Are you used to seeing big numbers in the “property tax payable” column on tax reports? Property owners in Texas, a state with notoriously high property taxes, may be forced to allocate “a large part” of their operating budget each year to property taxes. You should always be looking for ways to increase your return on investment, and reducing property tax costs can have a significant impact on your bottom line.
Market Value vs. Rated Value
Many investors ask why Texas property taxes continue to increase despite their declining income and rising operating costs. Because appraisal districts value so many properties, they are often unaware of the “softness” in the submarket. In addition, some appraisal districts were slow to recognize large increases in insurance costs. Because property taxes are a material expense, investors recognize that they need to review valuations annually. Most Texas real estate investors appeal their property tax assessments each year.
Why Property Tax Matters
Property taxes are one of the largest line item expenses incurred by property owners. When trying to cut excess property taxes, even sophisticated property owners may not know all of their rights. For example, the Texas Property Tax Code currently allows property owners to seek equity adjustments based on appropriately adjusted comparable properties.
Does Unequal Judgment Apply to Informal Hearings?
The legislature also introduced provisions in 1997 that tried to allow property owners to appeal unequal valuations during administrative hearings (informal review board hearings and appraisals). Unfortunately, the wording of the law is unclear. Some district judges chose not to consider appeals based on unequal judgments at administrative hearings. Unfortunately many district judges reject administrative appeals based on unequal assessments. Property owners get very angry when they feel they have been taxed unfairly. Fortunately, most cases of unfair judgment can be resolved through judicial appeal.
Why Are Properties Not Valued Equally?
You may wonder why properties are not being fairly valued. Reasons include data errors, focus on recent sales and inconsistencies in informal review board hearings and judgments due to personal elements. Because appraisal districts can track more than a million real property accounts, it’s unrealistic to expect all data to be accurate (the number of properties also affects their ability to accurately estimate your property value). Exaggerating the quality of one property while underestimating the quality of another property can lead to an unfair assessment. At times, some grading districts focus on recent sales without revaluing all properties in the surrounding area.
After the preliminary research is completed, the owner must determine the market value of the property and whether it corresponds to the total assessed value. There are three approaches used in inferring market value: cost, revenue and market. Property occupancy rates, rental rates, operating costs, net operating income and other factors, as well as the selling price of comparable properties, are valuable sources of information in determining market value. If the property owner determines that the appraised value is higher than the market value of his property, he must file a complaint with the local appraiser district. This can be done either by the property owner or his designated agent. Property tax protests must be filed by May 31 in Texas; Deadlines vary by state.
Preparing Your Hearing
Once the protest is filed, a protest hearing will be scheduled. Four types of data must be compiled for an audience: subject property images, revenue analysis, comparable sales data, and comparable valuations. The subject property drawings must show the quality and condition of the property repair. If any maintenance is deferred, document it with drawings and a quote. An income analysis should include an income statement for the previous year and a list of leases for a date approaching January 1 of the current tax year (most states use January 1 as the effective date for valuation.) The analysis should also detail market rents, market vacancies and market costs (including reserve for replacement) to obtain net operating income for the property (depreciation or debt payments should not be deducted when calculating net operating income).
If your property has above-market occupancy or rental rates or below-market operating costs, you will need to make adjustments when calculating net operating income. If you operate your own property, your revenue analysis should include an allowance for labor and management costs (if not on the income statement). Income not directly related to real estate rental (sales of boxes, truck rentals, etc.) should be excluded. Associated costs should also be excluded. The net operating income is then capitalized to provide an indication of the value of the property.
An assessment may be appropriate to support a value conclusion. Comparable sales are given strong consideration at trial as they are an indication of market value. Data from sales of comparable properties over the past year or two should be collected and reviewed. Appraisal comparators were given strong consideration in some assessment districts but were not considered in others. Images of competing properties that are undervalued than yours can be an effective tool for cutting your property taxes. Prepare a table summarizing your properties and a comparison of valuations.
Attending Your Audience (Informal Review Board and Assessment)
Once all relevant data is collected and analysed, the protest hearing process begins. The initial protest hearing was called an “informal” hearing. Informal hearings involve a meeting between the owner, or his/her designated representative, and the appraiser from the appraisal district. If the owner is not satisfied with the offer made by the appraiser, he or she can proceed to the next level of the protest process, a hearing of the appraisal review board (in some states this is referred to as an equivalency board). An appraisal review board session, also referred to as a “formal” hearing, involves a meeting with appraisal review board members, appraisers from the district appraiser’s district (who may be different from assessors at the informal hearing) and the owner or his/her designated representative. The Appraisal Review Board may set a value equal to, lower than or higher than the level proposed by the appraisal staff at the informal hearing; therefore, offers made at informal hearings deserve careful consideration.
The majority of protests were resolved during informal and formal hearings. However, in a minority of protests property owners believe the appraised value can be further reduced by filing an appeal. While some owners are pursuing a last-ditch opportunity to reduce their taxes, owners have the option to file a lawsuit against the appraised value. It may be financially feasible to file a lawsuit if a judicial appeal would reduce the assessed value of at least $200,000 to $300,000. This rule of thumb is for Texas; may be higher or lower in other areas. In Harris County (Texas), for example, approximately 500 to 800 property owners annually determine that there is still sufficient discrepancy after completing informal and formal hearings to proceed with an appraised value adjustment by filing a lawsuit. Litigation in Texas must be filed within 45 days of receiving written notification of the value set at the official hearing. This process may result in an additional reduction in the grade being assessed; however, it usually takes 12 to 24 months and requires the services of lawyers and appraisers. While relatively few owners know how to file a judicial appeal, they can be a very effective tool in lowering property taxes.
With property taxes making up a large percentage of operating costs, a commercial property owner I knew recently was delighted when his consultant told him that the company saved over $123,000 in property taxes. Some owners will notice less savings than that, but every little bit helps your bottom line.
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