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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