Property Taxes
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Property taxes are a huge expense in some states, so you need to get as accurate as possible when estimating property taxes in your development budget (shown as property taxes during construction), and after construction during stabilization.
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Estimating Property Taxes
Estimating property taxes is not complex, but it does take some investigation, and might not be very accurate compared to your actual tax bill. Most taxing authorities for property taxes have good websites where you can easily search the assessed value and property taxes for any property. Here are the steps I follow to get a property tax estimate on a future development:
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Find nearby properties that will be comparable to what you are going to develop. You can do this easily enough with Google maps. If you are developing a free-standing quick serve restaurant (QSR), go to your site on Google maps, and look up the addresses of other nearby QSRs.
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On a separate screen, open the "property search" section of the taxing authority's website. Type in the address of the comparable QSR, and write down the assessed value and property taxes for that property.
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After you have this info on 5 - 10 comparable properties, make a small chart of this info. Divide the property taxes by the assessed value for all your comps. This will give you an estimated effective tax rate on each comp. If you are getting about the same effective tax rate on most comps, just average them all together to get and estimated effective tax rate to use on your land and building.
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Take that estimated effective tax rate and multiply it by the sum of your land cost and estimated construction costs. This should give you a fairly good estimate of what the property taxes will be on your completed development.
Note that this estimate assumes that the taxing authority's assessed value of the land and building will be close to what you paid for the land, and what your building construction costs will be. With some taxing authorities, their assessed value can be much different (usually lower) than your land costs plus your construction costs. It is good to call the taxing authority, talk to an appraiser, and ask him how you should estimate the future property taxes on your development. If he doesn't have a good answer for you, share with him the above method to estimate property taxes and see what he thinks.
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Property Taxes During Construction
As you are building your development, the property taxing authority will still want to collect taxes even while you are under construction. The taxing authority typically assesses the value of your property on a specific date (usually January 1st), sends out your assessment sometime later (usually in the spring/summer), sends out your tax bill sometime later (usually the fall), then collects the property taxes at another later date (usually the beginning of the following year).
A few taxing authorities will only tax the value of your land (not capital improvement) while you are under construction. But some will actually assess the value of your partially completed building and factor that value into their assessment. For instance, if on January 1st, you are 50% complete with a building that has a $40 million construction cost, the taxing authority will likely assess the value of your land and $20 million for the value of the capital improvement in place at time of assessment. Call the taxing authority and find out how they assess properties that are under construction during the assessment date. I had a project where the property taxes during construction for partially constructed building were over $800,000 so it can be a big hit to your development budget that you should plan for.
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Next Page: Pre-Development Budget & Schedule (Pursuit Costs)
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