Let’s look back at our books for 2005: rents were up, occupancies were up, and expenses were down. Even after paying the Internal Revenue Service you think you still had a banner year. But like clockwork, that always-escalating property tax is there to take a lion’s share of the results of your hard work from the past year.

January 31st has passed, and that’s when property owners get to part ways with a tremendous amount of the income generated from their property. Exclusive of debt-service, property taxes are the single largest expense that commercial property owners face. That’s why it’s imperative to be knowledgeable of the process and potential remedies available to you in order to have the best opportunity to minimize your taxes. If we can successfully reduce our largest expense (property taxes), then we have obviously increased our net income. The end result is more income for the property owner, and a higher capitalized value of the income-producing real estate.

The Process
In early April/May, Central Appraisal Districts (CADs) throughout the state of Texas will be mailing the proposed value notices to owners. The CADs are only required to mail notice if the value has changed from the prior year, but more often than not, notices are sent annually regardless. The protest deadline is May 31st or 30 days after the notice date, whichever is later.
The following are all grounds for dispute for filing a petition/appeal with the Appraisal Review Board (ARB):

• Market value assessed on the subject property
• Unequal/non-uniform assessment of the subject property compared to comparable properties
• Erroneous inclusion of the subject property on the assessment roll
• Exclusion of qualified exemptions, which were timely filed
• Incorrect taxing jurisdictions
• Ownership disputes
• Actions by the CAD or Appraisal Review Board that adversely impact the subject property assessment

The most common basis of dispute is market value and/or unequal appraisal. Using the market value and/or unequal appraisal basis, we must first determine what exactly we are protesting. The assessment should be reflective of the land and building value only. There should not be any inclusion of business personal property or inventory, as these items are assessed on a separate account. Additionally, the Texas Property Tax Code also prohibits the assessment of any goodwill or intangibles, including business value.

The best place to start the research is by obtaining a copy of the CAD’s appraisal records for your property. These records should state the land area, building area, construction type, year built, ownership, legal description, and other descriptions and characteristics necessary in order to perform an appraisal of your property. The records may also include sales comparables, income/expenses estimates or models and assessment comparables utilized by the CAD in determining your assessment. It is imperative to go over these records with a fine-tooth comb, as any errors discovered here may quickly and easily resolve your valuation issues.
The next step is to determine which valuation methodology or methodologies are going to be most relevant and beneficial to our protest case.

Following are the three approaches to market value:

Cost Approach
This value estimate is based on the replacement cost [of your facility today] of the improvements, less any and all depreciation. Depreciation can consist of deterioration, functional obsolescence (inadequacy or super adequacy in floor plan, mechanical equipment, size, etc.) and external obsolescence (lack of demand, economic conditions, change of property uses in the area). This method is most typical for new construction or very unique properties where sales comparables are not available, or difficulties exist in determining income allocated to real estate versus the business concern.

Market Approach (Sales)
This value estimate is based on the principle that the recent sales price of other properties deemed comparable, with appropriate adjustments being made for differences, will result in an indication of value for the subject property. This approach is most useful when a number of properties have sold or are available for sale in the immediate market, and will provide a range in which the value indication for the subject property will fall. This approach can often provide misleading results when valuing income-producing properties, as the sale price of comparables is reflective of the income, expenses, management, and intangibles which apply to that comparable and not necessarily to the subject.

Income Approach
As defined by the Appraisal Institute, “…in the income capitalization approach, the present value of the future benefits of property ownership is measured. A property’s income streams and its resale value upon reversion may be capitalized into a present, lump sum value.” In layman’s terms, its income, less expenses, divided by a capitalization rate (return on investment) that results in an indication of value.
This is typically the most accurate valuation for income-producing properties, but it is also the most difficult and time consuming. It requires extensive research and data analysis, as well as proper application. It is critical to remember that the indication of value may very often include the business or enterprise value, and that appropriate deductions must be made to accurately determine the valuation of the real estate only.

Uniform & Equal
This is not an appraisal method utilized by fee appraisers for estimating market value, but rather one utilized in Texas and a few other states, for assessment purposes only. This value is determined by analyzing the median level of assessment of appropriately adjusted comparables. This is a practical (however time-consuming) basis for property tax protests.

The Protest
After you have filed your protest, you will be given at least 14 days notice of the date and time of your hearing. Most jurisdictions allow for an informal meeting with a CAD appraiser just before the actual Appraisal Review Board hearing. This is an opportunity for the CAD and the property owner and/or consultant to discuss each party’s case and review one another’s evidence as utilized in their determination of value. If an agreement about value can be reached at this informal meeting, then both parties sign a stipulation agreement and no further action is necessary. The majority of appeals each year are usually resolved in this manner, but under no circumstance should a property owner feel compelled to enter into an agreement that is not justified by the evidence presented.
If an agreement at the informal hearing is not reached, then you proceed with a formal hearing before the (ARB). The ARB typically consists of a three-member panel appointed by the CAD board of directors, but many jurisdictions have up to 10 panel members hearing cases. At the ARB hearing both the property owner and CAD appraiser will present their evidence to the panel and a decision is typically rendered upon completion of the hearing. It’s imperative to remember that the ARB has the authority to increase the value above that proposed by the CAD; this does not occur at the informal hearing. Battles must be chosen carefully and executed in a very diligent manner in order to achieve successful results.

Additional Remedies
The ARB is required to make its decision in the form of a written order and to deliver a copy of the order to the property owner by certified mail. This order must inform the property owner of his right to appeal the ARB’s decision if he is still dissatisfied with the appraised value of the property. The property owner has two options. He may file a petition for review with the district court or request binding arbitration.

Litigation
A petition contesting the appraised value of the property must be filed with the district court within 45 days after receipt of the final order from the ARB. A property owner may appeal a determination of the ARB based on a claim that the property has been assessed above market value and/or has not been appraised in an equal and uniform manner.
After determining the proper appraised value of the property, the court must order the appraised value changed to the appropriate value calculated on whatever basis the owner demonstrated a right to use for relief. Once a final determination of the appeal is made, the appraisal rolls are required to be corrected to reflect the determination of the court and the property owner is entitled to receive a corrected or supplemental tax bill or a tax refund, depending on the effect of the determination on the owner’s tax liability.
Additionally, relief of attorneys fees will be awarded by the court in the event that the taxpayer prevails in the case. The Property Tax Code provides that an award of reasonable attorneys fees is not to exceed the greater of $15,000 or 20 percent of the total amount by which the property owner’s tax liability is reduced as a result of the appeal. The award of attorneys fees, however, may not exceed the lesser of $100,000 or the total amount by which the property owner’s tax liability is reduced as a result of the appeal.
Review by the district court in property tax cases is by trial de novo. Black’s Law Dictionary defines de novo trial as, “trying a matter anew; the same as if it had not been heard before and as if no decision had been previously rendered.” Basically, this means that neither the taxing authority nor the taxpayer is bound by the evidence previously submitted at the ARB or by the value of the property on the appraisal roll.
Over 95% of all property tax appeals favorably settle well in advance of trial. Typically, attorneys fees are waived by both parties as a part of the settlement. As with any form of litigation, you should discuss the positive and negative aspects of your case with your attorney prior to pursuing your claim in district court.

Arbitration
In 2005, the Texas Legislature added Chapter 41A to the Texas Property Tax Code, which provides certain taxpayers with an alternative method of appealing an ARB, order: binding arbitration.
Chapter 41A provides a methodology for property owners to appeal appraisal review board orders without resorting to the courts. To qualify for binding arbitration, the property must be real property (no personal property allowed) and the appraised or market value (whichever is in dispute) must be $1,000,000 or less as determined by the ARB. Additionally, the property owner cannot dispute any matter other than appraised or market value.
To institute an arbitration appeal, the property owner must file with the appraisal district a completed form of request for binding arbitration together with a $500 deposit payable to the comptroller. The request and deposit must be filed within 45 days of receipt of the ARB’s order, the same deadline as for filing a district court appeal. A property owner cannot pursue both avenues of appeal, and litigation precludes arbitration.
After the hearing has concluded, the arbitrator has 20 days to issue an award determining the value. The arbitrator also has the authority to award attorney fees to the prevailing property owner. The arbitrator’s value determination is used to determine who pays the arbitrator’s fee. If the final value is closer to the property owner’s value opinion, then the appraisal district is required to pay the fee and the property owner’s deposit (less the comptroller’s 10 percent administration fee) is refunded.
There are many pros and cons to the binding arbitration, therefore I would recommend discussing it with your property tax consultant and/or attorney, prior to engaging, to ensure complete awareness of all the details.

In-House vs. Outsource
Depending upon the properties to be reviewed and the level of in-house expertise, it may be cost-effective to delegate part or all of the property tax function to an outside service provider. Since assessment calculations and administrative procedures vary among jurisdictions, this may be even more beneficial for owners of multiple properties as it is difficult for one person to be familiar with all aspects of the appeals process in various regions.
Among the criteria for selection of a consultant, you will want to ensure that the consultant possesses sufficient valuation skills, based on training and experience, along with a successful track record in securing assessment reductions.
Typical functions that an owner should expect a consultant to perform would include the following:

• Examine the assessor’s records to ensure accuracy in ownership, classification and measurement.
• Review the property’s physical characteristics (i.e. age, construction, location, ingress/egress, etc.) to determine their effect on property value.
• Verify assessments on comparable properties to determine if subject is equitably assessed.
• Review and analyze the property’s income and expenses to ensure assessment is in line with property’s economic profile.
• Formalizing of an appeal strategy.
• Attendance of informal and formal hearings on client’s behalf.

Additionally, the tax consultant may be called upon to perform other services for the client unrelated to assessment reduction such as tax estimates for budgeting purposes, auditing tax bills, and streamlining the tax payment process.

A close relationship with a property tax consultant can provide value beyond those of tax reductions. Where both the owner and the consultant operate as a team, the combined effort can contribute significantly to increased profitability for the property owner. Before pursuing your next appeal, take the time to evaluate what your expertise is and where your time is best spent to determine if you would benefit from out-sourcing.