Property taxes are one of the largest ongoing costs of owning commercial real estate, and one of the few you can actually challenge. Understanding how your bill is calculated tells you whether it is fair, and gives you the grounds to appeal when it is not.
Here is how commercial property taxes work, how assessors arrive at a value, who ends up paying them, and what to do if the number looks wrong.
Key Takeaways
- â–ªCommercial owners face more than one tax: property tax plus federal, and sometimes state and local, income tax on the property’s net income.
- â–ªYour bill is the assessed value multiplied by the combined mill levy set by the taxing bodies in your area.
- â–ªAssessed value is not appraised value. It is market value multiplied by an assessment rate that varies by county.
- â–ªAssessors value property using the sales, cost, or income approach, and may use more than one.
- â–ªYou get a window between the assessment notice and the bill to appeal, and appeals succeed often enough to be worth the effort.
- â–ªUnder a net lease, property taxes are usually passed through to tenants, so the bill affects them too.
The Taxes on Commercial Property
Owning commercial real estate brings more than one tax obligation, and property tax is only the most visible.
Property tax. Levied by local government on the assessed value of the real estate. It becomes a lien on the property until paid.
Federal income tax. Paid on the property’s net income, so tracking and deducting operating expenses accurately matters. Tenant deposits are not income; they sit on the balance sheet as a liability until they are either returned or applied.
State income tax. Some states tax income from commercial property, again on net rather than gross income.
Local income tax. Some cities and counties levy their own tax on the income a property generates.
Rates vary widely by location, which is one reason the same building generates very different tax bills in different metros. Where a property sits affects the return as much as what it earns, and that is worth weighing alongside how commercial rent is calculated when you underwrite a deal.
How Your Property Tax Bill Is Calculated
Two numbers produce the bill: the assessed value of the property, and the combined tax rate applied to it.
Assessed value = market value × assessment rate
Property tax = assessed value × total mill levy
A mill levy is the property tax rate, with one mill equal to one tenth of a cent, or 0.001. Several bodies can levy against the same property, typically the county, the city, school districts, and special districts such as water. Each sets its own rate based on what it needs to raise, and the rates are added together into a combined levy.
Worked through: if the assessor puts market value at $10,000,000 and the county’s assessment rate is 7%, the assessed value is $700,000. If the combined mill levy from all taxing bodies comes to 5%, the tax due is $35,000.
Reassessment happens on a cycle set locally, commonly every one to five years, so a bill can jump sharply in a reassessment year after several stable ones.
Assessed Value Is Not Appraised Value
This trips people up regularly. A property is appraised to establish fair market value, usually for a sale or a loan. It is assessed for taxation. Assessed values are typically far lower than appraised values, because the assessment rate discounts market value before the tax rate is applied.
A high appraisal does not automatically mean a high tax bill, and a low assessment does not mean the property is worth little.
How Assessors Determine Market Value
Assessors use three approaches, sometimes one, sometimes all three.
Sales comparison. Recent sales of similar properties in the area, adjusted for condition, improvements, and market movement.
Cost approach. What it would cost to replace the building today, less depreciation, plus the land value.
Income approach. What the property would earn fully leased, less vacancy and operating expenses, capitalized into a value. Some counties require owners to file an annual income and expense form to support this.
Which approach dominates depends on the asset. Income-producing property is usually valued on income, while special purpose buildings with few comparable sales often lean on cost. Knowing which method was used tells you where to look for errors, and the property type often determines that.
Who Actually Pays the Tax
The owner is liable, but under most commercial leases the cost reaches the tenant. In a triple net lease the tenant reimburses property taxes directly. In a gross lease they are built into the rent, often with an expense stop so the tenant covers increases above a base year.
That means a successful appeal benefits whoever carries the cost, and a tenant paying taxes through a net lease has a genuine interest in whether the landlord challenges an assessment. Check what your lease says about who can contest it.
How to Appeal a Commercial Property Tax Assessment
Owners receive two notices: the assessment of value, and later the tax bill. The gap between them, often 30 to 60 days, is your window to challenge the valuation. Once the bill arrives, the opportunity has usually closed for that cycle.
Assessors work at volume and make mistakes. Square footage can be recorded wrongly, condition can be overstated, vacancy or deferred maintenance can be ignored, and a market can be assumed stronger than it is.
To build an appeal:
Check the physical facts first. Square footage, year built, unit count, land area. Factual errors are the easiest wins.
Compare against similar properties. If comparable buildings nearby are assessed lower per square foot, that is your argument.
Bring your own numbers. Actual income and expenses, real vacancy, and any capital work needed all support a lower valuation on the income approach.
Watch the deadline. Appeal windows are short and strictly enforced, and vary by jurisdiction.
Consider professional help. Property tax consultants and attorneys often work on contingency, taking a share of the savings, which makes an appeal low risk on a large bill.
This article is for general information and is not tax or legal advice. Property tax rules, rates, assessment cycles, and appeal procedures vary by state and county. Consult a qualified tax professional about your specific property.
Frequently Asked Questions
How are commercial property taxes calculated?
Market value is multiplied by the county’s assessment rate to give the assessed value, and that is multiplied by the combined mill levy from all local taxing bodies. A $10 million property assessed at 7% with a 5% combined levy produces a $35,000 tax bill.
What is the difference between assessed value and appraised value?
Appraised value is fair market value, established for a sale or loan. Assessed value is calculated for taxation by applying an assessment rate to market value, and is usually considerably lower.
Can you appeal a commercial property tax assessment?
Yes. There is normally a window of 30 to 60 days between the assessment notice and the tax bill. Appeals commonly rest on factual errors, comparable assessments, or actual income and vacancy that contradict the assessor’s figures.
Do tenants pay commercial property taxes?
Often, indirectly. Under a triple net lease the tenant reimburses property taxes directly. Under a gross lease they are included in rent, frequently with the tenant covering increases above a base year.
How often is commercial property reassessed?
It depends on the jurisdiction, commonly every one to five years. Bills can rise sharply in a reassessment year, particularly if values have moved since the last cycle.
Matthew Preston
Content Writer, CRE News & Market Analysis
Matthew has covered commercial real estate for CommercialCafe since 2022. He focuses on the office and industrial sectors, reporting on leasing, development, and investment across national markets and individual submarkets. His work draws on data and original research. He also writes about demographic shifts and urban innovation in U.S. cities. The New York Times, The Real Deal, Bisnow, The Business Journals, and Yahoo Finance have cited his reporting.
