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Popularity Has a Price

Rising Popularity May Equal Rising Property Taxes

by Kay Bell and Jay Kanter


Learn the three main methods used to value property in Texas and how to appeal a value that is simply too high.

Texas’ booming economy means it's winning the popularity contest for business and as a result people are flocking to our yellow rose like the worker bees they are. Business is indeed booming which has increased the demand for housing, storage and everything else needed to accommodate everyone. Naturally, with such high demand, prices go up. All the new residents have created a demand for real estate. That's great for sellers, but for many homeowners and businesses holding onto their property, the resulting valuation increases have led to some skyrocketing property tax bills. An analysis by the Lincoln Institute of Land Policy of 2013 real estate taxation found Texas' property tax rates were the fourth highest in the United States and about 58 percent above the median rate for all states. Another study, issued in 2015 by the Tax Foundation, placed Texas sixth nationwide in property tax rankings. Comparisons of state real estate tax rates by CoreLogic in 2016 and WalletHub.com this March ranked Texas fourth and sixth, respectively.

Primary Revenue Source

Why does Texas have such relatively high property taxes? "We don't have an income tax," says Jay Kanter, principal of the Dallas-based Realty Tax Consultants, LLC.

Texas has what Kanter calls "somewhat of a corporate income tax" in the form of its franchise tax. "It's pretty healthy as far as bringing in income," he says, but not enough of a tax to dissuade relocating businesses. "Most business owners who come here don't seem to mind," says Kanter, because the tax for corporations is, comparatively, not that high. "It's actually pretty low," adds Kanter, so the thinking by corporate executives is "my business can afford the tax, but I don't want to pay a personal tax. That's why we're getting so much growth." Under Texas law, the same tax rates are applicable to all real property. "Businesses pay the exact same rate as residential property owners," says Kanter. "There is no variance in rates for businesses."

 In addition, what the state calls business personal property (BPP) is subject to an added property tax. These are items in use at the business. Companies pay tax on BPP on the market or replacement value at the same tax rate as assessed real estate. "In other states, it's called tangible property tax," says Kanter. "We call it personal since the property can be moved." Common taxable items in this category include computers, desks chairs, year-end inventory and monument signs. Some industries, he notes, can have quite a bit of expensive business personal property, such as oil rigs, trucks and airplanes. "Most self-storage facilities don't have an abundance of personal property: computers, filing cabinets, various tools, a golf cart, etc. Generally, $15,000 is the max value aside from a monument sign," says Kanter.

Most Hated Tax

While Texas' overall property tax rankings, both in rates and median tax amounts, have held relatively steady over the past few years, there are parts of the state where housing is now at a premium. And many owners complain they are being tax-priced out of their properties. And as the residential property tax and valuations rise, business valuations go along with it. It's not an unusual complaint. Nationally, property taxes are regularly named as the most-hated tax. One reason is because they are so common. Property taxes are the largest source of revenue raised by local governments. The way property taxes are calculated often causes confusion. Add to the mix the volatility of real estate and the lag time of some property appraisals, and you have the perfect tax storm.

In the end, the two main factors, at least for property owners, is their real estate's value and the tax rate applied to that value. 

Where property values are high, taxing jurisdictions can impose a lower tax rate and still raise at least as much revenue as a locale with low property values and a higher tax rate. But the devil is in the details of balancing those two components.

 Adjusting Appraisals

Although property taxes are levied by local governments, Texas state lawmakers have tried for years to limit them.The most notable initiative occurred in 1979, when the Texas Legislature approved a measure spearheaded by Rep. Wayne Peveto of Orange to standardize the administration of local property taxes. Peveto was concerned that some taxing districts had not reappraised property within their borders since their inception. Others, however, had reappraised more recently, and thus appeared richer than they actually were when compared with districts that had not reappraised.

 At the time counties, cities and school districts each appraised separately and there was no uniformity in how appraisals were carried out; nor was there a standard for appraisers' qualifications. "There was not even uniformity as to what types of property were placed on the tax rolls," wrote Peveto in an article published in the August 1995 issue of the Texas Comptroller's Fiscal Notes. "Some school districts taxed chickens; others taxed cars; others taxed only real property." Enactment of the Peveto Bill, as it became known, made the property tax system more consistent across Texas. It separated appraisals from tax collection by creating a system of countywide central appraisal districts. Additionally, property had to be assessed at full market value and reassessed at least once every three years.

But, Kanter points out, those assessments are only part of the process. "Values have increased significantly. Taxes are going to rise with that," he says. "Nobody should be unhappy about the increase in values. What they should be unhappy with is [that] local tax rates don’t get lowered even when values rise."

Reining in Property Taxes

Some Texas lawmakers say they've heard the unhappiness of property owners about their increasing real estate taxes. And while the setting of actual property tax rates is left to local officials, a measure to reduce annual increases is under consideration during the Legislature's 85th session. The key and most contentious provision in Sen. Paul Bettencourt's (R-Houston) S.B. 2 would prevent taxing jurisdictions from increasing property taxes by more than a certain percentage cap each year unless the hike was approved by voters. A companion bill has been introduced in the House by Rep. Dennis Bonnen (R-Angleton). The property tax limitation effort has the support of Lt. Gov. Dan Patrick.

 Cities, counties and law enforcement agencies that serve those areas are leading the fight against the tax limitation bills, which they say will provide minimal tax relief to most property owners while decreasing funding for critical city and county budget items. "The largest budget item for every city in Texas is public safety – police, fire fighting and emergency medical services," said Bennett Sandlin, executive director of the Texas Municipal League, after Bettencourt announced his bill last year. "Politicians can’t proclaim their support for first responders and then turn around and vote to restrict the funding that pays for the salaries, equipment, vehicles, health insurance and pensions of the men and women who protect our communities." City officials also argue that the first items to be cut from city budgets would be economic development incentives and city funding for state highway projects leading to fewer jobs and more traffic congestion.

 Regardless of what happens at the state capitol, property owners likely will still complain about property taxes, especially as long as the state's financial outlook remains healthy.

"Property appreciation in Texas is because of a good economy," says Kanter. "We wouldn't have this growth if we had an income tax, and from that standpoint, we're all benefitting. Whatever we pay in property tax, we're more than compensated for when we ultimately sell our property, provided values stay strong."

Appealing Property Values

Some valuations have jumped dramatically leaving some owners scratching their heads. Don Clauson, owner of Lockaway Storage, owns many facilities in San Antonio. Bexar County has been one of the areas in Texas hit the hardest with high valuations. “Prior to 2015, we never litigated a property tax bill. We sat down with the assessor and were able to reach a fair agreement. Starting in 2015, they have been unwilling to move off of onerous numbers and unwilling to reach an agreement. The appeal process no longer works. Every one of our properties will be under litigation in 2016.”

Some owners use a service rather than try to do it on their own. Mike Eckhoff with Assessment Advisors in Houston represents many self-storage owners with their litigation.

Property valuations will continue to rise as long as we have a good economy and demand out paces supply. But, paying attention to those increases and knowing what other area facilities are valued at is helpful to know in determining whether or not it’s worth it to hire outside help.

Texas state law recognizes three common methods to value property:

1. Market Data Comparison Approach: Most appropriate for single-family residential properties, this approach compares a home's characteristics with those of similar homes recently sold.

2. Income Approach: Most appropriate for commercial properties, this approach relies on an estimate of what an investor would pay for the property in anticipation of future income that it may generate.

3. Cost Approach: Often used for types of property that are not frequently sold or are under construction, and in cases in which Central Appraisal Districts (CADs) cannot obtain sufficient data on sales and income, this approach relies on an estimate of the cost required to replace the property, as is, with one of equal utility.

A separate appraisal review board settles any disputes between a property owner and the appraisal district regarding the appraised property value.

Source: Texas Comptroller



Popularity Has A Price

FAQs: Property Tax Assessments

It’s That Time of Year. Understanding Property Tax Assessment Is the First Step in Protecting Your Business.

by Mike Eckhoff, Assessment Advisors

Escalating property taxes are the bane of many businesses and homeowners. Getting hit with an enormous tax bill does not put a spring in your step. Since Texas doesn’t have a state income tax, property owners bear the burden. We’ve seen enormous growth in the last few years with businesses booming and tons of people moving to the state, which in turn has increased property values. However, some counties seem to target certain types of businesses in different years. A couple of years ago, Bexar county facilities saw a huge increase, while in 2018 Denton County property owners were hard hit. However, it is worth your time and effort to fight those tax evaluations and figure out if they are truly in line with others in your area. Here are some common questions from other facility owners that also prepare you to go to bat for your facility.

ESCALATING VALUES

Q: I received notice of the assessed value of my facility. I was astonished to see that the assessed value doubled! How can this be if I haven’t done anything to improve the property and my rents have stayed stable?

A: There are numerous reasons valuations change from one year to the next. One such reason is the County Appraisal District (CAD) reappraisal cycle. The Texas Property Tax Code requires appraisal districts to reappraise properties at least once every three years. Though many larger counties review annually, it is not uncommon to see smaller counties that have smaller staffs not meet the every-three- years appraisal requirement. I’ve seen many times where a valuation has not changed for more than five years, and yet market economics would suggest reappraisal was necessary.

Another reason the value could increase significantly is based on a prior-year protest. For example, the CAD may have proposed a value for your facility last year of $1 million, and you disagreed and filed protest. After presenting evidence to the Appraisal Review Board (ARB), the ARB may have agreed with you and reduced the valuation to $500,000. However, odds are if you are going to an ARB hearing, the CAD is not going to agree with the decision the ARB renders, if in your favor. Therefore, the subsequent year, the CAD may reinstate prior-year value as proposed value or use prior-year value as the starting-point value and propose yet a higher number. Be aware that the tax code does require that a value assigned by the ARB must be carried over for one subsequent year, unless substantial evidence of market changes support otherwise. What is substantial appears to be a very gray area, and rarely does an ARB uphold this requirement.

A few other reasons for a change to your valuation could be recent sales of similar facilities, land sales in the area supporting higher values, or the CAD changed the valuation approach (from cost approach to income approach).

DISCLOSURE OF P&L STATEMENTS

In many instances, the disclosure of the P&L can hurt your appeal as you may be getting higher rents and have lower expenses than what the CAD has modeled for your property. Disclosing these items can result in your value staying the same and increase the likelihood of additional increases in your assessment in the future.

RENT ROLL REQUEST

Q: The county tax assessor sent a letter requesting a copy of my rent roll (with names and addresses of tenants). Am I required to provide this information to them? If I do, what will be done with this information?

A: Typically, this request is made to ensure that the appraisal district is not omitting any business personal property (BPP—furniture, fixtures, equipment and inventory) from taxation.

Any BPP utilized for the operation of a business is taxable in Texas. However, these requests are most commonly for shopping centers, office buildings, warehouse parks and similar properties where numerous companies operate their businesses.  Such a request is not applicable to a typical self-storage facility as business operations do not occur at most facilities, other than that of the facility owner.

Additionally, this request could be made in the hopes that it discloses rental rates of each tenant. This could be used to help the CAD determine if the rental rate should be utilized in their appraisal model for subject property.

INCOME AS BASIS OF ASSESSMENT

Q: I received a letter from my county’s appraisal district that stated, “The State of Texas is requiring all mini warehouse self-storage facility valuations be based upon income produced by the property.” Is this true? Is this really a state requirement?

A: No! The Property Tax Code clearly states the chief appraiser may use three common approaches to value property: cost approach (replacement cost new less depreciation), market approach (sales comparison), and income approach (present value of future income stream). However, the tax code does not dictate which method an appraiser must use. Though the income approach to value is the most logical approach for income-producing properties, this is not a requirement.

P&L STATEMENTS

Q: When I informally protested the assessed value of my facility, the local appraisal district asked that I provide a copy of my Profit & Loss statement. I don’t want to do that. Do I have to provide a P&L to the appraisal district? Is there something else I can provide instead?

A: No, but if you don’t, rest assured that you will most likely be going to a formal Appraisal Review Board hearing.

In many instances, the disclosure of the P&L can hurt your appeal as you may be getting higher rents and have lower expenses than what the CAD has modeled for your property. Disclosing these items can result in your value staying the same and increases the likelihood of additional increases in your assessment in the future. Get a copy of the CAD’s appraisal record card for your property and see if there are line items in your P&L that would be favorable to disclosure (for instance, if you have lower rents and higher expenses than the model) before sharing with CAD.

If the P&L doesn’t help you, and your valuation still seems excessive, then you should prepare an Equal & Uniform study to see how your assessment compares to similar facilities.

“EQUAL AND UNIFORM” ASSESSMENT

Q: I researched the assessed values of the facilities in my area via the county’s tax database and see that all the values have gone up and similarly sized facilities are valued close to mine. But almost all the other facilities have amenities my facility does not. Can I use this information to protest my assessment using the “equal and uniform” provision of state property tax code? What factors will an appraisal district consider relevant in the protest process? In short, how can I get a fair shake?

A: The primary grounds property owners utilize for the “Remedy for Unequal Appraisal” argument is Subsection 30 of Section 42.26 of the tax code which states, “The appraised value of the property exceeds the median appraised value of a reasonable number of comparable properties appropriately adjusted.”

It is not uncommon for CADs to not have a uniform and equal valuation analysis even prepared for a subject property in advance of a hearing. Many CADs wait to see if the property owner is aware of this remedy and mentions it before the CAD will assemble such data. Often, however, they merely identify several properties and show you that your valuation is within the range of their comparables and consider the case closed. No two properties are identical though, and adjustments MUST be made to account for these differences.

This remedy permits the taxpayer to rely upon the market values as determined by the CAD for the comparable properties, and then the taxpayer arrives at an indication of value after adjusting the valuations of the comparables for differences in factors such as location, size, age, quality, condition and other economic factors. These other factors most certainly would include ratio of climate versus non-climate units, as this has the largest impact on valuation differences. Another obvious difference would be if your property was on land that is worth $2/SF and the comparables are on $10/SF.

CADs that criticize this remedy do so without answering the fundamental question of why they oppose the use of their own estimates of market value of comparable properties in determining if a taxpayer’s property has been unequally appraised. The obvious reason is that they do not want to have their mistakes known, which gives rise to unequal appraisals revisited upon them by other taxpayers seeking nothing more than equal treatment.

Just remember, these tips give you some different tools and different scenarios to tackle those huge increases in market valuations. It’s worth your time and effort to fight them. It not only helps your facility, but the whole area, especially when many owners in the same area are also fighting them.

Mike Eckhoff is the founder and president of The Woodlands based Assessment Advisors, a boutique property tax consulting firm specializing in protesting commercial real estate tax assessments. Mike has over 25 years combined appraisal and tax consulting experience and has successfully conducted tax appeals for thousands of properties throughout Texas. Additionally, Mike has been a member of the Texas Self Storage Association for nearly 15 years.

FAQs: Property Tax Assessments