Pro-active problem solving skills to prevent an expensive tax issue before it arises
Servicers must be certain that the people on their customer service team, and those they interface with in partner organizations, are experts in the commercial tax field.
Especially for servicers without broad experience in commercial tax administration, working with an outsource partner that offers a 100 percent guarantee provides a great risk cushion. The firms that offer these guarantees protect servicers by covering tax penalties and interest they may incur as a result of an oversight by the tax administration partner. That means that if a tax payment is missed and it results in a penalty, the outsource partner will pay that penalty.
When evaluating potential tax administration partners, servicers should thoroughly understand the guarantees companies offer and make sure they are comfortable with the terms.
Planning is Key
As with any new undertaking, planning is the key to successful entry into commercial mortgage servicing and to managing the special requirements of tax administration. The challenges may be different, but the requirement to manage tax payments efficiently and minimize risk and liability for the institution is the same as for residential portfolios. By using the available tools and tapping into the expertise of professionals in the field, servicers can move into commercial mortgage servicing with confidence.
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