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Property Tax Resources

Sep
28

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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Sep
25

Distribution Center Dilemma

"Compared to other commercial property types, distribution centers often sustain accelerated physical depreciation soon after construction. Assessors rarely have the manpower to understand the complexities of a particular property, however, and typically apply a very modest depreciation amount annually. Thus, it is the responsibility of the owner's valuation expert to recognize and quantify these issues in an opinion of value..."

By John Murphy, as published by Commercial Property Executive, October 2011

In construction terms, industrial buildings may be the simplest of commercial real estate holdings. But assessing industrial properties—and in particular distribution centers—for property tax liability requires a good grasp of the way the assets function, as well as an understanding of which assessment methods do—and do not—apply to this property type. Owners who understand some essential concepts about valuing distribution centers can better determine whether an assessed value is fair or if a tax appeal is in order.

Important distribution center attributes to consider include building age, building size, land size, land-to-building ratio, interior clear ceiling heights, column spacing, cubic feet and freeway access. Both the sales comparison and income approaches are reliable valuation methods for this product type, but researching lease and sales information can be tricky. For one thing, the value of distribution centers on a per-square-foot basis can change depending on overall size and other factors affecting the building's functionality. The following general rules will help to match comparables research to the property's size:

For buildings 500,000 square feet and smaller, market research starts with the local market, county and surrounding areas:

  • For buildings 500,000 to 1 million square feet, market research extends to state and regional levels.
  • For distribution centers measuring 1 million square feet or more, research should span the national market. With new facilities, assessors typically cite actual construction costs. It is important to note that the cost approach will result in an excessive assessed value without deductions for physical, external and functional depreciation.

Compared to other commercial property types, distribution centers often sustain accelerated physical depreciation soon after construction. Assessors rarely have the manpower to understand the complexities of a particular property, however, and typically apply a very modest depreciation amount annually. Thus, it is the responsibility of the owner's valuation expert to recognize and quantify these issues in an opinion of value.

The same principle applies to physical building attributes that benefit a specific user without improving the building's marketability. For example, new distribution centers typically have clear ceiling heights in the 32- to 36-foot range, while a few have ceilings as high as 110 feet.

Obviously, the latter properties are built for particular users, and the additional clear height will not translate to additional value in the marketplace.

On the contrary, that excess would result in a functional obsolescence deduction. The cost approach is a valid valuation method with newer facilities, provided that all forms of depreciation are applied. Market extraction depreciation, or analyzing actual sales of comparable properties, is an appropriate way to capture all forms of obsolescence.

Another way to look at the excessive ceiling height issue is to consider cubic volume. Consider the example of a 500,000-square-foot facility constructed in 2008 with a 70-foot clear height. The height is a functional obsolescence issue, as the market will not pay for the additional clearance above the standard 32 to 36 feet. How can the property owner's valuation professional measure that obsolescence?

One useful technique to level the comparable playing fi eld is to determine the subject's cubic feet of space. In this example, arguably, the cubic feet of the building would be comparable to properties with twice the square footage.

So the comparables selected for the income and sales-comparison approaches would be 1 million square feet in size, with clear heights of about 35 feet.

The Abatement Trap

Many companies are constructing distribution centers using abatements, which provide real estate tax relief for a time. While these incentives are enticing, it is a good practice for the property owner to obtain an opinion of value from an experienced appraiser even during the years that the abatement is in effect. Assessed values, however, tend to be overstated during the abatement period. If an owner sits idly by and ignores assessments during the abatement period, it will be extremely difficult to challenge an assessed value once the abatement expires. Annually reviewing the property's value should ensure a correct assessment both during and after the abatement.

Property owners need to be conscientious about the complexities involved in valuing distribution centers. This is especially true when a facility has physical characteristics that are outside the norm. Physical, functional and external forms of obsolescence should be recognized by the assessing jurisdiction, and owners must take responsibility for ensuring that assessors fully understand and account for all forms of obsolescence.

JohnMurphy175

John Murphy is director of real estate assessments at the Austin, Texas, law fi rm Popp Gray & Hutcheson. The fi rm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Murphy can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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