Property tax can make or break NOI
In many markets, property tax is the largest single operating expense. Small changes after reassessment can swing NOI—and valuation—dramatically. Smart investors underwrite tax risk up front and manage appeals with discipline.
Understand how your jurisdiction values property
Common approaches:
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Income approach: Assesses value by capitalizing NOI; widely used for multifamily.
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Sales comparison: Benchmarks recent sales, often adjusted for differences.
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Cost approach: Replacement cost minus depreciation (used less for stabilized MF).
Learn your assessor’s cap rate norms, expense allowances, and how quickly they revalue after a sale. In some places, a purchase triggers immediate reassessment; in others, there’s a lag or cap on annual increases.
Build conservative assumptions in underwriting
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Transaction-triggered bump: Model taxes at the expected purchase price using income or sales comparables, whichever is stricter locally.
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Phase-in schedules: If reassessments phase in over 2–3 years, reflect the step-ups in your pro forma.
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Mill rate + exemptions: Confirm the mill (tax) rate and any abatements, TIFs, PILOTs, or exemptions that apply—and their expiry dates.
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Scenario testing: Run downside cases: +10–20% assessed value, mill rate changes, or loss of abatement.
Assemble the appeal playbook in advance
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Calendar deadlines: Missing an appeal window kills your chance for a reduction this cycle.
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Hire specialized counsel (if warranted): Local tax attorneys and consultants understand assessor preferences and evidence thresholds.
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Evidence package:
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Trailing 12 NOI with normalized expenses
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Rent rolls and actual collections (post-concession)
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Capex records and items that don’t contribute to value
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Cap rate surveys and arm’s-length sales comps
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Narrative: Explain atypical factors—high insurance spikes, temporary vacancy from renovations, or one-off events.
Operate in ways that support lower assessments
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Expense clarity: Keep clean GLs separating true operating expenses from capital improvements.
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Stabilization plan: If you’re repositioning, document lease-up timelines and temporary income drag.
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Insurance & utilities: Substantiated cost increases can support lower NOI, hence lower value under income approach.
Watch for common traps
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Assuming seller’s taxes continue: Post-sale values often reset. Underwrite your own number.
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Ignoring equalization rates: Some areas apply equalization multipliers; confirm how they’re used.
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Abatement expiry: A sweet tax deal ending mid-hold can crater returns if not modeled.
Ongoing management
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Annual review: Compare assessed value to market-implied value under realistic cap rates.
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Sales comps monitoring: If nearby arms-length deals occurred at lower effective values, use them.
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Capex versus value-add: Track which projects truly lift NOI (and may justify higher assessments) versus necessary maintenance you can argue doesn’t increase value.
KPIs & controls
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Tax per unit vs. comp set
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Tax as a % of EGI (flag abnormal jumps)
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Variance from underwritten taxes (explain deviations quickly)
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Appeal success rate and fee ROI
Case-style example (condensed)
A 200-unit asset purchased at $30M had taxes underwritten at an assessed value equal to 85% of purchase, using a market cap rate of 6.0%. The assessor initially valued at 95% with a 5.5% cap, hiking taxes by 18%. The owner appealed with a stabilized T12 (showing lease-up drag), third-party cap rate support, and proof of above-market insurance. The board settled at 88% of price with a 5.9% cap—recovering ~60% of the hike and preserving ~$180k NOI.
Want a property tax sensitivity model and appeal checklist built for your asset?
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