Past Property Taxes Can Mislead You

Today we’re going to talk about a due diligence mistake that shows up in underwriting all the time, and it can be a silent killer of your cash flow. It’s the assumption that the existing property tax assessment, the number you see on the tax bill today, is a reliable input for your forward-looking pro forma. In some jurisdictions, it’s not.

In fact, in certain places the current tax bill is almost meaningless for a buyer, because the act of changing hands triggers a reassessment. And that reassessment is designed to “catch up” for years, sometimes decades, of artificially low increases under the prior owner.

If you don’t model that correctly, you can buy a property that looks like it has a healthy debt service coverage ratio, only to discover after closing that your taxes reset upward and your deal has a permanent drag on returns.

Let’s break down why this happens, where investors get fooled, and how to underwrite it the right way.

First, why can the existing tax bill be misleading?

Because property tax systems are not uniform.

In one jurisdiction, the assessed value may track market value closely and update frequently. In another, the assessed value might move slowly, or be capped, or lag reality for years. Some places have rules that limit annual assessment increases for existing owners, and then reset the assessment to near-market value on sale.

The seller might have held the asset for a long time. During that holding period, their assessed value increased at a limited rate, maybe one percent, two percent, or tied to inflation. Meanwhile, market values doubled.

So the seller is paying taxes on a value that’s anchored in the past.

You, as the buyer, are stepping into the present.

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