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COVID-19’s Impact on Affordable Housing Property Tax Valuations

The pandemic leaves affordable housing property owners vulnerable and searching for ways to reduce their property tax liabilities.

After a pandemic year that decimated rental incomes, owners of affordable housing properties should prepare to protest property tax assessments that overstate their liability.

As stay-at-home orders in 2020 forced businesses across the county to change their operations, a large portion of the labor force began to work from home. But many renters, including a large contingent of affordable housing residents, found themselves without jobs and struggling to pay rent.

Job losses and other issues related to COVID-19 adversely affected tenants and property owners alike, straining rental income while adding the cost of new safety procedures and equipment to landlords' operating costs. To reduce property tax liabilities and limit financial losses from the pandemic, it is now crucial for owners of affordable housing to correctly navigate procedures across jurisdictions and weigh all relevant valuation considerations for their properties.

Here are key areas for affordable housing owners to consider in arguing for a lower assessment.

Procedures have changed

The global pandemic transformed interactions between appraisal districts and property owners throughout the 2020 tax year. Many appraisal districts across Texas closed their doors to the public and shifted formal and informal meetings to a virtual setting to combat the spread of COVID-19.

As hearings approach in 2021, appraisal districts are expected to keep many of the pandemic-related practices in place. Telephone and video conferences will likely be the preferred format for hearings and informal meetings, but taxpayers should be prepared to appear in person should the jurisdiction require. Property owners can avoid procedural uncertainty by proactively communicating with the appraisal districts and being sure to meet requirements related to the protest process. Appraisal district websites can also be a helpful resource with regard to procedural guidelines.

Affordable housing performance suffered

The pandemic presented unprecedented challenges for the affordable housing industry. Many tenants lost income as result of job losses and experienced increased financial hardships. The federal government provided economic aid in the form of stimulus checks, which enabled some renters to pay partial or full rental amounts. As the pandemic ravaged on, however, stimulus checks ran out and many tenants ceased to pay rent, cutting into property owners' revenue. Nine out of 10 low- and moderate-income housing providers experienced a revenue decrease as result of COVID-19, according to a study from NDP Analytics.

While tenants' financial difficulties contributed to decreased property revenues, property owners also incurred increased expenses. Property owners were forced to invest in personal protective equipment, increase their cleaning standards and take other measures to ensure the safety of their employees and residents. Research from NDP Analytics also found that low- and moderate-income housing providers across the country averaged an 11.8% decline in revenue and 14.8% surge in operating expenses due to the pandemic. These additional expenses, combined with decreased revenues, created major hardships for many in the affordable housing industry.

Property tax valuation outlook

The Texas Property Tax Code provides two methods for protesting excessive property tax valuations: a market value remedy and an equal and uniform remedy. A market value claim argues that the assessment is excessive based on the three approaches to valuing commercial real estate: income, cost, and sales. Assessors and appraisers typically value an affordable housing property using the income approach. Assessors will gather market income, vacancy, and expense data to arrive at a net operating income, and then capitalize that using a market cap rate reflective of market performance. Taxpayers should evaluate the assessor's cap rate and argue for a more appropriate rate if needed.

Decreased net operating incomes at affordable housing properties in 2020 could result in lower 2021 assessments. When addressing valuation concerns with appraisal districts, property owners should provide evidence of financial strain such as concessions and reduced rent. Data of this sort provides insight to appraisal districts on the performance of a particular property or market and can aid in achieving a value reduction.

The Texas Property Tax Code also requires that properties be appraised equally and uniformly when compared to a reasonable amount of comparable properties. Affordable housing owners should be sure their properties fall within a similar range of values with other like properties on a square-footage basis. Assessors must consider the characteristics of affordable housing projects when choosing comparable properties. Valid comparable selections will allow for a true comparison that reflects the unique characteristics of this property type.

Address tax rates, too

Assessed valuations and tax rates are the two components that determine a property owner's tax expense in Texas. Disgruntled property owners often place the blame of a higher tax bill upon the assessor and forget to address the issue of tax rates.

Taxing entities determine their respective tax rates in the fall, once appraisal districts have certified their appraisal rolls upon completion of the administrative protest process. Property owners should not only protest their property taxes, but attend tax rate hearings and voice their opinions with elected officials to minimize their property tax expense.

Managing Property Taxes

COVID-19 strained affordable housing property owners throughout the past 12 months. Skillfully managing property tax expenses will be vital to the financial health of the real estate. The decision to appeal a tax assessment and partner with a knowledgeable property tax professional will be crucial to successfully reducing assessed values and navigating challenges in the pandemic's wake.

Carlos Suarez is a tax consultant at the Austin, Texas, law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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