Ever wonder how property tax on your apartment building or other commercial property is calculated?
Knowing how tax values are calculated will help you forecast your property’s future taxes and better property asset and management to improve your yearly ROI.
Filling Out The Income and Expense Form
Every commercial property owner is asked to fill out an income and expense form. This form ultimately goes to the board of assessors and is used to help determine the value of the property. Here is a breakdown of the most common way the assessors use the information you provide to calculate your future property tax.
The form itself will request commercial property owners to provide details rental income and expenses for the past year.
Rental Income:
apartments
rooming houses
commercial
industrial
hotel
motel
inn
B&Bs.
The form will may also ask you for any additional changes occurred since the purchase such as:
capital improvements
losses / demolition of a structure
This information is then used to determine if there is additional / less property value vs. past assessments, and your tax assessment will change as a result.
Expenses
This is very important! Commercial property owners must work to identify and cite every expense related to operating their property.
Weather the form lists it or not, property owners should make sure to include the below applicable expenses:
management fees
insurance
property taxes
legal fees
accounting / bookkeeping fees
advertising & marketing expenses
other outside agency / services fees
commissions paid to real estate brokers
payroll and payroll tax
insurance
utilities:
electric
gas/heat
water
cable
internet
phone
supplies
cleaning and decorating
repairs and maintenance
landscaping fees
trash removal
snow removal
future costs reserves
Do not understate your bottom line!
If you do, you may be awarded a higher valuation, thus higher property taxes.
Follow the Golden Rule: List everything!
Let the assessors determine if a cost isn’t relevant.
The Income Approach to Calculating Property Taxes
Based on your income and expense report, assessors will often use it to find a relevant cap rate to help determine what the initial value of the property is.
Example:
Office building with an 10% cap rate
Your net income last year was $150,000
Equals and assessed property value of $1,500,000
$150,000/.10% = $1,500,000
Calculating Expected Tax
Now let’s use the above assessed value to determine your taxes for the upcoming year.
If the local governing entity operates at a $10 tax rate for every $1,000 in assessed value, you could expect to pay:
$1,500,000/$1,000 = $1,500
$1,500 x $10 = $15,000 in expected taxes
Loading the Cap Rate
The example above is a quick peek into understanding how your commercial property taxes are determined.
Assessors in real life will likely evaluate with a bit more complexity. They may remove the taxes you currently pay out of your net income and then adjust the cap rate and reevaluate.
Let’s say last year you paid taxes of $15,000. The assessors will add the $15,000 back to your $150,000 net income figure. Now let’s say that the assessed value of your property last year was $1M.
Below is an example of getting the additional tax rate to be added to an 10% cap rate to properly value the property:
$15,000 / $1,000,000 = .015 tax rate
.10 Cap Rate + .015 tax rate = .115 (adjusted cap rate)
Using the new, adjusted cap rate of .115 (11.5%), and the adjusted net income of $165,000 (removing the original $15,000 from our bottom line), we get an assessed value as follows:
$165,000 / .115 = $1,434,782.61
$1,434,782.61 / $1,000 = $1,434
$1,434 x $10 = $14,340 in expected taxes
Happy calculating!
James English, Owner
