How to Lower Commercial Property Taxes

Discover what every investor needs to know about how to lower commercial property taxes. Find out why you are likely overpaying on your real estate taxes and how to get them reduced by disputing the tax appraiser’s assessment of your property.

Why Dispute Your Property Tax Amount?

1. Your Legal Right: You have the legal right to challenge the assessment of your commercial property through a dispute process. The local government doesn’t have unfettered authority to charge you whatever amount they want. You can legally contest their property appraisal.
2. Your Money: You shouldn’t pay one penny more in property taxes than you have to. After all, it’s your money and you should protect it!
3. Your Property Value: Property taxes are one of the highest expenses of a commercial property and they directly impact your cashflow and property value. The higher the property taxes, the lower your Net Operating Income, which means a loss cash flow and ultimately your property value!
4. Governments Make Mistakes: Property Appraisers often miscalculate the assessed value of your property and you shouldn’t pay more than you should due to their mistakes!

Building a Case for Reducing Your Tax Appraisal

If you do your due diligence and build a strong case for lower property taxes, you have an 80% chance of being successful. In fact, one of our Protégés recently had their property taxes lowered 35%. And one of the reasons you have such a high chance of success is because the taxing authorities make mistakes. Every year, local governments run a mass appraisal on all the properties in the area. Thousands of properties are assessed at one time, which is why information in your assessment is often inaccurate. Here are some common and not so common errors you can use to build a case for lower property taxes.

Incorrect Sales Comparables:

One of the most significant factors used to determine your property value is the appraised value of comparable properties in your area. Sometimes your multifamily or commercial property is overvalued because the property they are basing your appraisal on isn’t actually comparable. Overvaluing your property due to incorrect sales comparables is one of the most common mistakes made and if it gets corrected, you can get a reduction.

Inaccurate Information:

Another factor that affects your appraised value (which determines your property taxes) is the property details on your assessment. There can be simple errors like miscalculated square footage, the wrong number of units, or maybe the lot size or the year built is incorrect. And when property details are wrong, it affects how your property is valued compared to similar properties and contributes to incorrect sales comparables.

Improvements Never Completed:

It may seem unbelievable that you would be taxed on building improvements that weren’t finished or even started, but it actually happened to me. The previous owner of a property that I purchased had filed papers with the county to build additional units. He didn’t end up building those units, but he completed most of the preliminary permit processes. Unknown to me, the property tax authority had started taxing him even though he never started construction. The only reason I discovered this was that I hired a company to get my taxes reduced and they found the error. Needless to say, I won my case and got a huge tax reduction!

Property Condition:

The condition of your property is also an important factor.

• If a property has high vacancy and a low NOI, it’s worth less because income is one of the methods for determining value. A distressed property that is mismanaged and in need of repairs isn’t as valuable as one that’s stable and cash flowing.
• If you are renovating 75 out of 100 units, while you are renovating the property value should be lower than when the renovations are complete.
• Location impacts value as well. If you are in a noisy area near a highway, airport, or railroad track, your appraised value should be lower.

Extreme Weather Areas:

Another factor that will devalue your property is if you are in an area that frequently has flooding, hurricanes, wildfires etc.

Commercial Property Tax Dispute Process

Step 1: File the Protest

Every state has its own laws and procedures for filing a protest. With a simple online search you can find out how to protest property taxes in your state. Here are a few things to keep in mind:

• Most local governments send out tax notices at the beginning of the year. Often there are dead lines so you need to submit your protest within that window before the deadline expires.
• You can file a protest every tax year.
• Usually there isn’t a fee for filing.
• To file you need to print off a form called the Property Owners Notice of Protest from the county assessors office. Simply fill out your name, your property description, why you’re protesting, evidence of why you think your property value should be lower, and whether you want your hearing in person or over the phone. Then submit it to your local tax authority.

Step 2: Research Property Data

You can access your property details online or you can go to the tax assessor office and pull up the card with all the property information; year built, square footage, lot size etc. Read over the information and make sure it’s correct. Any errors you find are a basis for a protest.

Step 3: Calculate Your Property Value

Investors value commercial property 3 ways: through income (NOI), comparable sales, and replacement costs. When you have a residential property or a smaller commercial property, you can go through the protest process yourself. But with larger commercial properties, determining property value gets complicated and technical, which is why I hire a third party company. Hiring a third-party company to help with the protest process will give you a better chance at success. And they don’t charge you any money upfront, instead they take a percentage of the money that they save you when you win your case.

You can learn more about how appraisers determine the value of commercial property from my post 3 Keys to Commercial Appraisals.

Step 4: Exercise Your Rights

After you file the protest, you will get a notice informing you when your informal hearing date is. The hearing will only take 20-30 minutes and it will most likely just be you and tax assessor. This is where you negotiate a little with the assessor and the matter is likely settled. You will either win and your taxes will be lowered or your request will be denied. If the municipality rejects your request, you can request a formal hearing with the appraisal review board or make a judicial appeal. However, this is costly with lawsuits and attorneys, so you need to decide if it will be worth your time and money.

Getting Help with Lowering Commercial Property Taxes

Those in our Protege Program get our help in building a case and disputing their property taxes. Some governments are smarter than others and the better your information is, the more likely you can reduce your tax bill. Learn more about how to join our program here: Commercial Property Advisors Protege Program.