Mill
A “mill” is 1/1,000 of a dollar, or $1 for each $1,000 of assessed value. A mill is used to calculate a property’s millage rate.
Putting “Mill” in Context
Scenario Overview
Southeastern Pension Partners (SPP), a large institutional investor focused on stable, income-producing assets, is acquiring Magnolia Ridge Apartments, a 250-unit market-rate multifamily property in Frisco, Texas. Frisco, located in the Dallas-Fort Worth metroplex, is experiencing rapid growth, making it a competitive market for multifamily acquisitions. The assessed value of Magnolia Ridge Apartments is $40 million, and the property’s most recent mill rate is 0.021951.
Understanding the Mill Rate and Property Taxes
Texas is a non-disclosure state, meaning the actual sales price of the property is not publicly disclosed. However, the tax assessed value is determined annually by the local appraisal district. In this case, while the property’s market value has increased by approximately 30% over the past five years, the tax assessed value has risen by only 20%, leading to concerns of a potential “catch-up” adjustment.
Additionally, Texas law caps annual increases in the assessed value at 10%, offering some predictability to property owners despite the rising market values.
Property Tax Estimation and Risk Analysis
The current mill rate for Frisco is 0.021951, which translates to $21.951 in property taxes for every $1,000 of assessed value. Based on the $40 million assessed value, the current property tax liability is calculated as follows:
Formula:
Property Tax = (Assessed Value / 1,000) × Mill Rate
Calculation:
Property Tax = ($40,000,000 / 1,000) × 0.021951
Property Tax = $878,040 annually
SPP, however, recognizes the possibility that the local appraisal district may adjust the assessed value closer to the market value following the acquisition. With a market value estimated at $50 million, the maximum annual increase in assessed value due to Texas’s 10% cap would be:
- Year 1 Assessed Value: $40,000,000 × 1.10 = $44,000,000
- Year 2 Assessed Value: $44,000,000 × 1.10 = $48,400,000
- Year 3 Assessed Value: $48,400,000 × 1.10 = $50,000,000 (capped at market value)
Using the mill rate, SPP projects potential tax liabilities over the next three years:
- Year 1 Tax: ($44,000,000 / 1,000) × 0.021951 = $965,844
- Year 2 Tax: ($48,400,000 / 1,000) × 0.021951 = $1,062,578
- Year 3 Tax: ($50,000,000 / 1,000) × 0.021951 = $1,097,550
Strategic Considerations
These projections highlight the importance of accounting for property tax increases in acquisition underwriting. SPP must factor in the potential for a significant tax increase into their investment analysis to ensure the deal meets their target yield. While Texas’s 10% cap provides some protection, the upward pressure on assessed values in rapidly growing markets like Frisco creates a real risk of rising taxes over time.
By closely monitoring the appraisal district’s annual reassessments and maintaining reserves for tax payments, SPP aims to mitigate this risk and ensure a steady cash flow from Magnolia Ridge Apartments.
Frequently Asked Questions about “Mill” in Real Estate Property Taxation
What is a "mill" in property taxation?
A “mill” is defined as 1/1,000 of a dollar, or $1 for every $1,000 of assessed value. It is used to calculate a property’s millage rate.
How is the mill rate used to calculate property taxes?
The formula is: Property Tax = (Assessed Value / 1,000) × Mill Rate. For example, Magnolia Ridge Apartments with a $40 million assessed value and a 0.021951 mill rate has an annual tax of $878,040.
Why is the assessed value important in mill rate calculations?
The assessed value is the base amount used for tax calculations. Even in a non-disclosure state like Texas, it’s reassessed annually and “determined by the local appraisal district.”
How does Texas’s 10% cap on assessed value affect tax increases?
Texas law “caps annual increases in the assessed value at 10%,” providing some predictability to property owners even when market values rise sharply.
What are the projected tax increases for Magnolia Ridge Apartments?
If the assessed value increases to match market value, annual taxes are projected to rise to:
• Year 1: $965,844
• Year 2: $1,062,578
• Year 3: $1,097,550
These estimates are based on the same 0.021951 mill rate.
Why must property tax projections be included in underwriting?
SPP “must factor in the potential for a significant tax increase into their investment analysis” to ensure the acquisition continues to meet target yields.
How can investors manage rising property tax risk?
Investors like SPP mitigate risk by “closely monitoring the appraisal district’s annual reassessments” and maintaining reserves for tax obligations.
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