Commercial Property Tax Appeal
Commercial property taxes are one of the largest expenses for most owners of commercial real estate. The commercial property tax is charged forever; it is never fully paid. The government estimates a value each year and extracts money from commercial property owners unless they appeal. The commercial property tax is essentially a wealth tax.
How to Calculate Commercial Property Tax
Commercial property taxes are based on the assessor’s estimate of value, the assessment ratio and the tax rate for all relevant tax entities.
- The assessor’s value is just a guesstimate using the cost approach to value (in most cases). The cost approach is considered the least reliable method of valuation by licensed appraisers. Most assessor values are not accurate.
- The assessment ratio is 100% in most states. The taxable value is just the assessor’s guesstimate of value. Some states have an assessment ratio. The assessor’s estimated value is multiplied by the assessment ratio to determine the taxable value, or assessed value.
- There are often multiple taxing jurisdictions for each property, including city, county, school and special districts. The tax rate is the sum of the tax rates for all relevant tax jurisdictions. You can do little to impact the tax rate but do much to impact the assessed value.
Commercial property tax = Assessor value x assessment ratio x tax rate
How to Reduce Commercial Property Taxes
Protest the value of your commercial property annually. Yes, protest each and every year. Even if the value did not change, protest the value. The assessor’s values are based on the cost approach, the least reliable method of appraisal. You can protest both excessive value and unequal value each year.
Protesting excessive value addresses a value in excess of market value. Valuing commercial property is difficult and reasonable people can disagree.
Protesting unequal appraisal is based on similar properties having a more favorable assessed value. Even if your assessed value is below market value, you can likely support an appeal on unequal appraisal. For example, your office building is worth $100 per square foot (PSF), assessed at $80 PSF but similar office buildings are assessed at $60 PSF. You are at a disadvantage as a landlord if your property taxes are higher than your competitors.
Protest both market value and unequal appraisal annually. It is your right and most appeals are successful.
Do Commercial Tenants Pay Property Taxes?
Yes, tenants either directly or indirectly pay property taxes. With net leases, the tenant is directly responsible for paying the property taxes. With gross leases, the commercial property owner writes the check to the tax entities. However, the source for payment of taxes is the rent tenants pay. Commercial property owners seek an equitable yield in investment property. Higher property taxes lead to higher rent. Any way you look at it, higher commercial building property taxes mean higher rents and less net yield to the building owner.