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.
Property taxes make up a significant portion of a commercial building’s operating expenses. As a landlord or investor, failing to understand and plan for these expenses can crush your net operating income (NOI). And when NOI takes a hit, a commercial property’s valuation suffers.
WAYS TO CALCULATE TAXES FOR COMMERCIAL REAL ESTATE
Property taxes can be complicated, but when making your budget as a homeowner or considering a new home purchase, it’s important to know how much you’ll need to pay. There are steps to estimating property taxes, and they are;
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Find The Assessed Value Of The Property
The assessed value of a home is an estimation of your home’s current price. It is prepared by a municipal property assessor and used to calculate property taxes each year. The assessed value of your home is generally based on a percentage (assessment rate determined by the local county or municipality) of the fair market or home appraisal value of the property.
To find your property’s assessed value, the local government will order an appraisal on the property. Some areas conduct annual appraisals. Others do them every 3 years or less frequently. Some localities use the market value (how much the home would sell for in the open market) and others use the appraised value (the value the appraiser determined for the home). Either way, they take a percentage of this value to come up with the assessed value.
The percentage they use is called the assessment ratio or the percentage of the home’s value that’s taxable. The ratios vary drastically around the country. For example, if your home’s market value is $300,000 and your local government taxes 60% of the value, you’d pay taxes on $180,000 rather than $300,000.
Assessed value = (Market value x Assessment rate) / 100
If the market value of your home is $300,000 and the assessment rate is 80%, the assessed value is $240,000. You can also use your property tax bill and the real-estate tax rate of your county to calculate the assessed value of your home with this equation:
Assessed value = (Property tax bill x Tax rate) ✕ 100
If your property tax bill is $2,400 and your county’s department of finance tells you the real-estate tax rate is 1%, you can see that your assessed value is $240,000.
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Finding the Millage Rate
The mill rate for your property is determined by who or what is taxing you. That means that different mill rates are charged by different agencies, including the township/city, the county, school boards, and/or emergency services districts. These are all combined to help calculate your final property tax bill. You’ll typically see property taxes noted as millage rates. A mill rate is a tax you pay per $1,000 of your home’s value. For every $0.001 mill rate, you’ll pay $1 for every $1,000 in home value.
Here’s a simple formula. Find out your county’s mill rate and divide it by 1,000. Next, multiply your home’s assessed value (not appraised value) by the mill rate, and that’s your property tax liability. For example, if your area’s mill rate is 8.5 and your home’s assessed value is $200,000, you’d do the following.
8.5/1000 = $0.0085
$200,000 x $0.0085 = $1,700
You’d owe $1,700 in taxes per year.
Property taxes are calculated by multiplying the assessed, taxable property value by the mill rate and then dividing that sum by 1,000.
The calculation formula is:
Property tax levied on property = (mill rate x taxable property value) ÷ 1,000
For example, if the mill rate is 7 and a taxpayer’s personal residence has a taxable value of $150,000, then, using the calculation formula, the homeowner’s property tax bill for his residence is $1,050. So that means that for every $1,000 of assessed value, $7 is owed in property taxes.
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Determine the Newly Assessed Value
When a property is sold, it is re-assessed by the taxing authority and a new tax amount is calculated determining the newly assessed value of the property can be tricky. In many cases, the new value is the same or similar to the purchase price while in a few cases, it is based on a calculated portion of the purchase price. Here, the tax assessor’s website can be checked to see the sale history of the property. O the tax assessor can be contacted to derive additional information that can be helpful in knowing the tax calculation of the property.
In other cases, it is based upon a fraction of the purchase price. On the tax assessor’s website, look for the sale history of the property or search for any links that will provide information about the tax calculation methodology. If it is unavailable, it is a safe bet to use the purchase price as the newly assessed value.
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Calculating the Property Taxes After Sale
Property taxes are calculated using the value of the property, then multiplying the tax rate by the assessed value.
Assessed value x Millage rate = Property tax
For example, suppose the assessor determines that your property value is $500,000 and the assessment rate is 8%. The assessed value would be $40,000. Taking the mill rate of 4.5%, the tax due would be ($40,000 x 4.5%) = $1,800.
If the assessor determines that the market value of a commercial property is $10,000,000 and the assessment rate is 7%, then the assessed property value would be: $10,000,000 x 7% = $700,000. This assessed value is then multiplied by the total mill levy to determine the property tax. For example, if the combined mill levy from all taxing bodies such as school and water districts, city, and the county is 5%, then the property tax due on the property would be:
$700,000 assessed value x 5% total mill rate = $35,000 property tax.
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Estimating Steady State Growth
Commercial real estate investments are mainly held for multiple years and property taxes on these properties are due yearly. Once the initial adjustment is made to account for the new assessment, an additional assumption has to be made about how much those taxes will grow each year. Assessed values are reviewed each year and adjusted for changes in local market prices. How much the assessed value of a property can grow each year differs in each state or county. Depending on the cap growth for the property and also on the state, it is important to follow the steady-state growth.
With reference to the last example where the property tax is $35,000, using a cap growth rate of 4% annually, the property taxes on an investment holding of 5 years will be:
1st Year: $35,000 (as calculated above)
2nd Year: $36,400
3rd Year: $37,856
4th Year: $39,370
5th Year: $40,945
Following all these steps is a safe guarantee of getting the right way to calculate taxes for your commercial real estate properties.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
