The Texas Property Tax Dilemma | What NNN Owners Need to Know
The Lone Star State’s reliance on property taxes to fund essential services and public infrastructure has been on the rise for the past decade. With property taxes edging up to 1.8%, the state ranks among the top 10 most expensive. However, the burden disproportionately falls on commercial property owners, who often find themselves grappling with soaring tax bills. Counties across Texas have witnessed a steady uptick in property tax rates, significantly outpacing the national average of 1.10%. The following article describes the ramifications of this taxation model for NNN properties.
Commercial real estate tax rates are noticeably elevated compared to the national average, standing at 1.83%.
Deep Dive Into Commercial Property Taxes
Property tax rates for commercial properties typically incur higher tax expenses than residential properties. This is because commercial property taxes are calculated using the property’s assessed value, which tends to be higher than residential homes. Additionally, commercial properties generate income, further contributing to higher tax bills.
As property values escalate, so do the taxes, even if the tax rate remains stable. Appraisers have become more assertive in their assessments, especially in cities that have seen rapid growth.
In Texas, commercial property values are calculated based on the full appraised value, meaning properties are assessed at 100%.
NNN Properties: Unveiling the Hidden Costs
In the realm of NNN properties, where tenants assume responsibility for taxes, insurance, and maintenance expenses, owners are lulled into a false sense of security. While tenants shoulder immediate tax obligations, the long-term consequences affect property owners. Escalating the tax assessment on property value can strain tenants’ financial viability, potentially jeopardizing lease agreements and, consequently, landlords’ income streams. Moreover, should a tenant vacate the premises, property owners are left shouldering the total weight of heightened tax liabilities, often without adequate preparation.
Proposition 4: A Missed Opportunity For Commercial Owners
In November 2023, Texas voters approved Proposition 4 of Senate Bill 2, ostensibly aimed at providing tax relief. However, the benefits predominantly favor residential property owners, with commercial stakeholders receiving minimal reprieve. While the expansion of the Homestead allotment and reductions in school district millage rates offer relief to homeowners, commercial property owners are left with a mere cap on annual tax increases at 20% over a three-year period. This inadequate measure fails to address the underlying issue of exponentially rising property tax burdens.
Takeaways
Texas’ status as an income tax-free haven entices businesses and investors seeking financial freedom. However, the hidden burden of heightened property taxes is accompanied by several disadvantages, particularly for commercial property owners. As for NNN properties, where tenants frequently bear tax responsibilities, property owners face an unpredictable situation characterized by rising expenses.
As Proposition 4 falls short of providing substantive relief, the need for comprehensive reform will only grow stronger.
