The Importance of Property Tax Budgeting

Property taxes are a substantial operating expense for commercial real estate owners and operators, significantly impacting both property owners' bottom line and tenant viability. Accurate property tax forecasting is essential when evaluating the profitability of commercial assets. In this article, we will explore key areas affected by changes in property taxes and provide insights to optimize the budgeting process.?

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Avoid Generic Budget Templates: One-Size-Fits-All Property Tax Budget templates often oversimplify assumptions and fail to consider jurisdiction-specific nuances. Given the varying taxing jurisdictions across the country, relying solely on broad assumptions may lead to inaccuracies and impact forecasting. Tailored budgeting strategies enhance financial planning and yield better outcomes for commercial investments.?

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Acquisition & Disposition: When acquiring or disposing of properties, owners will inherit or dispose of the existing property tax assessment. Understanding the historical tax basis is crucial because it could directly influence future tax payments. In some cases, depending on the taxing area, when a property trades on the open market it can often trigger a reassessment, and a higher sale price may lead to increased property taxes for the new owner. Proper tax planning during the acquisition or disposition phase can mitigate these surprises.??

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New Construction and Improvements: New construction and property improvements can significantly impact the assessed value of a commercial property. When new construction occurs—such as building additions, substantial renovations, or tenant improvements—the property’s taxable value may increase.? There is a common misconception when valuing new construction, assuming the assessment should equal the permit value. Assessors consider a wide array of factors and use multiple valuation methodologies beyond construction hard costs. These factors include construction soft costs, financing, entrepreneurial profit, market conditions, sales data, and the property’s income-earning potential. Property owners must carefully evaluate these varying elements when planning construction or renovations to fully understand their impact on property taxes.?

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Special and Direct Assessments: A sizable portion of an owner’s property taxes can stem from special and direct assessment charges. Special Assessments are additional charges levied for specific purposes, such as bonds, road repairs, sidewalks, or sewer upgrades. Direct Assessments are additional charges for certain services, like fire protection or street lighting. Both special and direct assessment are not tied to the market or assessed value. Property owners need to understand these additional charges and factor them into their budgets. For example, in new or redeveloped properties where there is a change in use, these charges often surprise owners when they receive their first tax bill after construction completion. Understanding state and local system of laws is crucial to navigate these targeted taxes.??

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Navigating Changes in Tax Rates: Historical tax rates exhibit significant variation, challenging the common belief that rates consistently increase by a specific percentage each year. This is especially true in districts with longer valuation cycles. Local governments periodically adjust tax rates, considering multiple factors specific to each area:?

• Urban areas often have higher tax rates due to higher demand and property values.?

• Tax rates can vary based on property type (land, industrial, office, retail)?

• Tax rates are influenced by government spending needs, economic factors, and the balance between revenue sources.?

Accurate forecasting of tax rates is essential for effective property tax planning.?

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Valuation Cycle: Understanding the valuation cycle is essential, as not all jurisdictions re-appraise properties annually and, in some cases, there is a limit or cap. For example, some areas re-value properties upon sale, while others do not.?? Property owners must estimate future value changes based on specific legal requirements for re-appraisal in each jurisdiction.??

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Scenario Modeling: Prudent budgeting involves considering a range of possible outcomes. Property owners should model scenarios such as best-case and worst-case situations, accounting for potential appeals. By exploring different scenarios, informed decisions can be made, optimizing tax planning strategies.?

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Tenant Expense Reimbursements: Accurate property tax forecasts are crucial for tenant expense reimbursements because they ensure fair cost-sharing between landlords and tenants. When tenants are responsible for reimbursing property taxes, precise estimates allow them to budget effectively. Overestimating or underestimating tax expenses can impact a tenant’s financial stability and cause an administrative headache. Additionally, accurate forecasts help mitigate surprises, allowing tenants to plan for potential changes in their operating costs related to property taxes. Overall transparent budgeting fosters trust with tenants, when landlords can explain tax-related costs, tenants feel more informed and satisfied.??

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With budgeting season in full swing, seeking professional advice for property taxes in commercial real estate is crucial. It assists with understanding local nuances, assessment methodologies and providing insights that enhance your strategic decision making and minimize risks by providing accurate forecasts.??

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At Property Tax Resources, LLC, we believe that property tax consulting should be based on a deeply embedded relationship with our clients. Our goal is to align ourselves completely with our client’s objectives and to deliver the results they are seeking. We are a team of seasoned professionals with the necessary expertise to produce exceptional results across the country. Visit our website for more information:??

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www.ptaxresources.com?

Property Tax Resources, LLC?

[email protected]?

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