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Tax Trap in Dallas

"Just because a value may have decreased from a previous year assessment doesn't translate into a correct assessed value. Make sure that the property is being valued correctly with the appropriate approaches to value—income, cost and sales comparison..."

By John Murphy, as published by National Real Estate Investor - Online, September 2012

Since the beginning of the economic decline in 2008, property values have fluctuated in many Texas counties, including Dallas County. Now that the Dallas commercial real estate market is on the mend, commercial property owners must continue to monitor their property values and consider remedies available to appeal errant assessments.

Generally, the Dallas County real estate market has fared well over the past five years, having proven itself largely immune to the effects of the recession. In fact, the Dallas Central Appraisal District (DCAD) in July announced that overall property values increased this year for the first time since 2008, climbing by 1.4 percent. Commercial real estate drove the increase with a 4.6 percent gain that trumped a slight decline in residential values to boost the total tax roll.

Each July, DCAD produces an estimated value report which, after certification by the Dallas County Appraisal Review Board, is published as the Certified Estimated Value Report. This report summarizes tax roll estimates by property type, including commercial, business, personal and residential property. The report also provides a total value for all classes.

It is important to note that the appraisal district bases values on an effective date of Jan. 1 for each year, and that the certified estimated value is 100 percent of market value.

Popp Hutcheson conducted a market research study to determine changes in asking price per square foot for commercial properties in Dallas as of Jan. 1 for each year from 2008 through 2012. Please note, in the chart below, the research data represents an average of the three dominant commercial property types: office, industrial and retail.

dallas-values-600

Asking price per sq. ft. has fluctuated over the five years measured but does not correspond directly to the Dallas County Certified Estimated Values. Although the Dallas market did not suffer nearly as much as most counties in Texas and the U.S., it is clear that the market failed to adjust asking prices appropriately during and after the recession. This is especially true in 2009, when the average asking price increased despite market-wide value declines at the deepest point of the downturn. Arguably, DCAD tracked the recession more appropriately with decreases in Certified Estimated Values for each year.

 

What does this mean for the taxpayer?

The apparent disconnect between market value and asking prices in Dallas underscores the potential for overestimating taxable property values. While this is a macro-level view of certified values and asking prices, the point of all this is quite simple. The property owner must be diligent in tracking assessed value. Carefully review each notice of appraised value from the appraisal district and watch for any increases in assessments.

Just because a value may have decreased from a previous year assessment doesn't translate into a correct assessed value. Make sure that the property is being valued correctly with the appropriate approaches to value—income, cost and sales comparison. For example, an appraiser may value a 15-year-old, income-producing commercial property via the cost approach. That typically isn't the most appropriate method, because an assessor seldom appropriately captures all forms of depreciation (physical, functional and external) using the cost approach.

dallas-values-600

The income approach may be the most appropriate method for appeal purposes, and careful consideration should be taken in applying a true market rent, vacancy rate, collection loss, expense ratio and, of course, capitalization rate to arrive at an appropriate market value. Cost can be used as additional support, however, provided that all forms of depreciation are properly captured. The value indicated via these approaches should be very close, thus arriving at a reasonable concluded value.

Also make sure that the appraisal district has the correct building square footage, age, physical characteristics and land size on its record cards. DCAD, like most jurisdictions, has a difficult job tracking and making sure that each and every property is valued correctly. As with anything, mistakes happen and more often than a property owner may realize.

Additional remedies

Dallas taxpayers, as well as all Texas property owners, have a right to equal and uniform appraisals. Taxpayers need to seek professional help to determine whether their property is valued the same, from an equality and uniformity perspective, as competing properties in Dallas County.

DCAD's shrinking value estimates over the years do not ensure accurate assessments. Inappropriate valuation methods, clerical errors and unequal appraisals can all inflate taxable values, and it is extremely important to keep these risks in mind.

john-murphy-activeJohn Murphy is director of real estate assessments at the Austin, Texas-based law firm Popp Hutcheson which represents taxpayers in property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached This email address is being protected from spambots. You need JavaScript enabled to view it.

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