Commercial property tax loans are issued to help property owners pay property tax owed on property that is used for commercial purposes. Commercial property includes real property such as office buildings, warehouses, apartment buildings, factories, land, and other pieces of real estate that are used for a business purpose, as well as tangible personal property such as machinery, equipment, supplies, and inventory.
The property tax lender provides the cash to satisfy a business’s instant tax obligation in full. Then, the lender enters into a repayment plan with the borrower that allows the borrower to repay the loan over an extended period of time at an interest rate much lower than the late fees and penalties that the government would charge if the business’s property tax bill remained unpaid.
Just like Texas authorizes counties to assess property tax on residential property based on the property’s assessed value, it also authorizes counties to assess property tax on the value of commercial property. Commercial property owners typically receive their property tax bill around November of each year, with the due date generally no later than January 31 of the next year. This gives commercial property owners about two months to get their affairs in order with respect to their annual property tax before it becomes overdue.
The government, like your business, needs money to pay for overhead operating expenses, research and development, and other costs of doing business. However, the government funds its budget primarily through taxes rather than selling goods and services.
The three taxes that comprise the bulk of most governments’ revenue are the sales and use tax, the income tax, and the property tax. Texas, however, is one of seven states that have no state income tax. This makes property tax especially important to local governments’ bottom line.
About 50% of revenue generated by property taxes funds public schools in most counties. Counties also use the funds generated and collected through their property tax to pay for other public services like infrastructure and public libraries.
Texas businesses pay some of the highest commercial property tax rates in the country. Indeed, Texas’s economy was the second-largest in the United States in 2018, posting a gross state product of $1.8 trillion.
Businesses, like individuals, do not pay state income tax in Texas. Texas charges certain businesses a franchise tax of around .5% on gross annual receipts for the privilege of doing business in the state; the maximum franchise tax is 1%, making this tax negligible compared to the income tax charged by other states. Furthermore, certain passthrough business entities such as LLCs, certain partnerships, and sole proprietorships are not liable for the franchise tax at all, making Texas generally a very good place to do business.
Each individual county is responsible for assessing and collecting commercial property tax on businesses within its jurisdiction. Texas also authorizes all counties to set their own property tax rates. Thus, while counties generally assess property tax as a percentage of a piece of commercial property’s market value, the specific percentage charged varies on a county-by-county basis. Therefore, it is impossible to identify a single statewide commercial property tax rate.
Still, average property tax rate data are helpful to illustrate businesses’ total commercial property tax burden.
Since Texas does not collect state or local income tax, state and local governments must make up for this lost revenue in other ways. Charging a relatively higher property tax is a primary way of doing so..
The property tax is built into the very fabric of Texas’s system of government. The Texas Constitution provides in pertinent part:
All real property and tangible personal property in this State, unless exempt as required or permitted by this Constitution, whether owned by natural persons or corporations, other than municipal, shall be taxed in proportion to its value.
This provision goes on to authorize the Texas legislature to exempt certain goods that are not “used for the production of income” from property tax. But the practical effect of this provision is that businesses owe property tax on both real and personal property because in the state’s eyes, all business property is “used for the production of income.”
Thus, businesses not only owe property tax on the value of land and buildings that they own, but they also owe property tax on the value of tangible personal property such as machinery, equipment, office furniture, and business supplies. Texas is one of only ten states that charge property tax on the full value of a business’s inventory.
Property taxes are assessed at the county level on all real and personal business property located within the county. These property tax rates vary from county to county depending on the rate set by the county and the presence or absence of special taxing districts established to fund things like hospitals and junior colleges.
The average commercial property tax rate throughout the state of Texas comes out to around 2.5%. Thus, businesses will pay property tax equal to 2.5% of the assessed value of the land, buildings, machinery, equipment, supplies, and inventory that they own each year. Only South Carolina, Michigan, Mississippi, and Tennessee come in above Texas, making it 5th in the nation.
An average rate of 2.5% may not sound like much. But if a business has a total of $2 million of taxable property in a given tax year – which, by contrast, may sound like a lot but is not, especially for manufacturing or industrial businesses –that business’s property tax bill will be $50,000 for just that year.
As the old saying goes, there are only two things that are certain in life: death and taxes. Texans get to avoid paying state income tax, but Texas’s high property tax rains on that parade.
Despite this reality, there are certain ways to ensure that businesses don’t pay any more than what they legally owe.
The most effective way to ensure your business does not pay any extra to the tax collector is to pay commercial property tax on time. Failing to pay commercial property taxes on time carries steep fees and penalties that add up very quickly. Falling behind on your commercial property taxes by even a few months can dramatically inflate the bill’s total to the point where it can become unmanageable, especially for new businesses with limited cashflow in the first place.
The first penalty is the base late fee. Starting February 1 of the year following the subject tax year, taxing authorities are authorized to charge a 6% late fee. Taxing authorities can also tack on a 1% interest charge and another 1% each month the tax bill remains unpaid. If commercial property tax remains unpaid by July 1, the base late fee doubles to 12%. Additionally, the taxing authorities may charge an additional 20% attorney’s fee at this point in time. Some counties, however, do not charge their attorney’s fee unless and until they actually file a lawsuit to recover delinquent commercial property taxes.
At the end of July following the subject tax year, businesses that owe delinquent commercial property taxes could be liable for an additional 38% on top of the commercial property tax that they already owe.
A business’s total property holdings and its corresponding commercial property tax burden can quickly add up. Given the broad tax base available to local taxing authorities and Texas’s relatively high commercial property tax rates, commercial property taxes be a significant burden on businesses’ cashflow. This burden is magnified for new businesses that may be promising, but not yet established enough to have the cashflow required to shoulder a substantial tax burden.
This is where a property tax loan can be quite valuable. Texas law authorizes private lenders to pay a business’s commercial property tax on the business’s behalf. The lender then attaches a lien to the commercial property to secure the loan, which the business pays back over time. This valuable service allows commercial property owners to satisfy their tax obligation through a flexible payment schedule tailored to their unique financial situation.
By paying commercial property taxes before they incur substantial late fees and penalties, property tax loans allow businesses to avoid the increasing interest rate, large late fee, and expensive attorney’s fee charged by taxing authorities when commercial property taxes remain unpaid.
Property tax loans can also dramatically increase a business’s cashflow by allowing them to satisfy their tax obligation over time and thus free up valuable funds to reinvest and grow the business.