While much of the discussion around Creative Media & Community Trust (CMCT)'s Q1 2024 earnings call centered on the company's efforts to strengthen its balance sheet amidst rising interest rates and a potentially cooling real estate market, a single, seemingly innocuous detail caught our attention: a "one-time benefit" from a real estate tax adjustment in the fourth quarter of 2023. This adjustment, barely a blip on the radar of most analysts, may be the canary in the coal mine, signaling a much larger trend within CMCT's burgeoning multifamily portfolio.

CMCT, known for its creative office properties catering to the tech, media, and entertainment sectors, has been strategically shifting its focus towards multifamily assets. This shift is evident in its recent acquisitions of three properties totaling 696 units and the two development projects in Los Angeles set to deliver 104 additional units by mid-2025. The company is aiming to create a more balanced portfolio, capitalizing on the perceived resilience of the multifamily sector in uncertain economic times.

The real estate tax adjustment, however, suggests something more profound than a simple diversification strategy. It hints at a shrewd tactical maneuver by CMCT, exploiting a potential undervaluation of its multifamily properties, specifically the two acquired in Oakland, California.

Oakland, having experienced a surge in multifamily construction between 2018 and 2022, now finds itself grappling with excess supply. CMCT, capitalizing on this oversupply, acquired its two Oakland properties at a "substantial discount" to replacement cost. This discount, likely factored into the assessed values of the properties, would naturally result in lower initial property taxes.

Here's where the "one-time benefit" becomes particularly intriguing. Property tax assessments are typically conducted periodically, often annually. If, as CMCT projects, the Oakland market continues to absorb the excess supply, rental rates will rise, driving up property values. This, in turn, will trigger reassessments, leading to higher property tax bills for CMCT in future quarters.

The "one-time benefit" could, therefore, represent the last gasp of artificially low tax burdens on these properties before a wave of reassessments reflecting their true market value. This implies that the current multifamily NOI, while showing significant room for improvement through occupancy gains and rental rate increases, is actually *understating* the true earnings potential of these assets.

CMCT Multifamily Occupancy Trends

CMCT's consolidated multifamily occupancy has been steadily increasing. The company anticipates achieving stabilized occupancy in the mid-90s range.

Potential NOI Impact

Let's examine the numbers. CMCT's consolidated multifamily occupancy reached 84.5% at the end of February 2024, up from 79.3% at year-end 2023. The company anticipates achieving a stabilized occupancy in the mid-90s range. Assuming a conservative 5% increase in rental rates across its Oakland properties, coupled with a hypothetical 20% increase in assessed values leading to a corresponding jump in property taxes, the potential NOI boost could be substantial.

While it's impossible to pinpoint the exact impact without access to CMCT's detailed property tax data and assessment schedules, the underlying implication is clear: the "one-time benefit" may be a harbinger of a much larger, recurring surge in multifamily NOI driven by reassessments that accurately reflect the appreciating value of these strategically acquired properties.

"Fun Fact: Property taxes are a major source of revenue for local governments, funding essential services such as schools, police, and fire departments. CMCT's increasing property tax contributions will directly benefit the communities where its multifamily properties are located."