Commercial Property Tax Loans

Commercial property tax loans are issued to help property owners pay property tax owed on property this is used for commercial-rather than residential-purposes. Commercial property include 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 necessary to satisfy a business’s instant tax obligation in full, then 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 as how the State of Texas authorizes counties to assess property tax on residential property based on the property’s assessed value, Texas 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 bill coming due generally not later than January 31 of the next year. This gives commercial property owners about two full months to get their affairs in order with respect to their annual property tax before it becomes overdue.

Commercial property taxes in Texas

Just like your business needs money to pay for overhead operating expenses, research and development, and other costs of doing business, the government needs money to operate, as well. The government, however, sells no products or services to generate the revenue it needs. Instead, the government funds its budget primarily through taxes.

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. For this reason, the property tax is especially important to local governments’ bottom line.

Something like 50% of revenue generated by property taxes goes to fund public schools in most counties. But counties also use the funds generated and collected through their property tax to pay for other public services like infrastructure and public libraries.

Commercial property tax rates

Texas businesses pay some of the highest commercial property tax rates in the country. To be sure, this should not reflect poorly on Texas’s business climate or Texas’s desirability as a place to start and grow a business. Indeed, Texas’s economy was the second-largest in the United States in 2018, posting a gross state product of $1.8 trillion.

Remember, businesses, like individuals, do not pay state income tax in Texas. Texas does charge certain businesses a franchise tax of around .5% on gross annual receipts for the privilege of doing business in the state. And the maximum franchise tax is 1%, making this tax negligible compared to the income tax charged by other states. Furthermore, certain passthrough businesses 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 located within its jurisdiction. The State of Texas also authorizes all counties to set their own property tax rates. Thus, although 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. For this reason, it is not possible 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.

Businesses’ property tax burden in Texas

Because Texas does not collect state or local income tax, state and local governments must make up for this lost revenue in other ways. A primary method of doing so, as we’ve discussed, is by charging a relatively higher property tax.

Indeed, 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 from property tax certain goods that are not “used for the production of income.” But the practical effect of this provision is that business owe property tax on nearly all business property-both real and personal-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 businesses also owe property tax on the value of tangible personal property such as machinery, equipment, office furniture, and business supplies. Furthermore, Texas is one of only ten states that charge property tax on the full value of a business’s inventory.

Average commercial property tax rates

Property taxes are assessed at the county level on all real and personal business property located within the county. Accordingly, 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.

However, 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, ranking Texas 5th in the country. Only South Carolina, Michigan, Mississippi, and Tennessee come in higher.

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 in reality is not that much, especially for a manufacturing or industrial business-that business’s property tax bill will be $50,000 for that year alone.

Late fees and penalties

As the old saying goes, there are only two things that are unavoidable in life: death and taxes. Texans at least get to avoid paying state income tax, but Texas’s high property tax tends to rain on that parade.

Still, despite this reality, there are certain ways to make the best of it, ensuring businesses don’t pay any more than the tax they legally owe.

The most effective way to ensure your business does not pay the tax collector any more than it is required to by law 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, very fast. Indeed, 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 quickly become unmanageable-especially for new businesses with limited cashflow in the first place.

The first penalty is the base late fee. Beginning on 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, as well. It bears noting, however, that some counties do not charge their attorney’s fee unless and until they actually file a lawsuit to recover delinquent commercial property taxes.

So, 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.

How a commercial property tax loan can help

As these illustrations show, 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 can place a significant burden on businesses’ cashflow. And 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 prove to 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 specifically 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, ballooning 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. Instead of writing a large check to the tax collector to pay commercial property tax in a lump sum, commercial property tax loans allow businesses to satisfy their tax obligation over time, freeing up valuable cashflow to reinvest and grow the business.