Reducing Property Taxes Will Increase Property Value
Property taxes affect commercial and industrial property owners and operators to different degrees. With rental or income producing, property taxes are a major concern.
For example, with most income producing properties, property taxes are one of the largest, if not the largest, expense to be incurred. If the taxes can be reduced on these type properties, the bottom line, cash flow, NOI (Net Operating Income), or whatever you choose to call it, can increase significantly. This increase in income will affect the value of the property. The purpose of income producing property is to produce income and the more income it can produce, the more value the property will have.
Calculations are shown below on the value effect of a tax reduction: (cap rate assumed)
NOI Before Property Tax Reduction $100,000
Indicated Value – Cap Rate 8% $1,250,000
If a successful appeal of the property taxes produces an annual savings of $20,000, the calculations indicate a different value:
NOI After Property Tax Reduction $120,000
Indicated Value – Cap rate 8% $1,500,000
As indicated above, a property value increase of $250,000 resulted from the property tax reduction.
With other type properties such as manufacturing and operating properties (hotels, hospitals, nursing homes), property tax expense is important, but does not get as much attention as some other expenses. This is because even though still a large expense, property tax is not one of their largest expenses. Operators of such properties are primarily concerned with operations costs such as payroll costs and cost of goods sold. Their profit and loss statements are far more complex than income producing property statements.
Nevertheless, manufacturing and operation properties can also enjoy significant property value increases from property tax reductions and property taxes should not be neglected.
In addition, as property taxes vary from state to state and city to city, property values change simply due to property tax expense. In Memphis the property taxes in 2008 on commercial and industrial property were 2.72% of the property market value. Taxes on a million dollar property were $27,200 per year. In Nashville, property taxes on commercial properties in 2008 represented 1.647% of market value. Therefore, taxes on a million dollar property were $16,470.
Property taxes on the million dollar valued property are $10,730 less in Nashville than in Memphis. This means the bottom line or NOI for the Memphis property must be $10,730 greater than the NOI for the property in Nashville in order for the Memphis property to equal the value of the Nashville property. This is a significant increased burden upon the Memphis property.
These value variations can also lie within a single county. If a property is located in the County only, taxes are usually much less than if the property is located within a city and must pay both city and county taxes. Hence, values can be lower if the property is located within a city and subject to sometimes almost twice the amount of taxes.
This varying effect of taxes upon property values may be even more drastic compared to other areas of the Country. For example, in California taxes including various fees are stated at approximately 1.1% to 1.2% of current market value. Realistically, on an average or median basis, the percentage, I would guess, is really about half that because of their Proposition 13 passed in 1978. This Proposition forced assessors to freeze property values beginning with 1978 values (with only 2% annual increases allowed) unless the property has sold. Only if the property sold, or decreased in value, could the property be reappraised at market value. So, only on the properties which have recently sold, or on properties which have decreased in value, are taxes as high as 1.2% of market value. These low taxes have contributed greatly to the large cash flows, NOI’s, and ultimately high values that income producing properties in California enjoy.
In summary, property taxes affect value and if the taxes can be reduced, the property value can be enhanced.