Commercial Property Taxes Are Not a Fixed Expense: Why Regular Reevaluation is a Smart Move

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April 2023

All businesses pay some menu of taxes, and a majority are property taxes based on the assessment of their real estate assets. Whether for a single building or a portfolio, these taxes are usually one of the largest expense items in the budget.

But what may be easy for property owners to forget is that an assessment is not a fixed value, but instead fluctuates based on various factors such as market changes, tenant demand changes, interest rates, and aging finishes.

As with any variable expense it should be a standard course of business practice to regularly review your assessment and taxes to ensure the property and its returns are not overburdened or short changed.

Reducing the tax payments on a single property or portfolio of properties can have significant financial benefits, as it decreases operating expenses and enhances cash flow. This could then improve Debt Service Coverage Ratios (DSCR) which is a key metric used by lenders, and consequently can provide improved financing opportunities for commercial property owners.

In our work we often see properties over assessed with owners paying a much higher burden in taxes. While buildings themselves may not move, the external and internal changes surrounding them move their market value needle. Changing neighborhoods, vacancy, altered ordinances, even the obsolescence of a building’s function all impact property value.

For example, an assessment was not reflective of changes happening in the neighborhood. The valuation was brought to current market value which was significant documentation presented within the appeal process. In this instance the owner’s tax bill was reduced by $78,000.

Similarly in another instance, the assessment of a property was based upon a previous use, during a time when the neighborhood was flourishing. When a shift in population occurred the building’s purpose no longer made sense. An evaluation of the current fair market value was completed, which came in at 93% of the previous assessment. This new information was presented with the appeal process and consequently the property taxes were recalculated. With the lower tax bill the owner earned a savings of several tens of thousands of dollars annually.

By implementing these measures the savings owners often garner can then be used to strengthen the business and improve the asset’s overall value. The savings are put toward essential purposes such as paying down debt or on necessary maintenance and renovation work. This can be advantageous to the owner helping sell a property quickly and profitably.

It is in the best interest of every business to create a plan and manage property taxes. This begins by regularly evaluating the assessment of a property to ensure it reflects its true market value. Owners, managers, and businesses can, and should, take control of their tax expenses, and utilize the savings for strategic initiatives and investments.

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