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Property Tax Resources

Nov
19

Property Taxes Are Not A Fixed Expense

If you have taken an accounting class, your professor likely explained that property taxes are one of the fixed expenses on real estate financial statements. While your professor was technically correct that property taxes are considered a fixed expense in accounting, many property owners, asset managers and investors are finding out that "fixed" certainly doesn't mean always consistent or predictable.

In a recent third quarter earnings call of a large, publicly traded hotel REIT, the discussion contained all the typical metrics on financial performance and forward-looking guidance. The call was overall very positive; however, one particular comment from the chief financial officer raised a critical issue. The REIT had significantly missed its pro forma expenses on property taxes, which had negatively impacted actual earnings. The REIT's miscue on projecting property taxes and the sizable impact on its financial results indicated that planning for this expense item can be particularly difficult, especially during an upswing in the current real estate cycle.

Hotel performance has bounced back from a cyclical low in late 2008, and many U.S. markets are approaching the peak performance levels last reached in 2006. Additionally, investment capital in-flows into the hotel sector are at record highs for public and private REITs, private equity funds and other investors. All these factors have led to record investment volume and investors chasing after a limited number of deals (especially in top-tier markets) and subsequently are driving up hotel asset pricing.

While all this is good news for existing hotel owners and investors, it often creates a budgeting challenge for changes in property taxes. With strong market fundamentals, improving performance metrics and sales volume on the rise, assessors have been quick to increase tax valuations on hotels. Many assessors are recouping much of the value lost during the downturn and have typically been more aggressive than in past cycles.

For example, in late 2013, a mid-sized hotel investor had just acquired its first Texas hotel. The investor had done its own due diligence and projected property taxes to increase by 3 percent ever year of ownership — sound familiar? In early 2014, after closing on the acquisition, the investor reached out for help when the hotel's tax valuation notice had increased 100 percent, almost whiping out projected cash flow. Had the investor called for help prior to closing he could have been warned about the possibility of an increase and properly budgeted for the future tax years.

So, what can owners and investors do to help identify pitfalls in underwriting for property taxes? Here are a few budgeting points that will help to avoid surprises:

Understand the assessment laws and practices in the jurisdiction. All states and many assessors within the same state operate differently, so get the facts straight on local practices. For example, some assessors reappraise at the time of transaction and others only revalue on a set cycle that could vary dramatically from every year to multiple years between a revaluation.

Is there a disclosure requirement? And to what degree will it be used to establish future tax valuations? In Texas, sales disclosure is not required by law. Therefore, a deal with non-disclosure agreements between the parties can be an important aid to budgeting.

Get to know the local political landscape and legislative undercurrents. Any proposed law changes or political pressures on a specific property classes can be a major influence on a prudent budget. Recently, there has been a push in a few areas around the country to increase taxes on commercial properties to try to reduce the escalating tax burden on residential properties.

Find out what is taxable. Hotels are a truly unique asset class and present a major appraisal challenge that could significantly impact property tax projection. Hotels contain real estate, business personal property and intangible value. Some states don't tax personal property (furniture, fixtures and equipment) and others don't tax business intangibles, value associated with a business operation and related to the brand affiliation, contracts, trained workforce, loyalty programs, etc.

Make reasonable assumptions. Using a standard 3 percent growth rate or some other unsupported assumption "just to push the deal through" almost always comes back to haunt budgets later.

Enlist help from a local and knowledgeable expert. If you are budgeting for an acquisition then make sure to consult the experts prior to going under contract on a deal. Make sure the expert understands hotel taxation and valuation. Ask about the specific valuation models and techniques employed by local assessors. If your expert doesn't know those answers, then find an expert who does. Taxpayers managing an existing hotel should seek expert tax advice every budget season.

While no list is exhaustive for every situation, these points will make sure you are on the right path to proper and more accurate budgeting for property taxes.

michael-shalley-activeMichael Shalley is a principal in the Austin, Texas law firm of Popp Hutcheson PLLC, which focuses representation of taxpayers in property tax disputes and is the Texas Member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Shalley can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
17

Identifying Intangibles

The Appraisal Institute Resolvers Some Debates About Nonphysical Assets

After decades of debate in the marketplace and legal battles over the role of intangibles in commercial property valuation, the Appraisal Institute has published a detailed treatise intended to clarify many of the issues in question. For the first time, the organization has devoted an entire chapter to these nonphysical assets in the latest edition of its industry guide, The Appraisal of Real Estate.

There were plenty of reasons for the Appraisal Institute to weigh in on the subject. Intangibles are a familiar concept for anyone involved in property taxation, eminent domain or financial reporting, but have been a long-standing source of disagreement among appraisers, taxpayers and tax assessors. Arguments frequently arise over the allocation of intangibles—or how to determine the portion of value that intangibles contribute to the total assets of a business. In earlier years, some appraisers and market participants even questioned the very existence of intangibles within real estate.

In many states today, intangible assets are exempt from taxation under specific exclusions for property tax valuation. Therefore, intangible assets—and more important, the appropriate methods for allocation have become critical to the appraisal assignment and to the final tax liability.

Over the years, The Appraisal Institute has offered specific seminars, courses and some collections of articles on intangibles, but nothing as specifically on point as Chapter 35 in The Appraisal of Real Estate, 14th Edition, published in late 2013. This chapter, titled "Valuation of Real Property with Related Personal Property or Intangible Property," defines intangible property as nonphysical assets including but not limited to contracts, franchises, trademarks and copyrights, as well as goodwill items such as a valuable trade name and a trained
workforce.

For some property types, the real property usually trades as part of an ongoing operation that includes all of the assets of that business. Examples include healthcare facilities, assisted living and skilled nursing centers, hotels, convenience stores and car washes. In sales of those assets, the total sale price represents the overall value to all the assets of the business, which makes parsing the value among the tangible and intangible components a challenge for appraisers and assessors. The new chapter attempts to clarify when appraisers should be on the lookout for intangibles, stating, "As the proportion of income attributable to non-real estate sources increases, the potential for the property to include intangible assets also rises."

Additionally, the publication cites some existing requirements under Standards Rule 1-4(g) of the Uniform Standards of Professional Appraisal Practice, which states: "When personal property, trade fixtures or intangible items are included in the appraisal, the appraiser must analyze the effect on value of such non-real property items." The chapter goes on to define the three general classes of property as real property, personal property and intangible property, further breaking down each general classification into individual components for each.

It appears the Appraisal Institute is finally comfortable with confirming the existence of intangibles within certain property types, and with describing how to define them and when to look for them. Unfortunately, that is about where the clarity ends.

The chapter continues with an explanation of two different premises for valuation used by business appraisers. Under the going concern premise, the ongoing business is assumed to continue operations indefinitely, and the liquidation premise assumes the business is closed and the assets are sold. The premise that produces the highest-value conclusion is used to develop a final-value opinion. Assuming the going concern premise is used, however, that is just the starting point to develop a total value for all assets. The chapter fails to provide guidance for properly breaking out the value components of each asset.

One logically would expect the next section of the chapter to contain a how-to discussion for developing a supportable allocation value for the intangible components of the total assets. The chapter does offer some suggestions under the three general valuation approaches: income, cost and sales. Regrettably, each approach is delivered with cautious statements and vague examples, with a point-versus-counterpoint followup for each method.

It is understandable that the Appraisal institute is reluctant to state an absolute preference for one method over another when dealing with intangibles. But with this intensely debated issue, a more in-depth discussion with practical recommendations to make credible conclusions would be more useful.

The new chapter is a welcome addition that helps to clarify the issues involved, that provides definitions and ideas, and that suggests what to consider when the appraisal assignment requires an allocation among asset classes. As the chapter's authors acknowledge, the debate is over for the existence of intangibles in real estate. However, it continues when it comes to determining the proper valuation techniques for intangibles.

Shalley

Michael Shalley is a principal in the Austin law firm of Popp Hutcheson PLLC, which focuses its practice on representation of taxpayers in property tax disputes and is the Texas Member of the American Property Tax Counsel. Mike can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Sep
22

Texas Property Tax Change Explained

Property owners to benefit from adjustments in appraisal review boards, appeals and hearings.

"Texas House Bill 585, which passed in June of this year, was written to provide for a fairer and more efficient tax appeal process, and its passage into law may help taxpayers appeal their assessments..."

As the economy recovers and property values rise, real estate taxes are a growing concern for Texas property owners. Each dollar of additional tax is a dollar removed from an income-producing property's bottom line, and some taxpayers will find that the increases in tax appraisals are overreaching and require a formal protest. That being said, taxpayers who protest their property values will likely be pleased with the Texas Legislature's recent revision to the property tax code. Texas House Bill 585, which passed in June of this year, was written to provide for a fairer and more efficient tax appeal process, and its passage into law may help taxpayers appeal their assessments.

Complaints about the state's property tax system often involve a perception of bias on the part of appraisal review boards (ARBs), the citizen panels that hear and decide property tax appeals at the administrative level. A second concern is a perceived lack of responsiveness on the part of appraisal districts with regard to taxpayer concerns. To address this, HB 585 provides for increased oversight of these entities. The new law requires the comptroller to provide model hearing procedures with clear expectations for all Texas ARBs.

In large counties, it also establishes a taxpayer complaint system through a taxpayer Liaison, an intermediary housed at the district and tasked with hearing taxpayer concerns regarding procedures and personnel. The liaison's go-between responsibilities will now increase to include accepting taxpayer complaints and providing clerical support in the ARB selection process.

On top of re-emphasizing oversight and improving accountability, HB 585 tackles another perceived flaw in the property tax appeal system. Appraisal district boards of directors have historically selected ARB members. In Houston, however, a district judge selects Harris County ARB members. ARB member selection in counties with more than 120,000 residents will now take on this same model used in Harris County. Only district judges will possess the power to appoint members.
It's a move that could also have disciplinary implications, as ARB members who do not follow procedures may be removed by a judge as well. And in large counties, the appraisal district will be removed from the panel selection process completely. Aside from the new panel requirements, the new law seeks to make protesting property values easier and more effective. Appeal hearings must now be set for a certain date and time.

If a hearing does not occur within two hours of its scheduled time, a taxpayer may request a postponement. Also, if before a scheduled hearing
a change in value is made with an informal agreement between taxpayers and appraisers, the law strengthens the standards of evidence appraisal districts must provide in order to raise the property value the next year. This could mean less volatility for values. These changes are not the only changes set forth by HB 585, as the new law also provides new procedures for district court appeals. While shifts in accountability and scheduling may seem small, they could indicate a broader trend toward a more fair and equitable Texas property tax system.

As more guidelines favor taxpayers, it improves their likelihood of achieving fair results. What's more, keeping tax values fair will ensure that Texas' ability to attract developers and investors remains strong.


Shalley Michael Shalley is a principal and Patrick McGill a tax consultant at the Austin law firm of Popp Hutcheson PLLC. which focuses its practice on property tax disputes and is the Texas member of the American Property Tax Counsel. Michael Shalley can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. an Patrick McGill can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
08

Cap Rates And Property Taxes

Changing cap rate spreads may inflate property taxes.

"Accurate capitalization or cap rates (the ratio between the annual net operating income of an asset and the capital cost or market value) enable an appraiser or investor to calculate an asset's value from its net operating income..."

By Michael Shalley, as published by Shopping Center Business, March 2013

A scarcity of comparable sales data is driving many property tax assessors to rely on historical rules of thumb that may threaten inflated tax bills for shopping center owners. Studying the problem requires a clear understanding of the events that have weighed down transaction volume, how mass appraisal software works, and how extrapolations from the few property sales available today can lead appraisers astray.

A Recipe for Confusion

The recent credit crunch may be regarded as one of the worst in American history. The crisis hit hard in March 2008, as investment bank Bear Stearns became the first of dozens of major American financial institutions to fail or be bailed out by the Fed. The causes were many, starting with subprime mortgages and extending to consumer credit, commercial mortgage backed securities and credit default swaps. But one of the greatest impacts for the commercial real estate market came in the form of uncertainty regarding property values and future access to credit.

This vast uncertainty that followed the crisis halted or cratered most transactions in commercial real estate, making it almost impossible to accurately appraise property and peg asset prices. Appraisers and property tax assessors struggled to find comparable sales, and many times looked back to historical rules of thumb to extrapolate data gathered from a few current sales for application in a wide range of assessments. It is the use by property tax assessors of these old standards in mass appraisal valuation models that may overburden some property owners.

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Accurate capitalization or cap rates (the ratio between the annual net operating income of an asset and the capital cost or market value) enable an appraiser or investor to calculate an asset's value from its net operating income. So an assessor who knows the cap rate from a recent property sale can use that data in assessing similar properties.

In normal and functioning commercial real estate markets, the spread in capitalization rates between Class A, B and C properties has generally held a consistent range. Historically, the variance or spread in cap rates between Class A or investment-grade properties and Class B properties typically averaged between 75 basis points and 150 basis points. A similar cap rate spread existed between Class B and C properties. However, these old rules of thumb have become at least temporarily obsolete.

There has been a flight to quality among investors and well-leased Class A shopping centers' cap rates are getting really aggressive," says Rafi Zitvar, a principal at Global Fund Investments LLC, which specializes in retail real estate. On the other hand, "Class B and B-minus centers have to be priced very attractively, say 200 to 300 basis points above Class A centers, for us to even look at them." The PWC Real Estate Investor Survey — compiled quarterly by PricewaterhouseCoopers and formerly known as the Korpacz Real Estate Investor Survey — reveals this widening trend for cap rates among asset classes in the national strip shopping center category. The survey data confirms that the average cap rate spread between institutional grade and non-institutional grade properties has increasingly widened for the past six years (as shown in the chart).

Modeling Mishaps

Many property tax assessors use a mass appraisal income approach model that uses cap rates to assess shopping centers. The model breaks down various components of each shopping center that are usually predicated on the classification of the center. The rental income, expenses and a corresponding cap rate for each shopping center are driven by the class inputted into the valuation model. Cap rates for each classification of shopping center are calculated off a sliding scale, where the base rate is usually a Class A cap rate supported by a sale or sales in the market, and then all other classes are modeled out using a scale based on typical spreads. It is the scaling or setting of cap rates for Class B and C shopping centers using a Class A cap rate that can result in overvaluation.

Clearly, the cap rate spreads between the top-quality shopping center assets and other classes have significantly changed over the past few years. Therefore, when assessors use historical cap rate spreads between different classes of shopping centers, the mass appraisal model overvalues properties from all but the highest class. It takes some experience, diligence and a detailed understanding of the assessor's model to ensure that a shopping center is being accurately appraised using today's standards.

ShalleyMichael Shalley is a principal at the Austin, Texas, law firm of Popp Hutcheson PLLC., which focuses its practice on property tax disputes, and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
24

The Pitfalls of Sales Comparisons

"By overlooking seller financing, assessors inflate taxable values..."

By Michael Shalley - as published by National Real Estate Investor - April 2010

It's no secret that commercial real estate sales volume is down. Sales transactions of U.S. commercial real estate valued at $5 million or more totaled 3,336 for all of 2009, down 60% from the previous year, according to Real Capital Analytics (RCA).

Despite more stringent underwriting and a growing reluctance by lenders to make commercial real estate loans, buyers and sellers closed a few select deals. Today, tax assessors are using those sales as a basis to value property for 2010.

Improper conclusions by tax assessors based on these imperfect sales could result in excessive values on which property tax assessments will be based.

Only 15% of U.S. property transactions last year represented a distressed situation, but the year's deals typically reflected a decline in value from highs of the preceding five years.

Due to the scarcity of credit available for real estate purchases, assumable mortgages and seller financing emerged as the dominant means of closing transactions in 2009, according to RCA. That means that many of the past year's deals closed without the use of market-rate loans that would have pushed down closing prices.

True market value?

The prevalence of those significant price reductions, mortgage assumptions and seller financing in 2009 sales data poses a challenge for appraisers and tax assessors, and a threat to taxpayers.

If not properly adjusted for in a sales comparison approach to valuing property, these same three factors that sellers used to bolster sales may understate how far actual market values have declined.

Special financing or sales concessions often characterize transactions in depressed markets. Understanding the details behind each transaction is important for establishing a credible sales comparison approach to value at any time, but it becomes absolutely critical during volatile periods with few sales.

Suppose an assessor valuing office buildings for his tax district believes that most property values have declined, but he has a limited number of transactions to determine market value. In a review of recent sales, he sees that a 100,000 sq. ft. office building has sold for a reported $10 million, or $100 per sq. ft.

The same property sold five years ago for $12 million, or $120 per sq. ft. With no further investigation of the transaction details, the assessor concludes that office building values in the neighborhood have declined 17% in five years and are now trading at $100 per sq. ft.

The devil is in the details

On its face, the assessor's conclusion appears reasonable, but with depressed markets we must dig deeper into the details of every transaction. In this example, the use of seller financing reveals a market value that is significantly lower than the $10 million transaction price would lead us to believe.

Assume the seller provides a higher loan-to-value ratio and lower interest rate than what the market offers. This props up the sale price by $1 million.

Adjusting the sale price for below-market financing, you arrive at a market value of $9 million, or $90 per sq. ft. That represents a 25% decline, as opposed to the assessor's 17% calculation.

As RCA reported, seller financing has become one of the primary alternatives to new loans, and it usually provides below-market financing terms for the buyer. Additionally, it provides the seller with a continued investment in real estate and avoids the need for a redeployment of capital into alternative investments.

Assessors are bound by the Uniform Standards of Appraisal Practice, which require an appraiser to address whether financing terms are at, below, or above market interest rates. The assessor also must determine whether a sale reflects unusual conditions, terms, or incentives.

Most sales closed today have a story behind the deal. By uncovering the details of each transaction, you might find that an adjustment is necessary to arrive at a true market value, and those details will give you a stronger case to present to the assessor in seeking a reassessment.

ShalleyMichael Shalley is director of appeals at the Austin law firm of Popp, Gray & Hutcheson, the Texas member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Nov
05

Haven't Gone 'Green'? It May Mean Property Tax Relief

"Taxpayers who show taxing jurisdictions how their hotel's market position has changed with the recent green movement may be able to obtain tax savings that produce huge bottom line impacts for them."

By Michael Shalley, as published online by Hotel Resource, November 2008

In these tough economic times, hotel owners need to proactively manage their property tax liabilities. The massive movement toward 'green' construction presents a meaningful opportunity for existing hotels to reduce their property taxes because 'green' has introduced obsolescence into the property tax equation.

How Obsolescence Works

Two types of obsolescence resulting from the 'green' movement affect hotels and, for that matter, all commercial buildings. Functional obsolescence reduces the ability of a building to perform the function for which it was originally designed and built. For example, in the 1950s and 1960s, the market saw swift and substantial functional obsolescence when the innovation of central air conditioning found its way into commercial buildings. Properties that lacked this new feature quickly saw market demand dry up, causing a loss in value.

Economic obsolescence refers to external forces that affect the ability of the building to continue to perform, such as changes in the types of building design and performance demanded by the market. This changing market demand can be seen in the new 2008 SmartMarket research report. It indicates that green building has become a global phenomenon, with 53% of respondents expecting to be dedicated to green on over 60% of their projects in the next five years.

Today, the biggest functional obsolescence issues for conventionally built hotels involve the acceptance and implementation of green technologies, especially in the areas of energy efficiency and water conservation. Green or cool roofs, photovoltaic panels, rainwater collection systems, and geothermal heating represent just a few technological advances that are being utilized in cutting edge green hotels.

Obsolescence Equals Tax Reductions

Taxpayers who show taxing jurisdictions how their hotel's market position has changed with the recent green movement may be able to obtain tax savings that produce huge bottom line impacts for them. If your hotel competes against others that have incorporated many of the new green building standards and operating protocols, you may have an argument for obsolescence. Should your local building code require green certification for new construction, chances that your hotel competes against green hotels are much greater.

In presenting arguments to the assessor for reducing property taxes, taxpayers need to demonstrate that hotels using green building materials, efficient design, high performance systems and operational protocols produce higher net operating incomes than non-green facilities. While green hotels provide economic, social and environmental benefits, it is the direct monetary benefits received by owners that typically affect market value.

Observed data on market value differences between high performance green hotels and conventionally built hotel is limited. That makes it even more imperative for taxpayers to clearly demonstrate to the assessor the direct economic benefits and the shift in market demand that supports a lower assessment for a non-green hotel.

Thus, it becomes critical that the taxpayer describe and explain to the assessor the technical differences in building components and systems employed in green and non-green hotels. In that way, the taxpayer exposes the assessor to the economic impact that these components and systems have on the market value of their non- green hotel.

ShalleyMichael Shalley is a Director of Appeals at the law firm Popp, Gray & Hutcheson in Austin, Texas. The firm 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. Mr. Shalley can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
28

Going Green Shouldn't Increase Property Taxes

"Most experts suggest that the hard costs to go 'green' have come down significantly in the past couple of years, but in hotels, 'green' start-up costs (operational training and certification process) still present a financial challenge."

By Michael J. Shalley, Esq., as published in Hotel News Resource, April 28th, 2008

A key question remains: do the added start-up costs of going 'green' translate into higher property taxes for hotels? The answer is they can and here's how you can prevent it.

Eco-friendly operations and design have moved into the mainstream of real estate and changed the way the market approaches renovation and new development. Hotel owners and operators are now fully engaged in the 'green' movement, as they have witnessed the positive market response to these initiatives in other areas of real estate. Most experts suggest that the hard costs to go 'green' have come down significantly in the past couple of years, but in hotels, 'green' start-up costs (operational training and certification process) still present a financial challenge. A key question remains: do the added start-up costs of going 'green' translate into higher property taxes for hotels? The answer is they can and here's how you can prevent it.

The wider availability of 'green' materials, improvements in recycling, and additional experience in 'green' construction methods have resulted in a decrease in hard costs. Industry experts indicate that the actual hard costs for 'green' construction today just about equal conventional construction costs. However, the operation of 'green' hotels cause an increase in soft costs and raise numerous operational issues not found in 'non-green' hotels.

For example, experienced and certified 'green' consultants can be costly and need to be retained to guide the project through the dizzying array of 'green' credits required for proper accreditation.

On the operational side, managing a 'green' hotel takes a special skill set not found in most management companies, and those companies possessing the necessary skills cost more money. The additional costs to operate and maintain special mechanical systems such as water recycling systems, eco-friendly grounds and solar power create operational challenges for a 'green' hotel. These operational issues require specific training, marketing and documentation, all of which drive start-up costs higher.

From a property tax perspective, three components comprise a hotel property: the real estate, the tangible personal property (furniture, fixtures and equipment), and the operating business. The real estate and tangible personal property are the two components, and the only two components, that by law are subject to property taxation in most states.

Many tax assessors use the income approach to value hotels, and most recognize that certain income adjustments must be made in order to remove the value of the hotel's business for property tax purposes. Once specific business start-up costs for a 'green' hotel are established, appropriate adjustments should be made to the income model to remove: 1.) the costs associated with the 'green' business initiatives and 2.) the expected rate of return on the 'green' investments. When owners fail to remove these items from their hotel's valuation, the eco-initiatives that drive additional business value for the 'green' hotel can be inadvertently taxed as real estate value.

ShalleyMichael Shalley is Director of Appeals is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. The firm 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. Mr. Shalley can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it..

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American Property Tax Counsel

Recent Published Property Tax Articles

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