The Tax Bill on the Pro Forma Is Not Your Tax Bill

Every broker pro forma includes a line for property taxes. It shows the current annual amount the seller pays. It looks reasonable, maybe even low relative to the property value. And it is accurate, for the seller.

The problem: that number reflects the seller's assessed value, which may be years or decades old. The moment you close on the purchase, most jurisdictions reassess the property to your purchase price. Your tax bill will be higher. Sometimes dramatically higher.

This is not an edge case. It is the default in the majority of U.S. markets. Property tax reassessment on sale is one of the most predictable, most quantifiable, and most frequently overlooked expenses in CRE acquisitions. On a typical value-add multifamily deal, the reassessment delta can reduce NOI by 8% to 15% on a single line item.

How Reassessment Works

In most states, the county assessor maintains an assessed value for every property. That value determines the annual tax bill. Two mechanics drive the gap between what the seller pays and what you will pay.

Annual cap on increases. Many states limit how fast assessed value can grow each year, typically 2% to 3%. If the seller has owned the property for a decade, the assessed value may have compounded at 2% annually while market value grew at 5% to 7%. After 10 years, the assessed value can trail the market value by 30% to 50%.

Reassessment trigger on sale. When the property sells, the assessor resets the assessed value to the purchase price (or a value derived from it). Your annual tax obligation immediately reflects the full market value, not the seller's artificially low basis.

The result: you inherit a property with a tax bill that is materially higher than what the seller was paying. The delta between the two is pure expense increase that hits your NOI on day one.

The Worked Example: $8M Multifamily

Consider a 120-unit multifamily property in a mid-market Sun Belt metro.

Seller's position:

  • Purchased 10 years ago for $4M
  • Current assessed value (after 2%/year cap): approximately $4.9M
  • Effective tax rate: 1.7%
  • Seller's annual tax bill: $68,000

Your position after closing:

  • Purchase price: $8M
  • Reassessed value: $8M
  • Same effective tax rate: 1.7%
  • Your annual tax bill: $136,000

The delta is $68,000 per year. That is not a one-time cost. It recurs every year you own the property.

NOI impact: The broker's pro forma shows NOI of $680,000, built on the seller's $68K tax bill. Your actual NOI after reassessment: $612,000. That is a 10% reduction in operating income from a single line item.

Cap rate impact: The broker marketed this deal at an 8.5% cap rate ($680K NOI / $8M). Your real going-in cap rate: 7.6% ($612K / $8M). The deal that looked like a solid 8.5 is actually a 7.6. In a market where 10-year Treasury yields sit near 4.5%, that 90 basis point compression changes the risk-adjusted return picture entirely.

The DSCR Consequence

The NOI reduction does not just affect your return. It affects whether you can finance the deal at all.

Assume you are financing 70% of the purchase price ($5.6M) at 7.25% on a 30-year amortization.

Annual debt service: approximately $458,000

DSCR with broker's NOI ($680K): 1.48x. Comfortable. Well above the 1.25x minimum most lenders require.

DSCR with your actual NOI ($612K): 1.34x. Still passing, but the cushion is thinner.

Now layer in reality. Your first year of ownership will include a lease-up period, deferred maintenance, and at least one month of lost rent from turnover. Assume your effective first-year NOI comes in at $580K after those adjustments.

Adjusted first-year DSCR: 1.27x. That is barely above the lender minimum with no margin for further occupancy dips. If two additional units go vacant, you are below 1.25x and in technical default territory.

The $68K tax delta turned a deal with a comfortable 1.48x DSCR into one scraping the floor at 1.27x. The difference between those two numbers is the difference between a lender who approves your draw request without questions and one who sends a notice of default.

The Supplemental Tax Bill

In several states, including California and Texas, the reassessment does not wait until the next fiscal year. Instead, the county issues a supplemental tax bill shortly after closing. This bill covers the difference between the seller's assessed value and your new assessed value, prorated for the remaining months in the fiscal year.

If you close in October and the fiscal year ends in June, you owe eight months of the tax delta immediately. On the $68K annual delta in our example, the supplemental bill would be approximately $45,000, due within 30 to 60 days of issuance.

This is cash out of pocket that most buyers do not budget for because the broker's pro forma never mentions it. It does not reduce NOI (it is a one-time adjustment), but it reduces your cash reserves in year one, exactly when you need them most for renovations and lease-up.

State-by-State Comparison

Reassessment rules vary significantly by state. The table below covers five major CRE markets.

State Effective Rate (Typical CRE) Reassessment Trigger Annual Cap on Increases Notes
California 1.0% to 1.2% Sale resets to purchase price 2%/year (Prop 13) Supplemental bill issued at closing. Commercial properties now reassessed more frequently under Prop 19 changes. Long-held assets can have massive basis gaps.
Texas 2.0% to 3.0% Annual reassessment to market value 10%/year (homestead only, not CRE) No cap on CRE reassessment. Assessor can increase to full market value any year. Aggressive protest process available but costly. Highest effective rates in the country for CRE.
Florida 1.0% to 1.5% Sale resets to market value 3%/year (Save Our Homes, homestead only) CRE has no annual cap. Assessment resets fully on sale. Tangible personal property tax adds 1% to 2% on FF&E.
New York 1.5% to 3.0%+ Complex class-based system Varies by property class NYC uses income-based assessment for large multifamily (class 2) and commercial (class 4). Assessment ratios differ by borough. Challenging to predict without local counsel.
Illinois 2.5% to 3.5% Triennial reassessment (Cook County) None for CRE Cook County reassesses every 3 years with no cap. Effective rates among the highest nationally. Assessment appeals are common but add legal cost.

The pattern is clear: states with the fastest population growth (Texas, Florida) tend to have the most aggressive reassessment mechanics for commercial properties. The "low tax" reputation of Sun Belt states is a residential phenomenon. CRE investors in these markets face some of the highest effective rates in the country.

How to Calculate Your Post-Acquisition Tax Bill

The calculation is straightforward. The inputs are publicly available.

Step 1: Find the effective tax rate. Look up the county's millage rate (or "mill rate") for the property's tax district. Multiply by any applicable assessment ratio. The county assessor's website publishes both. You can also divide the seller's current tax bill by the current assessed value to back into the effective rate.

Step 2: Apply the rate to your purchase price.

Your estimated annual tax = Purchase price x Effective tax rate

In our example: $8,000,000 x 1.7% = $136,000

Step 3: Estimate the supplemental bill. If the state issues supplemental bills on sale, prorate the delta from your closing date to the end of the fiscal year.

Supplemental = (Your tax - Seller's tax) x (Months remaining / 12)

Step 4: Replace the seller's tax in your underwriting. Do not adjust the broker's number. Replace it entirely with your calculated figure. Every downstream metric (NOI, cap rate, DSCR, cash-on-cash return) should reflect your tax basis, not the seller's.

What the T-12 Will Not Tell You

The trailing 12-month operating statement shows the seller's actual expenses, including their actual tax payments. This is accurate historical data. It is also completely irrelevant to your future ownership.

The T-12 tax line reflects the seller's assessed value. Your assessed value will be different. Using the T-12 tax figure in your forward projections is the single most common property tax error in CRE acquisitions.

The same applies to the expense ratio. If you calculate your expense ratio using the seller's T-12 expenses, the tax component will be understated. Your actual expense ratio will be higher. On a property where taxes represent 25% to 35% of total expenses, a 50% increase in the tax bill can push the expense ratio up by 5 to 8 percentage points.

The Mental Model

One sentence to remember: Always underwrite your tax bill, not the seller's.

The seller's tax bill is a product of their purchase price, possibly from a different economic era. It has no bearing on what you will owe. Every pro forma you receive will use the seller's number because it makes the deal look better. Your job is to replace it.

This applies to every deal, in every market, every time. There is no scenario where the seller's tax basis is the right number for your underwriting.

Where This Fits in Your Diligence Process

Property tax reassessment is a first-pass screen. You do not need to visit the property or read the lease abstracts to calculate it. All you need is the purchase price, the county's effective tax rate, and 60 seconds of math. If the reassessed tax bill materially changes the deal economics, you know before you spend money on inspections, appraisals, or legal review.

Run the numbers yourself on Yield Desk Quick Screen. Plug in your purchase price and the actual tax rate. If the cap rate and DSCR still work with your tax basis, the deal passes the first screen. If they do not, you just saved yourself weeks of diligence on a deal that was never going to pencil.

Where to Go Next

This is educational content, not investment advice. Tax rates, assessment ratios, and reassessment rules vary by jurisdiction and change over time. Consult a local tax attorney or CPA before relying on specific figures for acquisition decisions.