Commercial Property - Frequently Asked Questions

What is an income-producing property?

An income-producing property is real estate that is purchased and held primarily for its ability to generate income. This income is typically produced through leasing space to tenants or collecting rent. Examples include office buildings, shopping centers, apartment complexes, warehouses, and hotels. The value of these properties is closely tied to their ability to produce consistent and sustainable income over time.

How are Commercial properties categorized?

Commercial properties are grouped into six major categories based on their primary use:
Land
Office
Retail
Industrial
Multifamily (apartments)
Specialty/Hospitality (such as hotels, nursing homes, and unique-purpose properties)

Each category has its own market characteristics, income patterns, and valuation considerations. Because of this, properties are appraised using data and methods specific to their category rather than being valued in the same manner as residential property.

How often are commercial properties appraised?

Under Section 23.01 of the Texas Property Tax Code, all taxable property must be appraised at its market value as of January 1 of each year. As a result, commercial properties are reviewed annually and appraised based on market conditions in effect on that date.

How is Commercial Property Appraised?

Commercial property is appraised using generally accepted appraisal methods as required by the Texas Property Tax Code. Appraisers consider the type of property and the quality of available data and may use one or more of the three primary approaches to estimate market value:

Cost Approach – Estimates what it would cost to build a new structure with similar usefulness, then subtracts depreciation for age, wear and tear, and functional or economic factors. This approach is often used for newer or special-purpose properties.

Sales Comparison Approach – Reviews recent sales of similar properties in the market and makes adjustments for differences such as size, location, age, and condition to arrive at an estimated value.

Income Approach – Estimates value based on the property’s ability to generate income. This is done by analyzing rent, operating expenses, and vacancy, then converting the resulting Net Operating Income into value using a capitalization rate.

The approach or combination of approaches used depends on the type of property and the availability of reliable market information.

What is Market Value?

The Appraisal District is required by law to appraise all taxable property at its market value. Market value is defined by the Texas Property Tax Code as the price at which a property would transfer for cash or its equivalent under current market conditions if the property is exposed for sale on the open market for a reasonable period of time; both the buyer and seller know all the uses and purposes to which the property is adapted and for which it is capable of being used, as well as any legal restrictions on its use; and neither party is under duress and both seek to maximize their financial benefit.

In simple terms, market value represents what a typical buyer would reasonably pay a willing seller for the property as of January 1 of the tax year.

What is a Capitalization Rate (Cap Rate)?

A capitalization rate, or cap rate, is a key component of the income approach to value and is used to convert a property’s income into an estimate of market value. It represents the rate of return an investor would expect from a particular type of property, based on factors such as risk, location, property type, tenant stability, and overall market conditions.

The income approach is based on the principle that a property’s value is related to both:
• The quantity of income it produces, measured as Net Operating Income (NOI), and
• The quality and stability of that income, which is reflected in the capitalization rate.

Properties with stable income and lower risk typically sell at lower cap rates, while properties with more uncertain income or higher risk usually require higher cap rates to attract investors.

The basic formula used in this approach is:

Value = Net Operating Income ÷ Capitalization Rate

For example, if a property generates $100,000 in Net Operating Income and the market supports a 10% capitalization rate, the estimated value would be $1,000,000.

What is Gross Building Area (GBA)?

Gross Building Area refers to the total enclosed area of a building measured from the exterior walls. It includes all usable floor space as well as interior hallways, stairwells, mechanical rooms, and basements. It does not include unenclosed areas such as exterior balconies or open parking structures.

What is Net Rentable Area (NRA)?

Net Rentable Area, also called rentable area or usable area, is the portion of the building for which rent can be charged. This includes tenant spaces and certain common areas depending on lease structure, but excludes mechanical rooms, stairwells, and other non-rentable areas.

What is secondary income?

Secondary income, also known as ancillary income, is income generated from sources other than base rent. Examples include parking fees, vending machines, laundry facilities, billboard leases, storage units, and service fees. While not the primary income source, this revenue contributes to the overall value of an income-producing property.

Are exemptions available for commercial properties?

Some commercial properties may qualify for property tax exemptions when they are used for specific purposes defined by law. These exemptions are based on how the property is used, not simply on who owns it.

Examples of qualifying uses include properties used for affordable or low-income housing, childcare or daycare facilities, pollution control equipment, and properties owned and operated by charitable, religious, or educational organizations.

To receive an exemption, the property must meet all statutory requirements, and the owner must file an application with the appraisal district using forms approved by the Texas Comptroller of Public Accounts. Approval is not automatic, and exemptions must be applied for and renewed when required by law. Each exemption type has specific eligibility criteria that must be met.

Can I request a property inspection?

Yes. If the Appraisal District’s records contain incorrect information about the physical characteristics of a property (such as size, age, or condition), the owner may request an inspection by calling (210) 242-2432 and asking to speak with a Commercial Appraisal Staff member or by submitting a request through our online Help Center (BCAD.org). Property owners may also verify current property characteristics by using the Appraisal District’s Property Search tool.

Why did my commercial property value increase?

Commercial property values may change from year to year due to market conditions. Factors that can affect value include increases in market rents, lower vacancy rates, rising construction costs, higher sales prices of similar properties, and changes in operating income. Even if no physical changes were made to the property, market activity could still impact its value.

Does the Appraisal District use my actual rent and expenses?

The Appraisal District considers market-based income and expense data for similar properties when estimating value. While owner-provided income and expense information can be helpful, values are based on typical market performance rather than a single property’s individual financial situation, unless that information is verified and considered representative of the market.

What expenses are allowed in the income approach?

Allowable expenses generally include normal operating costs such as maintenance, management fees, utilities (paid by the owner), insurance, and reserves for replacement. Expenses related to financing (mortgage payments), income taxes, or personal business decisions are not included in the income approach.

Why doesn’t the Appraisal District use my purchase price?

A recent purchase price is one factor that may be considered when determining value, but it does not automatically establish market value. The sale must meet the definition of market value under the Texas Property Tax Code, meaning it must be an arm’s-length transaction between a willing buyer and seller, without unusual financing, concessions, or distress conditions.

What is an arm’s-length transaction?

An arm’s-length transaction is a sale between unrelated parties, where neither party is under pressure to buy or sell and both are acting in their own best interest. Sales between family members, business partners, or involving foreclosures or special incentives may not represent true market value.

Why are cap rates different between properties?

Capitalization rates differ because not all properties carry the same level of risk or income stability. Cap rates reflect how investors view the balance between return and risk for a particular property.

Factors such as property type, location, age, and physical condition can affect how desirable a property is and how reliable its income may be. Tenant quality and lease terms also play an important role—long-term leases with financially strong tenants generally provide more stable income, while short-term leases or weaker tenants increase the chance of vacancy or nonpayment.

Overall market conditions, such as interest rates and investor demand, also influence cap rates. Newer properties with stable tenants in strong locations usually sell at lower cap rates because they are considered lower risk, while older properties or those with less stable income typically require higher cap rates to compensate for higher risk.

What information can I provide to help support my value?

Property owners may submit documents such as:
• Rent rolls
• Income and expense statements
• Recent fee appraisals
• Closing statements
• Lease agreements
• Photos or repair estimates for deferred maintenance

This information helps the Appraisal District better understand the property’s performance and condition.

What happens if my property is vacant or partially vacant?

Vacancy is considered in the income approach through a vacancy and collection loss factor. However, values are based on typical market vacancy rather than temporary or short-term conditions unless the vacancy is prolonged and supported by market evidence.

Does remodeling or tenant finish-out increase value?

Improvements such as renovations, expansions, or major tenant finish-out may increase value if they improve the property’s income potential or marketability. Routine maintenance generally does not increase value, while deferred maintenance may reduce value.

Why are commercial values different from residential values?

Commercial properties are primarily valued based on their income potential and market performance rather than comparable home sales. This means changes in rent, occupancy, and operating costs play a much larger role in determining value.

What is economic obsolescence?

Economic obsolescence refers to a loss in value caused by external factors outside the property’s control, such as declining market demand, traffic pattern changes, zoning restrictions, or nearby competing developments.

Can I protest my commercial property value?

Yes. Property owners have the right to file a protest if they disagree with the appraised value. Protests must be filed by the statutory deadline shown on the Notice of Appraised Value. Value notices are typically mailed in early April each year. In most cases, the deadline to file a protest is May 15. Property owners may present their protest in person, by mail, by using our online portal or by appointing an authorized agent to represent them.

Why is my property valued higher than last year if my income went down?

Appraised value reflects market conditions as of January 1, not just one property’s short-term performance. Temporary vacancies, tenant turnover, or one-time expenses may not represent long-term market trends. Values are based on typical market income and expenses for similar properties.

Does the Appraisal District consider property condition?

Yes. Physical condition, age, construction quality, and deferred maintenance are all considered when appraising commercial property. Properties in poorer condition or with functional limitations may be adjusted downward compared to newer or well-maintained properties.

Why is my value based on income I am not actually receiving?

The income approach estimates what the property could earn in a typical market scenario, not necessarily what it is earning under individual ownership or management decisions. This ensures fairness and consistency among similar properties.

Does location affect my value?

Yes. Location is a major factor in commercial value. Properties in high-demand areas with good access, visibility, and surrounding development typically command higher rents and lower vacancy rates than properties in weaker locations.

What is functional obsolescence?

Functional obsolescence is a loss in value caused by design features that are outdated or no longer meet current market preferences, such as low ceiling heights, inefficient layouts, inadequate parking, or lack of modern amenities.

What is physical depreciation?

Physical depreciation is the loss in a property’s value caused by normal “wear and tear” over time as a building ages and is used. It reflects the gradual decline in the condition of building components such as the roof, HVAC systems, plumbing, flooring, windows, and other structural or mechanical parts.

As these components get older, they become less efficient and eventually require repair or replacement. Appraisers account for this decline in condition when estimating a property’s value, since an older building in poorer condition is typically worth less than a newer building with the same utility.

What is stabilized income?

Stabilized income is the typical long-term income a property is expected to produce under normal market conditions. It assumes a reasonable occupancy level and excludes short-term income changes caused by things like temporary vacancies, new lease-up periods, or unusual market conditions.

Appraisers use stabilized income to reflect market-supported performance rather than temporary highs or lows that do not represent the property’s true earning potential.

Why does the Appraisal District use mass appraisal instead of a full fee appraisal?

The Appraisal District appraises thousands of commercial properties each year and uses mass appraisal techniques to ensure uniform and equitable treatment. These methods rely on standardized models and market data rather than individualized narrative appraisals for each property.

What does “equity” mean in property appraisal?

In property appraisal, equity means that similar properties are appraised at similar levels of value. Properties with comparable size, location, use, age, and condition should be valued in a consistent way. The goal is to ensure that no property owner is unfairly taxed more or less than others with similar properties.

Equity focuses on fairness across groups of comparable properties rather than on the unique circumstances of a single owner. This helps create a uniform tax base so that all property owners share the tax burden proportionally based on the market value of their property.

Can personal financial hardship reduce my property value?

No. Property value is based on the characteristics of the property and overall market conditions, not on the owner’s personal financial situation or business performance. Appraisers must estimate what a typical buyer would pay for the property in the open market.

Factors such as debt, cash flow problems, or operating losses are unique to the owner and not to the property itself and therefore do not affect the property’s market value. Because these circumstances do not change what the property would sell for, they cannot be used to reduce the appraised value for property tax purposes.

Why are lease terms important?

Lease terms help show how steady and dependable a property’s income will be. Things like how long the lease lasts, whether the rent goes up over time, who pays for expenses, and how strong the tenant is financially all affect how risky or stable the income is.

Properties with longer leases and reliable tenants usually have more predictable income, while short leases or weak tenants can mean more vacancies and less certain income, which can lower the property’s value.

Why do different commercial properties on the same street have different values?

Even when commercial properties are located on the same street, they can have different values because no two properties are exactly alike. Differences in building size, layout, age, and physical condition can affect how useful or attractive a property is to potential buyers and tenants.

Value can also vary based on the type of tenants, how the leases are structured, and how much income the property generates. A property with long-term leases and stable tenants may be worth more than a similar property with short-term leases or higher vacancy.

These differences in characteristics and income potential explain why properties in close proximity can still have different market values.

What is a fee appraisal and how is it different from the District’s appraisal?

A fee appraisal is a private appraisal prepared by an independent appraiser for a specific client and purpose, such as obtaining a loan, refinancing, buying or selling a property, or settling an estate. It is based on a detailed inspection of a single property and reflects the conditions and assumptions relevant to that particular assignment and date of value.

The Appraisal District’s appraisal is performed for ad valorem (property tax) purposes and must follow the Texas Property Tax Code. Instead of valuing one property at a time, the district uses mass appraisal methods to value large groups of similar properties in a uniform and consistent manner as of January 1 each year.

Because fee appraisals and district appraisals serve different purposes and use different methods and assumptions, it is possible for a fee appraisal value and the district’s appraised value to differ. Each is valid within the context of its intended use.

Can environmental issues affect value?

Yes. Environmental conditions can have a significant impact on a property’s market value. Issues such as environmental contamination, being located in a floodplain, or being subject to environmental or regulatory restrictions can make a property harder to sell, develop, or lease.

These factors may increase operating costs, limit how the property can be used, or reduce the pool of potential buyers and tenants. When marketability or income potential is reduced, the property’s value may also be lower. Appraisers consider these conditions when they are known and supported by market evidence.

Why is January 1 important?

January 1 is the official valuation date for property tax purposes in Texas. This means all property is appraised based on its condition and market value as of January 1 of the tax year. Appraisers must consider the market data and information that existed on or before that date when estimating value. Changes that happen after January 1—such as property improvements, new leases, or shifts in the real estate market—are generally not reflected in the current year’s value. Instead, those changes are usually considered in the following year’s appraisal. This system helps ensure that all properties are valued using the same point in time, while promoting fairness and consistency.

What happens if the Texas Governor declares a disaster in my area?
When the Texas Governor declares a disaster for a county or region, certain temporary property tax relief may become available under state law. Under Section 11.35 of the Texas Property Tax Code, a property owner may qualify for a temporary exemption if their property is physically damaged as a direct result of the declared disaster.

To qualify, the property must be located in the disaster-declared area and must have sustained damage caused by the disaster. The exemption applies only to the portion of the property that is damaged and only for the portion of the year that the damage exists.

The amount of the exemption is based on the percentage of damage and the length of time the property remains in a damaged condition during the tax year.

Property owners must file an application with the appraisal district using a form approved by the Texas Comptroller of Public Accounts and provide documentation showing the extent of the disaster-related damage. The exemption is temporary and is removed once the property is repaired or no longer qualifies.