Is Commercial Property Tax a Fixed Cost? Why You’re Paying Too Much
February 26, 20244 mins read
Written by: Drew McClean, Senior Vice President of Client Success

Is Commercial Property Tax a Fixed Cost? Why You’re Paying Too Much

While commercial property tax may be a fixed expense, it is negotiable and has the potential for substantial savings for your company. Yet despite this, many organizations do not negotiate the money they are paying on their property, whether they are lessees or owners. This has a lot to do with the amount of experience required to negotiate on these rates.

Let us examine the potential for savings that your company can achieve by negotiating your commercial property tax, and the best ways to go about that process.

Is Property Tax a Fixed Cost?

Yes, property tax is a fixed cost.

A fixed cost refers to a recurring payment that doesn’t change with an increase or decrease in the number of goods produced or sold. Property tax is something that remains static regardless of how your business is doing. Generally, you can expect increases on how much you will be paying year over year.

While property taxes are typically seen as non-negotiable, in reality most businesses simply don’t find the time to attempt reducing this fixed cost. Similar to other monthly expenses like water, sewer, gas, and electric, many businesses are overpaying on real property taxes, and like those costs, commercial property taxes can be negotiated.

Can Commercial Property Taxes Be Reduced?

One of the biggest misconceptions around property tax as a fixed cost is the notion that it is non-negotiable. This is not limited to the commercial property owner – commercial lessees can also appeal the assessments on which their property taxes are based.

It is fairly routine in commercial real estate for those leasing property to be responsible for the full amount or a portion of property taxes. This is called a net lease, or in situations where the tenants are responsible for real property taxes, maintenance costs, and the insurance premium, a triple net lease. These businesses have the legal right to appeal under the terms of their lease agreements with their landlords. In some states, the claims of lessees are prioritized over owners, meaning that enterprises operating under net leases may dispute assessments without property owner involvement.

If the legal groundwork for reducing property taxes as a fixed cost, why aren’t more businesses disputing it?

In short, the process is often overwhelming. Understanding state and local government tax codes are essential for the success of filing appeals, and the time and experience required to sift through this information is something most businesses don’t know how to do and don’t want to waste time doing.

Yet for businesses that successfully negotiate on their property taxes, a wealth of savings is available. Roughly 40% of companies who’ve hired us to negotiate on their behalf have realized substantial savings in this area of cost savings alone.

Calculating Property Taxes and Reducing Fixed Cost

Data suggest that that between low appeal rates and high rates of over-assessment, more companies should be taking advantage of the appeals process for property taxes as a reduced fixed cost. Why aren’t more companies doing this?

Property taxes are complicated, but the assumption that negotiating it is impossible is a myth. Securing an expert to work on your behalf produces the best results, as they have the experience to work through the entire process.

To start, property taxes should be seen as a variable cost rather than a straightforward rate or number. While property tax may be a fixed cost, it is not a fixed number. Property value assessed through three different variables:

Income: This value represents the income a property generates against the overhead costs associated with producing that income.

Replacement/Cost: An assessment of what it would cost to replace the property’s structures and features.

Market: The market value of the property in question in comparison to similar properties in the area.

Running these numbers illustrates that both the assessed value and the rate are processes, not principles. For instance, an assessor who develops their assessment based on the cost of replacing the real estate property within current market conditions does so under a long list of variables such as building materials, structural elements, and design that may be regionally specific. Understanding the heuristics that assessors use when making judgments on commercial properties is key to countering with your own assessment.

The imbalance between actual market value and the intervals by which local assessment cycles occur means that too often, companies are not paying property taxes that reflect the actual worth of their building. Using a third party that doesn’t charge up front can help ensure that you’re getting the right property tax rate, and can lead to considerable savings for your business.

At SIB, our team of experts help businesses across the country ensure that they are paying a fair property tax rate through our property tax reduction services. We understand all of the elements that go into calculating property taxes, and know how to negotiate on your behalf. We only get paid if you save money, meaning that we will fight to ensure that you get the best pricing available – no questions asked.

Are you ready to start saving on your property taxes? Contact us today for more information about our services.