Texas property taxes and your commercial lease: why the bill lands on the tenant

Why your rent moves with the tax bill

In Texas, property taxes are set locally each year from the appraised value of the property and the rates adopted by local taxing units, and most commercial leases pass those taxes through to tenants. In a triple-net lease, you pay your share of the building's taxes on top of base rent. In a full-service or modified gross lease, you typically pay your share of any increase above a base year. Either way, when the appraisal or the tax rate goes up, your occupancy cost usually goes up with it.

I have worked in commercial real estate since 1999, beginning at The Staubach Company, and property taxes are one of the lines I watch most closely for clients, tenants and owners alike. They are often among the largest operating expenses a commercial property carries, and they are the one that changes every single year.

How a Texas property tax bill is built

The Texas Comptroller states plainly that Texas has no state property tax and that the Comptroller's office does not collect property tax or set tax rates. Instead, each county has an appraisal district that values property, and local taxing units, such as cities, counties, school districts and special districts, each set their own rates. Your bill is the appraised value multiplied by the combined rates of every taxing unit where the property sits.

Timing follows a fixed cycle. According to the Comptroller, appraisal districts appraise property as of January 1 each year, and taxpayers generally have until January 31 of the following year to pay, with penalties and interest starting to accrue on most unpaid bills on February 1. The Collin Central Appraisal District explains that it considers the cost, sales comparison and income approaches, and that for income-producing property it may estimate value from market rent, vacancy and operating expenses converted to value with a capitalization rate. That is why a building that is leasing well can see its appraisal rise.

Because the combined rate depends on every taxing unit that overlaps a property, location changes the bill. Two similar buildings a short drive apart can sit in different cities, school districts or special districts and carry noticeably different tax costs. When I compare spaces for a tenant, the tax line is one of the first places those differences show up, and it is worth asking each landlord for the actual bills rather than relying on an estimate.

How the tax bill reaches tenants under each lease type

Under a triple-net lease, the landlord estimates the year's taxes, bills tenants a monthly share, and reconciles against the actual bill once it is known. Because the actual bill is not known until the local rates are set, reconciliation statements commonly arrive after the year ends. If the appraisal rose more than the landlord estimated, tenants receive an additional charge.

Under a full-service lease with a base year, the rent includes taxes at the level of that first year, and you pay your share of increases above it in later years. The choice of base year matters: if the first year's taxes were unusually low, perhaps because the building was not fully assessed yet, every later increase is measured from an artificially low starting point. Under a gross lease, the landlord absorbs taxes, at least in theory, but the rent is priced with them in mind.

My guide on what commercial space really costs beyond the quoted rate covers the other operating expenses that ride along with taxes.

In a multi-tenant building, your share is usually your pro rata share: your rentable square footage divided by the building's total rentable square footage. Check how the lease defines that denominator. If it uses only the leased area rather than the whole building, tenants end up paying the share attributable to vacant suites, which is a cost that properly belongs to the owner.

The appraisal notice and the protest window

Property owners have the right to protest the appraisal district's value. The Texas Comptroller states that in most cases the protest deadline is May 15 or 30 days after the appraisal district mails its notice, whichever is later, and that protests are heard by the appraisal review board. The Comptroller also notes that around May 15, review boards begin hearing protests from owners who disagree with their values.

For commercial property, a protest is usually built on evidence: the property's actual income and expenses, vacancy, comparable sales and the condition of the building. Many owners file every year as a matter of routine, often through a property tax consultant or attorney. A successful protest lowers the value for that tax year, which lowers the taxes passed through to tenants as well.

Tenants can help even when the owner files. If your business knows the space has problems that affect its value, such as a roof that leaks or a parking lot that floods, tell the landlord in writing before the hearing. Owners preparing a protest need exactly that kind of information, and a lower value benefits everyone paying the taxes.

Can a tenant protest the value?

Sometimes. The Comptroller explains that if a lease requires you to pay the owner's property taxes, you may protest the property's value to the appraisal review board, but only if the property owner does not file a protest. The owner must send a copy of the appraisal notice to a tenant who leases real property, and a tenant who must reimburse the owner for taxes can ask the chief appraiser to send the notice directly.

In practice, coordination works better than competition. If you lease a large share of a building on triple-net terms, ask the landlord each spring whether it intends to protest, and ask to see the result. If the landlord does not plan to protest and you believe the value is too high, that is the moment to talk to a property tax professional about your own rights.

Tax terms worth negotiating before you sign

Because taxes are hard to control, landlords usually exclude them from any cap on operating expense increases. That makes the lease language around them more important, not less. These are the points I raise for tenants.

• How the base year is set in a full-service lease, and whether it reflects a fully assessed building
• Whether tax refunds from successful protests are credited back to tenants
• Whether the landlord commits to protest when values rise, or allows the tenant to request one
• How taxes are prorated in the first and last year of the lease
• Whether increases caused by a sale or new construction elsewhere on the property are passed through
• Your right to see the tax bills and the reconciliation calculation
• Whether the cost of protesting, such as consultant fees, is passed through and how it is shared

What owners and buyers should budget

For owners, taxes on vacant space cannot be passed to anyone, so vacancy carries a direct tax cost. For buyers, the tax line in a seller's operating statement reflects the past, not necessarily the future. Appraisal districts value property each January 1, and a building that has just sold, been renovated or leased up may be valued differently next year.

Underwrite a purchase with a realistic tax estimate rather than last year's bill, and plan on reviewing the notice of appraised value every year. My guide on first-time commercial buyer mistakes covers the other ownership costs to plan for. Owners who leave this to chance often learn about a sharp increase only when the bill arrives.

At closing, taxes for the year of the sale are generally prorated between buyer and seller based on an estimate, because the final bill is not known yet. Your contract and your attorney determine how that estimate is made and whether it is adjusted once the actual bill arrives. If tenants reimburse taxes, make sure their estimated payments and the reconciliation are accounted for correctly between seller and buyer as well.

A yearly tax routine for tenants and owners

A little attention at the right points in the year prevents most surprises. This is the routine I suggest to clients, whether they own or lease.

• Early in the year: remember that values are set as of January 1, and note any changes to the property
• When the appraisal notice arrives: compare the new value with last year's and with the property's income
• Before the protest deadline: confirm whether the owner is filing, and gather evidence if needed
• When the reconciliation statement arrives: check the tax figure against the actual bill
• Before the January 31 payment deadline: confirm the bill has been paid to avoid penalties
• Each year: update your budget for the coming year's estimated taxes

Help with the numbers

Property taxes are one of the main reasons occupancy costs in North Texas can rise even when base rent is fixed. When I represent a tenant, I look at the tax history of every building we consider and the lease language that governs how taxes are passed through. When I work with an owner, I look at how taxes affect the building's net income and value.

For the legal and tax side of a protest, talk to a property tax consultant, a CPA or an attorney. For how taxes shape a lease or a purchase, I work from McKinney with business owners across Dallas–Fort Worth on office, retail and industrial property. Once you have signed, my guide on the dates and bills to track after signing a commercial lease puts the annual tax reconciliation on your calendar with everything else.

Questions people ask me