You are looking at a renovated rowhouse. The listing sheet shows annual property taxes of 940 dollars. You pull the two houses on either side and both are paying around 3,800.
Nothing is wrong with the data. The property carries a tax abatement with six years left on it. For six more years the owner pays almost nothing on the improvement value, and then the bill nearly quadruples on a date that is already printed on a schedule somebody filed at the county.
This creates a very specific underwriting question, and it is one most investors never think to ask until a lender answers it for them in a way they did not expect: which tax figure goes into the ratio, the one on the bill today or the one that arrives in year seven?
The answer is not standardized. That is the whole article.
What an abatement actually exempts
These programs go by different names depending on the state and the municipality, and the details vary enormously, but the structure is almost always the same. A local taxing body wants to encourage new construction or substantial rehabilitation in a designated area, so it exempts some or all of the assessed value of the improvements from taxation for a set number of years. The land stays fully taxable.
That last distinction explains the 940 dollar bill. The owner is not paying zero. They are paying full freight on a vacant lot’s worth of assessed value while the building sits outside the tax base.
Two common shapes:
The cliff. Full exemption on improvements for a fixed term, often ten years, then the whole thing lands at once. The bill goes from 940 to 3,800 between one year and the next.
The phase out. The exemption declines on a published schedule: one hundred percent in year one, then ninety, then eighty, and so on. The increases are smaller but they arrive annually, which is its own kind of problem for a fixed rent roll.
Either way the schedule exists in writing. You can read it today. That is what separates this from the thing it is constantly confused with.
This is not a reassessment, and the difference matters
When you buy a property, many counties reassess at the new sale price, and the tax bill you underwrote can rise sharply afterward. That is a genuine risk and it ambushes investors regularly. It is covered in property tax reassessment after purchase.
An abatement burning off is the opposite kind of event. It is not a surprise, it is not discretionary, and it is not a function of what you paid. It is a scheduled step up with a known date and a known amount, visible before you write the offer.
It is also not a special assessment, which is an additional charge layered on top of the regular bill for a sewer line or street work. That is covered in the special assessment on the tax bill. An abatement is a subtraction that expires. A special assessment is an addition that amortizes. A property can carry both, and some do.
The math, and why the question is not academic
Take a property at 240,000 dollars with 1,950 dollars of monthly market rent. Insurance runs 125 a month. The abated tax bill is 940 a year, or about 78 a month. Fully taxed it is 3,800 a year, or about 317 a month.
Finance 200,000 of it at 7.25 percent on a thirty year fixed. Principal and interest come to roughly 1,364 dollars.
Underwritten on the abated bill: 1,364 plus 78 plus 125 gives a payment obligation of 1,567. The ratio is 1,950 divided by 1,567, or 1.24. That is a comfortable file.
Underwritten on the full bill: 1,364 plus 317 plus 125 gives 1,806. The ratio is 1,950 divided by 1,806, or 1.08.
On a program with a 1.10 floor, the exact same property on the exact same terms either sails through or gets declined, and the only variable is which line a credit policy tells an underwriter to use. Nothing about the building, the rent, or you has changed.
Run both versions before you make an offer. The DSCR deal calculator takes a minute, and if the ratio mechanics are not second nature, how to calculate DSCR is the foundation. Taxes and insurance are the two expense lines inside the ratio, which is why both of them move it so hard, something explored in how rising insurance and tax costs are reshaping DSCR deals.
Ask the question before you are in contract
Approaches differ. Some programs take the current actual bill at face value, because that is what the borrower will actually pay next year. Some require the fully assessed figure, on the view that a loan amortizing over thirty years will outlive a six year abatement by a wide margin. Some sit in between and use the figure that will apply at a stated future point.
All three positions are defensible. None of them is predictable from the outside. So the move is simple and nobody makes it: ask, in writing, before you go under contract. The answer determines your maximum loan amount on that property, and finding out at underwriting costs you a rate lock.
The escrow shock nobody budgets for
Suppose you qualify on the abated figure and close. Here is what year seven looks like, and it is worse than the headline number.
Your escrow account is being funded at 78 dollars a month because that is what the bill was when the account was set up. How escrow accounts are built and adjusted is covered in escrow and impounds on a rental loan.
The abatement expires and the new bill arrives at 3,800. Two things now happen in the same notice.
First, the ongoing monthly collection rises from 78 to about 317, a jump of 239 dollars.
Second, and this is the part that stings, the servicer has already paid a larger bill than the account was funded for, so there is a shortage. Depending on when in the cycle the step up lands, that shortage can easily run 1,400 dollars, and it is typically spread over the following twelve months. That adds roughly another 117 a month.
Your payment goes up about 356 dollars in one letter, of which 117 is temporary and 239 is permanent. If you had not read the abatement schedule, that letter arrives as a surprise on a property you have owned for six years and thought you understood.
The following year the shortage recovery falls off and the payment settles back down by that 117. Escrow accounts that end up overfunded run the other direction, described in escrow refund and surplus.
Waiving escrow does not solve this. It just moves the 3,800 from a monthly collection to a lump sum you have to have on hand. Escrow waivers covers when that is even available and whether it is a good idea.
Does the abatement even survive the sale?
This is the question with the largest downside and the least attention paid to it.
Some abatements run with the land and transfer to a new owner for the remaining term. Some are personal to the original applicant and are extinguished on transfer. Some require the new owner to file for continuation within a window, and missing the window ends it. A few reset.
An investor who assumes the abatement transfers, underwrites to a 78 dollar monthly tax line, and then learns at the first billing cycle that it died at closing has lost 239 dollars a month of cash flow on a property they bought for the cash flow.
Verify this with the taxing authority in writing. Not the listing agent, not the seller, not the title company’s summary. Get the certificate, the remaining term, the step down table if there is one, and the transfer rule. The same instinct applies to municipal requirements generally, which have a habit of surfacing late: municipal rental registration and occupancy inspections is the other common version of this.
While you are at the courthouse, check for anything else attached to the parcel. Transfer taxes, recording fees, and unpaid municipal charges all land at closing and are routinely underestimated: transfer tax, recording fees, and municipal liens.
What it does to value
There is a valuation distortion here worth naming. In neighborhoods where abatements are common, buyers bid partly on the low carrying cost, which means sale prices embed the benefit. If every comparable sale carries a fresh ten year abatement and your subject has four years left, the comps are not comparable on the one dimension that drives the payment.
Appraisers vary in how, or whether, they handle this. It is not a standard line on the grid, which is explained in how an appraiser turns three sold houses into your rental’s value. Do not count on the appraisal to protect you from paying a full abatement price for a partial abatement property.
Underwrite it yourself at the full number
Whatever the lender uses, build your own model on the fully taxed figure. If the deal only works on the abated bill, you are not buying a rental, you are renting a subsidy with an expiration date and a thirty year loan behind it.
Build the net operating income with the real stabilized expense, which is the discipline in net operating income on a rental. The tax treatment on your return is a separate matter and does not change the ratio, covered in rental property tax deductions. Other incentive programs tied to a designated area have their own underwriting profile, discussed in opportunity zone rentals.
A good abated property is still a good property. Six years of suppressed carrying cost is real money and it compounds if you put it to work instead of spending it. Just know the date, know the amount, know whether it transfers, and know that your rent in year seven needs to be higher than your rent today.
Other closing table items can quietly reorder a timeline the same way, like an overseas seller, covered in FIRPTA withholding on a rental purchase, or an occupancy right recorded against title, covered in a rental encumbered by a life estate.
Looking at an abated property and want to know which tax figure a lender will use before you commit? Get in touch or call 412-990-2941 and we will find out before you are under contract instead of after.
FMC Capital is a Pittsburgh-based mortgage brokerage, NMLS #1840537. We place loans on rentals and flips for investors across Pennsylvania and additional states. Abatement programs, terms, and transfer rules differ by state and municipality; lender treatment of abated taxes varies and is subject to change. This is not tax or legal advice.