Benchmarking commercial property taxes across the US

Navigating a fragmented property tax system

Benjamin Franklin once said, "In this world, nothing is certain except death and taxes,” but in the world of commercial real estate (CRE), there exists another certainty: far too many property owners are paying more property tax than they need to.

Property tax systems across the US are incredibly fragmented; there are more than 17,000 property tax jurisdictions with countless variations in tax policy and how taxes are calculated. As a result, property taxes can become a juggernaut of misunderstood policy and financial consequences. In fact, despite the fact that property taxes make up approximately 40% of operating expenses for commercial properties in the US and nearly 25% of net operating income, property taxes are often one of the most overlooked components of a CRE strategy.

On the latest episode of the CRE Exchange podcast, Altus Group’s Director of Tax Research, Sandi Prendergast, sat down with hosts Omar Eltorai and Cole Perry to discuss recent findings from Altus Group’s 2024 US Real Property Tax Benchmark report, effective tax rates, assessment disparities, and more.

You can’t manage what you can’t measure – commercial property taxes are no exception

Altus Group’s inaugural tax benchmark report breaks down tax assessment and rates for 10 major cities across the US to provide commercial taxpayers with a deeper understanding of the key factors impacting taxation while highlighting strategies for managing the tax burden of CRE portfolios.

“Anyone who works in commercial real estate – from property owners to managers and property accountants – should have an in-depth understanding of how the property tax system works,” explains Prendergast. “Property owners and investors should know how property assessments compare to market values, how to identify opportunities to challenge property tax assessments, and how to anticipate property tax increases in the future.”

One of the primary challenges facing commercial property owners, Prendergast notes, is the lack of alignment between property tax assessments and current market value. “It’s hard to identify unless you are tracking it and doing a frequent analysis, and before we developed our benchmark report, property tax analysis primarily dealt with the data on an aggregate basis to determine assessment base and average costs,” she notes. “But when you’re looking at the total assessment base, it’s difficult to capture the value change in each property over time. Using Reonomy data, we are able to break it down further, from the taxing jurisdiction down to the municipality and down to the property level, to segment our findings across property types in each region.”

There are a number of factors impacting the amount of tax you pay, including the market, assessments (how the assessors interpret the market), and tax rates. To compile the benchmark tax report, Prendergast looked at sales data from Reonomy and market valuations from the NCREIF ODCE index to correlate assessment and sales data and, in turn, evaluate assessments in relation to the market. “I was able to identify benchmark properties in each city, and then look at the benchmark tax rates per square foot,” she explains. “But the key metric that I looked at was the effective tax rate. The effective tax rate provides us with a common unit of measurement and helps to simplify all of the factors that impact a tax bill.”

Commercial tax rate outliers: New York City and Chicago

The median tax rate across the cities included in the benchmark tax report was just under 2%. In New York City and Chicago, however, their commercial rates are double that. “The other eight cities are within 60 to 120% of the median, which is a pretty close range,” Prendergast notes. “New York City and Chicago were outliers.”

In fact, in New York City, the effective tax rate for multi-family is higher than for commercial, and more than twice the rate of any other city included in the report. Chicago, on the other hand, had the highest effective property tax rate, and offices in Chicago are taxed at almost twice the next highest rate.

The majority of the cities analyzed, she adds, had one tax rate that applied to all properties, aside some tax relief provided to homeowners by making a portion of the assessment exempt from taxation (i.e. a homestead exemption). “Some of the cities we looked at, though, had a special tax rate for multi-family properties. This provides a tax break – sometimes a significant one – because the taxes that are applied to multi-family properties will eventually be paid by the tenants,” Prendergast explains. “What I was surprised to see in New York City was that the multi-family millage rate is higher than for commercial, but the portion of market value that’s taxed, the assessment factor, is the same as it is for commercial. The combined effect of this is a ‘double whammy’ of a higher tax rate and a higher factor.” While single family residential properties are taxed based on 6% of fair market value, multi-family and commercial properties are assessed based on 45% of market value. The millage rate for multi-family is $12.502 per $1,000 value, while commercial is 10.592%.

How to compare property taxes across different markets

Property tax for office, retail, industrial and multi-family properties can be compared using the following key metrics: effective property tax rates, tax/sale ratios, market parameters, and benchmark taxes per square foot (estimated taxes per square foot for a benchmark group of properties).

“After correlating the sales of properties in 2023 with the assessed values of those properties, I was able to calculate a property tax-to-sale ratio. Comparing the property tax-to-sale ratio and the effective tax rate reveals if a property is over or under-assessed,” explains Prendergast. “For example, based on their sale prices, office properties in Chicago were paying a much higher rate than any other market sectors in that city and a far higher rate than would have been indicated by the effective tax rate.”

San Francisco’s tax/sale ratio for office properties tells a similar story, Prendergast notes, but with a different outcome. Sale prices for office properties in the city have fallen significantly and, as a result, the city’s tax-to-sale ratio for office buildings is much higher than their 1.18% effective tax rate. “Under Proposition 13, the assessments of those properties are going to be reduced to their sale price,” she explains. “This will have a ‘right-sizing’ effect on property taxes. In Chicago, the assessments we looked at are based on 2021 market values, and it remains to be seen if the assessor will account for the value decline in the 2024 reassessment.”

The effective tax rate is the rate that can be applied to fair market value to determine the total property tax. If you want to estimate property tax costs, you need to not only look at the tax rate, but also the market and how the assessor addresses that market. “Office properties in Washington, DC are paying $12.30 a square foot, whereas warehouse is paying $2.30 a square foot,” Prendergast notes. “Meanwhile, retail properties in the same city are paying $5.31 a square foot. This is where you can really see the variations, even though the tax rate that’s being applied is the same.”

Are prices out of touch with market values?

Our analysis of tax-to-sale ratios highlighted a wide range of disparities between sale prices and market values. This information reveals where properties and sectors are over-assessed and, conversely, where they’re under-assessed.

“Using this data, property owners can better predict future tax increases that might be over and above a typical annual increase,” Prendergast explains. “Looking at industrial warehouse properties in Dallas, for example, the tax-to-sale ratios were quite low. However, when the 2024 assessments came out, there were 40-50% assessment increases for those properties.”

In two of the cities in the study, Nashville and Chicago, assessments are still based on 2021 valuation data. This is a key part of an assessment challenge; the legislation will generally require that the assessment reflects the valuation date. “When you’re putting forward an appeal in these cities, you need to reference the market conditions as of 2021,” Prendergast notes. “If circumstances have changed or if, for example, a property is experiencing lower occupancy, you can file an appeal to express that, but in 2021 terms – rents as of 2021, cap rates as of 2021, which may tell a different story than the current market.”

This challenge begs the question – why is there such a long period of time between revaluations in certain cities? In some instances, it’s argued that a full revaluation of all properties in a city is simply a massive undertaking, in others, there is resistance to valuation updates in part because of the perception that an assessment update will increase taxes. “Oftentimes, you’ll hear about proposed assessment reforms that involve freezing assessments at some point in the past,” Prendergast notes. “There is a misconception that reassessment will derive new values, and those values will be higher – which means taxes will go up. In most cases, a reassessment is a reallocation of the tax burden between properties, not a tax grab. Moreover, outdated assessments result in properties that have lost value (such as older properties or office buildings) paying more than their share of taxes. On the other hand, properties that have increased in value (such as newer properties), pay less.”

Outdated assessments penalize the least value properties. Ultimately, the more frequent revaluations are, the more fair the assessment system and tax system becomes.

Over-taxation does not lead to revitalization

The “urban doom loop” theory suggests that declining office values in the downtown cause a drop in property tax revenue, which leads governments to reduce spending on services and improvements, which leads to further migration out of the downtown, which further depresses real estate values. This theory has become increasingly relevant in the current CRE landscape, as office occupancy rates have remained in free fall in major cities across North America.

“In most jurisdictions, a decline in assessed values will actually help to prevent a doom loop,” Prendergast shares. “A property can’t recover if it continues to pay higher tax costs than it should be. San Francisco is a great example – we’ve seen a massive decline in office values, but that decline is reflected in assessments due to requirements set by Proposition 13. As a result, properties are now able to have lower asking rents, because their operating costs are significantly reduced which, in turn, helps to attract more tenants. When these properties attract more tenants, there’s an influx of activity in the market, which can lead to a revitalization. Simply put, you will never revitalize an area by over-taxing it.”

Communicating a decline in value to assessors can also pose a challenge, as their valuations are typically based on transaction data. Oftentimes, the sales that are happening in a down market are distressed sales, and many of the lease negotiations will include tenant incentives such as free rent or property improvements, which aren’t captured by the assessors. “Assessors are looking at asking rents and stabilized occupancy, or exclusively at transactions for the best-performing properties,” Prendergast explains. “So, there will be a lag before we see a decline in assessed values that might lead to any kind of revenue issues for municipalities.”

Strategies to address property tax disparities

The single most important thing property owners can do to limit the impact of property tax and market disparities across their portfolio is develop a comprehensiveproperty tax management strategy. If you have multiple properties across multiple jurisdictions, property tax management software is a great way to manage assessments, adhere to deadlines, anticipate changes, and track appeals and results.

“There is often a big disconnect between when appeals are submitted and when tax bills need to be paid. The process can take months, or sometimes even years, so a system that keeps track of everything in one place is a huge time saver and can significantly reduce costs,” Prendergast explains. “More importantly, don’t just wait for your next tax bill. Work with experts who are familiar with the relevant legislation and tax policy procedures, remain aware of your property tax notice, and get ahead of deadlines to ensure you remain compliant.”

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