Understanding the Impact of Property Tax on Commercial Real Estate Investments

Property taxes are a major consideration in commercial real estate investment strategy. This is especially true in states where there is no state income tax and local governments rely heavily on property taxes to fund public services. For investors, these taxes can significantly impact the bottom line; therefore, understanding how property taxes are assessed is essential for maximizing profitability. Let our team answer your questions about how high property tax liabilities impact your commercial real estate portfolio.  More importantly, let us prove our value in advocating for you, your tenants, and your investors.   

Why Property Tax Matters for Commercial Real Estate

Property taxes are one of the largest recurring expenses for commercial real estate owners. Failing to properly account for them during acquisition, budgeting, and leasing decisions can erode returns and cause operational strain.  

Today’s leasing environment is a “Gross-lease” world.  Every potential tenant scrutinizes the overall cost of tenancy.  High property tax assessments diminish your competitive edge.  Our team is well-versed in protecting you, your tenants, and your investors from excessive value assessments.  

The Appraisal Challenge

Appraisal districts use standardized/mass appraisal methods to assess property value, but these methods may not reflect the unique realities of your portfolio, the submarkets conditions, or particular strains on certain property types.  Overvaluation is common, particularly in rapidly growing markets or in contracting markets.  The same can be said for properties undergoing renovations, lease transitions, or temporary vacancies.  Oftentimes, the appraisal districts’ models are formulated with data that is out of sync with the market or simply outdated.  

Because commercial properties are complex assets, minor errors in valuation assumptions can lead to hundreds of thousands in excess tax liability. Avoiding overpaying your tax obligations could be the difference between profits and losses.  

Impact on Investment Performance

Property taxes affect more than just operating budgets—they influence every stage of the investment lifecycle.

• Acquisition: Projecting future tax obligations is critical to accurately underwriting a potential purchase. An overlooked reassessment can quickly turn a profitable deal into a strained asset.
• Cash Flow: Rising taxes may reduce net operating income (NOI), directly impacting investor returns and debt service coverage ratios.  
• Tenant Relations: In triple-net lease (NNN) structures, tenants are responsible for property tax increases. Frequent spikes in tax bills can strain relationships and affect retention, especially if tenants feel the taxes are unjustified.
• Disposition: A high tax burden can make a property less attractive to future buyers, limiting resale value or requiring price concessions.

Managing the Risk

Successful investors take a proactive approach to managing property taxes. Key strategies include:

• Annual Valuation Reviews: Compare the appraised value to actual income, expenses, and comparable sales to identify grounds for appeal.
• Filing Appeals: Timely protests to the Appraisal Review Board can significantly reduce assessed values and lower tax bills.
• Structuring Leases Carefully: Ensure lease agreements account for tax fluctuations and establish clear tenant/landlord responsibilities.
• Engaging Professionals: Tax consultants and attorneys who specialize in commercial ad valorem tax advocacy are critical in helping you navigate the system, file/track appeals, and optimize your tax position portfolio-wide.

Learn How Wilson & Franco Can Help

In commercial real estate, every dollar matters. Property taxes represent a major line item that is often negotiable, but only if investors stay informed. At Wilson & Franco, our goal is to ensure you understand how property taxes are assessed before developing a strategy to manage them. Reach out for a private consultation to discuss how we can position your portfolio for long-term success in every market across the country.