A.CRE

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

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.

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.

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.”

Texas law “caps annual increases in the assessed value at 10%,” providing some predictability to property owners even when market values rise sharply.

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.

SPP “must factor in the potential for a significant tax increase into their investment analysis” to ensure the acquisition continues to meet target yields.

Investors like SPP mitigate risk by “closely monitoring the appraisal district’s annual reassessments” and maintaining reserves for tax obligations.

Alternative Meanings:
  • Mill
    Un "mill" equivale a 1/1,000 de dólar, es decir, 1 dólar por cada 1,000 dólares de valor catastral. Se utiliza para calcular el tipo de gravamen de una propiedad.
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