Blas Ortiz and Andrew Albright of Popp Hutcheson PLLC offer tips for decreasing liabilities.

For property tax purposes, commercial property owners concern themselves primarily with the administrative appeals and real estate taxes, while often ignoring corresponding business personal property. By doing so, those owners forfeit many tax-saving opportunities when complying with state filing requirements for and appealing taxes on business personal property. Since the majority of states tax business personal property in some form or fashion, commercial owners should follow several tax saving tips when preparing annual compliance filings.

Conduct the personal property test

Commercial property owners must realize that personal property tax savings begin during the compliance phase when formally rendering personal property value to the local assessor. This typically starts with what is reflected on the fixed asset list. In many states, taxable personal property represents anything that's not real estate, is income-producing, and not considered intangible. Generally speaking, the primary test to determine whether an asset is personal property rests on the answer to the following question: If the asset were removed from the real estate, would the real estate be irreparably damaged? A yes answer means the asset would likely be real estate. Removing real estate line items becomes crucial. Otherwise it amounts to double taxation if an asset more appropriately characterized as real estate also gets taxed as personal property. Properly delineating each asset line item as personal property or real estate is a vital first step to lowering personal property taxes.

Classify assets properly

Taxpayers will find that proper asset classification holds another key to decreasing tax liability. Certain assets may be depreciated on shorter age-life schedules if described and classified properly when reported to the business personal property assessor. The North American Industry Classification System, along with various cost estimator and valuation services provide general classification and age-life guidance when finding acceptable depreciation schedules for a company's fixed assets. A local property assessor or state department of revenue may also provide personal property classification and depreciation schedules, though it may not always be clear how that information was derived. If applicable, include potential obsolescence factors that may affect the final opinion of value. Many states periodically audit tangible personal property returns, so be prepared to explain any deviation from the assessor's depreciation schedules and the inclusion of obsolescence or inutility factors.

Understand depreciation

Commercial owners must also keep in mind that the net book value of assets on a fixed asset list, although pertinent for accounting purposes, is not considered when calculating ad valorem property tax liability. Accounting guidelines allow for depreciating assets differently than property tax depreciation. For accounting purposes, an asset is usually depreciated at a set amount each year over the asset's total typical life until it depreciates to $0. Those items often remain on the books even if the assets have been disposed of because they no longer have accounting value and, therefore, do not impact the overall book value.

However, for property tax purposes, assets are never fully depreciated to $0 value. Instead, they are depreciated to a residual value anywhere between 5 percent to 20 percent of the original cost. That being the case, when reporting assets, the preparer may look to the local assessors' asset depreciation schedules to determine each asset's depreciated value based on the asset's current age. As a corollary to that, the preparer should also confirm whether any disposed or "ghost assets" remain on the books, and if so, remove them from the fixed asset list before rendering.

Consider intangibles

The removal of intangible property continues to be a fundamental step often overlooked when reviewing fixed asset ledgers for the purpose of filing self-reported personal property renditions and returns. In certain states, items such as software and warranties are nontaxable. While being mindful of each state's specific guidelines for intangible property, consider embedded intangibles which might be identified within an asset's total capitalized cost. Removing intangible personal property line items, in accordance with state and jurisdictional laws and guidelines, can preserve potential front-end tax savings for many years.

File properly and on-time

Knowing when to report is just as important as knowing how to report. To avoid late filing penalties, be aware of the filing requirements and methods for each specific jurisdiction, such as postmark and submission deadline rules. Be aware that many assessors and appraisal districts are shifting to electronic filing vs. traditional hard copy filing. Additionally, be certain to properly identify the property by identification number, owner name and address.

Business personal property should not be ignored when determining a company's property tax liability. Following consistent and informed methodologies when filing tangible personal property compliance can create viable tax savings opportunities year after year.

Land use changes can subject unwary landowners and developers to massive property tax bills.

For real estate developers in Texas, the purchase and development commencement dates on a land project may have heavy tax implications that could make or break a deal.

Agricultural Exemptions

The Texas Property Tax Code allows some landowners to benefit from special property valuations for wildlife management, agriculture, or open-air uses, commonly referred to as agricultural exemptions. Depending on the valuation and exemption in place, a landowner may be excused from paying large amounts of taxes.

Under an agricultural exemption, tax liability is based on the land's productive agricultural value, as opposed to market value. The agricultural exemption supports and promotes the land's agricultural or wildlife- use by providing a discounted land value for use in calculating property tax liability while the land is being used for approved agricultural purposes.

Securing an agricultural exemption is not necessarily an easy process or a guaranteed result for a landowner in Texas. To qualify, land must have been primarily used for agriculture at least five of the past seven years. Accepted agricultural purposes include crop production, raising livestock, beekeeping, timber production, wildlife management, and similar activities. Additionally, many counties set minimum acreage requirements, and some consider the agricultural activity's degree of intensity.

Triggering Rollback

An agricultural exemption does not attach to the land forever, and some developers may be unaware of the rollback tax. This somewhat vague provision of the state's tax code can impose a heavy tax burden when a piece of agricultural land is purchased for development, and/or when the land use changes. This tax burden may be more onerous than simply losing the exemption moving forward.

Appraisal districts maintain two values on the appraisal roll for agricultural land. Similar to how homestead exemptions are recorded, the appraisal roll lists the land's market value and the lower valuation reflecting its wildlife or agricultural production. When appraising agricultural land, the assessor will determine and record both its market value and the value of its capacity to produce agricultural products.

When an assessor calculates the amount of tax due on the land, he/she will also calculate the amount that would have been required had the land not benefited from an agricultural exemption. The difference in the amount of tax imposed under the exemption and the amount that would have been due without an exemption is called the additional tax for that year.

If land that has been designated for agricultural use in any year is sold or diverted to a nonagricultural use, it triggers a rollback tax. The taxes due under this provision include the total amount of additional taxes for the three years preceding the year in which the land is sold plus interest at the rate provided for delinquent taxes. This rollback tax is in addition to the larger, non-exempt tax burden moving forward from the sale.

The chief appraiser determines whether the land has been diverted to a nonagricultural use. A tax lien attaches to the land on the date the usage change occurs to secure payment of the additional tax imposed, as well as any penalties and interest incurred if the tax becomes delinquent.

The lien favors all taxing entities for which the additional tax is imposed. If the usage change applies to only part of a parcel, the additional tax applies only to that portion of the tract and equals the difference between the taxes imposed on that section of the property and the taxes that would have been imposed had that part been taxed on market value.

Monitor Exemptions 

The county appraisal district may have incomplete or incorrect information about a particular property's change in use. It could be that the use is diverting from agricultural use to wildlife management, and the exemption may still apply. This means that an agricultural exemption could be erroneously removed from a property that would still qualify.

This happens most often when a change of ownership and a deed newly recorded with the county triggers the removal of the special valuation. Owners must be diligent in submitting to the county a new application for agricultural or wildlife management use by April 30 of each year to ensure that their exemption stays in place.

Review Annual Assessments

Landowners should not grow complacent about protesting assessments annually. If agricultural owners don't file protests to keep their assessed land value down year over year, they may be on the hook for more taxes when they sell the land to a developer.

A taxpayer may protest a property valuation each year for the current tax year, but many Texas counties do not increase land values every year unless property transactions prompt them to do so. Few taxpayers protest when their assessments do not increase from the previous year, and the protest process is even more likely to be overlooked when the landowner has an agricultural exemption.

Repercussions for the landowner become apparent when they receive a compelling offer to sell. The landowner may make a sweet deal with a developer, but this will always trigger a change of use and the rollback tax. The buyer and seller will need to reach an agreement about satisfying the tax payment upon closing.

This becomes even more difficult for the landowner to manage if their properties are in counties that do not send a notice of appraised value when the value rolls over unchanged from the prior year. Therefore, it is still important and worth the effort to protest the valuation of agricultural land each year, even when the value is unchanged or minimally increased.

To accurately forecast potential property tax liabilities for development projects, landowners and developers alike must be aware of both the taxable and market values of land under consideration for sale or development. The rollback tax provision can be a bit complicated, but the right property tax team can help to navigate the process and avoid pitfalls that could disrupt the project's profit potential.

Shopping center owners need to be especially vigilant regarding unfair taxation in 2022.

Property owners should expect to receive a Notice of Appraised Value from their appraisal district by mid-April. This year it is imperative that retail property owners submit an assessment protest prior to the deadline and help to establish fair taxable valuations in the post-pandemic marketplace.

Since March of 2020, COVID-19 has brought uncertainty and ongoing challenges to real estate owners. People often discuss the commercial real estate "winners and losers" of COVID-19, and of the four commercial real estate food groups, retail certainly suffered one of the heaviest initial blows. But how has the property type recovered as the pandemic has evolved? This article explores where exactly retail falls, and then offers strategies to argue more effectively for reduced assessments.

Evolving trends

To develop a full picture of the current state of shopping centers, one must look back to 2019 and early 2020 before the pandemic. In 2018, approximately 5,800 retail stores closed nationwide and only 3,200 opened, for an overall deficit of 2,600 locations. In 2019, the size of the annual store deficit nearly doubled with 5,000 more closures than openings. Ecommerce sales volume rose steadily from 2010 through 2019, which, coupled with accelerating physical store closures, clearly indicate a slowdown in the need for traditional storefronts.

In 2021, county assessors were generally conservative in raising values, primarily due to pandemic-related issues such as tenants going out of business and owners being forced to defer and abate rent. Additionally, shopping center transaction volume dropped throughout 2020, which forced appraisal districts to rely on limited data to arrive at market rents and capitalization rates for their 2021 models.

County appraisal districts preparing assessments for 2022 will most likely attempt to significantly raise taxable values to reflect what they view as a retail rebound that occurred during 2021. While assessors may conclude that retail is recovering well as the pandemic evolves, the data and overall trends fail to support that position.

If an appraisal district takes an aggressive stance in raising values, citing the "booming return of in-person retail shopping," it will be crucial for appellants to show the lingering state of uncertainty in the retail real estate market. Toward that end, the following three strategies will be keys to successfully arguing for reduced assessments.

1. Consider the tenant mix. When appealing taxable assessed values, either during the administrative process or later in district court, property owners must consider the tenant mix of their shopping centers and how the pandemic affected their retailers.

For instance, a center containing a drycleaner and a trampoline park will take much longer for those tenants to recover from the pandemic than many other properties. With work-from-home becoming the norm, many people no longer need pressed clothes. In addition, ball pits and trampolines crowded with children fail to appeal to a pandemic-conscious society. These trends are reflected in rents, with rates for specific uses such as these flattening or even declining since the onset of the pandemic.

2. Review the property's classification. The second strategy for appealing values is to review how the property is classified on the tax rolls. As many owners begin to utilize space in alternative ways, the center may no longer be operating entirely as a retail center. In other words, it may be more appropriate for it to receive either a light industrial or fulfillment center classification.

Amazon, for example, has been converting shopping malls into last-mile distribution centers steadily for the past six years. Amazon converted about 25 shopping malls into distribution centers between 2016 and 2019, Coresight Research reported. Converting stores to distribution spaces in a shopping center will drastically reduce foot traffic for any remaining retail tenants and negatively affect the customer experience, resulting in a lack of desirability for retail investors.

3. Demonstrate shrinking retailer footprints. It is no secret that consumer visits to physical retail locations is nowhere near pre-pandemic levels. Black Friday foot traffic in 2021, for instance, was down approximately 28 percent from 2019 levels, according to Sensormatic Solutions data. While in-person shopping will likely remain an element of the retail experience, there is a lingering sense of uncertainty surrounding its significance, especially with the strong adoption of curbside pickup.

Some major retailers have addressed this issue by downsizing stores. Target stores, for example, have historically averaged 130,000 square feet, but of the 30 stores the brand opened in 2020, all but one used a smaller format, according to pymnts.com. These small-format and college campus stores average 40,000 square feet, while some are much smaller.

It is reasonable to suspect that other retailers will follow suit, rendering many larger, anchor spaces within shopping centers obsolete and harder to fill with tenants. As the tide shifts to a "less is more" philosophy when it comes to store footprints, both appraisal districts and taxpayers should incorporate this increased risk into value calculations by raising cap rates in their models. Not only do shrinking store footprints and conversion of space to distribution uses bring an increased level of uncertainty to the asset class, but last-mile distribution centers also fail to command retail rents.

When shopping center owners receive assessed values for property taxation in the coming months, they should compare the assessments to values received in prior years, especially 2019. If the valuation trend of a particular property fails to make sense – either due to the overall uncertainty and risk surrounding brick-and-mortar retail or due to property-specific issues such as tenant mix and use of space – it will be extremely important for the taxpayer to act by protesting the property's taxable assessed value. 

Multifamily owners can avoid excessive property taxes by being prepared with the right research and documentation.

Property tax systems vary from state to state across the country, with differing procedures in each assessor's jurisdiction. Complicating things further, the personalities of assessors and their staff influence the way they interact with property owners or their agents.

It is the responsibility of the property owner or their agent to learn and adapt to the procedures and behaviors at work in their assessor's offices. However, there are universal preemptive steps that property owners in any jurisdiction can take to combat excessive valuations. These property-specific action items and best practices can significantly increase the chances of a successful valuation protest.

1. Document Property Financial Statements

In most appraisal systems, income-producing apartment property will be valued using the income approach. Arguably the most important pieces of information the apartment owner can present in protesting assessed values are the property's rent rolls and profit-and-loss statements. The timely preparation and completion of these documents prior to a protest is essential to any discussion of fair market value. Key line items such as potential gross income, vacancy and collection loss, and net operating income can assist in negotiating lower assessed values. Market rent, in-place rents, and occupancy are key indicators on a rent roll and should be shared with assessors, in most cases, to help them determine how a property is performing.

2. Conduct Market Rent Surveys

Collaborating with property managers to finalize market rent surveys can provide extremely valuable evidence to discuss with the assessor. Most jurisdictions rely on general market data to compute values across the submarket. Market surveys specific to a property typically entail more reliable data and can be used to strengthen the property owner's market value analysis.

3. Vet Comparable Sets

In addition to a market value analysis, many jurisdictions allow taxpayers to present an equity argument. In an equity claim, property owners or their agents will be looking at assessed values of the subject property's set of comparables, which are similar properties in the area that can provide reference points in determining market value. If the appraiser's list of comparables contains apartments not found on the market survey, the taxpayer will have a good reason to request that those be removed from the set being discussed. This strategy is valuable when an appraiser or assessor is using higher-class apartments in the subject property's submarket, thereby inflating the equitably assessed value.

4. Document Deferred Maintenance and Bids

An argument often heard during valuation protests is "my property has deferred maintenance, and therefore should be valued at a discount." This argument will be more likely to succeed if the taxpayer validates their assertions using contractor bids, pictures, or some proof of the amount of maintenance that needs to be done. Obtain bids before the valuation date, detailing work that needs to be done, including the cost of materials and labor. Also before the valuation date, document damages with pictures, if possible. Following this advice will differentiate the subject property from a long list of others claiming deferred maintenance with no support for the cost of repairs.

5. Learn Relevant Tax Laws

Property owners should educate themselves about the property tax system in their property's state and specific jurisdiction. Deadlines play a very important role, so make sure to meet and understand them. Missing a deadline can forfeit the opportunity to contest an assessed value, precluding relief for an excessive appraisal. Property tax laws and local regulations can be daunting, and the avenues that lead to success can be easily overlooked. In some situations, the property owner will want to speak with a local property tax professional to explore available options.

6. Build and Maintain Assessor Relationships

It is important to realize that the assessor assigned to a protest will likely be someone the taxpayer will be interfacing with throughout the valuation process and potentially for the entire term of property ownership. Integrity and honesty in every interaction with the assessor will help to establish trust and strengthen this relationship over time, which will benefit the taxpayer in the long run. The simple act of beginning a dialogue with the assessor early in the protest process can increase a property owner's chances of reaching a timely and successful settlement.

Advance completion of financial statements that could support a tax protest should be an annual priority for any property owner, as this data is invaluable in arguing for a lower assessment. While this sounds like a routine process for most property owners, the assessment timeline is different in every jurisdiction and may not coincide with your typical year-end financial audit. Finalizing market rent surveys and collecting bids for deferred maintenance will add to the chances of success. Learning the property tax rules and deadlines affecting the property, or having an educated team versed in the state or local market, will directly impact success. Finally, building long-lasting relationships with assessors based on openness and reliability is not only common courtesy, but can make assessors more receptive during the appeal process, and therefore increase the likelihood of achieving desired results.

The right to appeal property tax assessments may be more important than ever in the wake of COVID- 19. Despite the pandemic's disastrous and continuing effects on the value of many classes of real estate, some property owners saw tax assessments increase dramatically in 2021 and fear 2022 will bring additional increases.

What is the Value, Anyway?

When property owners receive their 2022 assessments, their first step should be to determine whether the valuation is, indeed, excessive. The right to appeal an assessment does not mean that an appeal is always prudent, so carefully analyze your property's performance in the context of the current valuation.

For example, suppose you own a mid-size, multitenant office property outside of Austin, Texas. Market vacancy rates increased to 20% in the fourth quarter of 2021 from 12% at year-end 2020, but asking market rents increased 10% in that time. Your office property fared better than the general market and only increased its vacancy to 5% when one small tenant did not renew its short-term lease.

The property's in-place rental rates were unaffected and unpaid rent from tenants at year-end 2021 was minimal. The property's assessment for 2022 indicates a 20% decrease from the previous assessment.

Although there are many additional circumstances to consider, in this scenario, it may be best to forego an appeal.

In many cases, however, property owners may see dramatic jumps in assessments for 2022 that do not reflect actual property performance and market fundamentals. Taxpayers and assessors alike are seeking how best to analyze the value implications of the past 18 months on different property types going forward.

Vacancy levels have affected individual office properties quite distinctly, and pandemic performance seems to be largely influenced by market location, tenant mix, and landlords' flexibility in negotiating lease terms moving forward.

An Uncertain Future for Office

The office market has suffered from continuing uncertainty despite a recovery in jobs. According to Cushman & Wakefield's Q2 Office Market Beat report, "even as occupiers increasingly clarify post- pandemic future workforce policies and set targets for employees to return the office, leasing activity has remained below pre-pandemic levels."

Moving into the fourth quarter of 2021, there is uncertainty among employers as to what return-to- office policies will even look like. Resurgence of COVID-19 cases in many markets, as well as dramatic shifts in labor preferences during historically high rates of workforce migration, have forced many employers to reconsider or delay their initial return-to-office policies.

Delivery of office product that began construction before the pandemic exacerbates vacancy woes. Cushman & Wakefield reported that, as of the second quarter of 2021, "more office space was delivered in each of the past three quarters than any other quarter in the past three years except Q4 2019."

However, vacancy levels have affected individual office properties quite distinctly, and pandemic performance seems to be largely influenced by market location, tenant mix, and landlords' flexibility in negotiating lease terms moving forward.

An Insider's Perspective on Value

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.

Find out why not all industrial properties deserve increased tax assessments, contrary to popular belief.

While some commercial property types struggled to stay relevant in 2020, industrial real estate seemed supercharged by the pandemic. This year, tax assessors are likely to use strong investor and occupier demand for some industrial properties to support significantly higher assessments for all industrial real estate. They may see this as a solution to make up for value losses in the hospitality, retail, and office sectors. That means industrial property owners should prepare for major assessment increases and begin building arguments to establish their properties' true taxable value.

E-commerce in perspective

If e-commerce was rising before 2020, it skyrocketed after the initial shock of the pandemic. The e-commerce share of total retail sales jumped to 16.1% at the end of the second quarter of 2020 from 11.8% in the first quarter and 10.8% a year earlier, according to the Census Bureau. As e-commerce grew, so too did industrial leasing demand, as online retailers secured spaces to process incoming goods and fulfill orders for shipment to consumers.

The e-commerce operations driving the surge in demand brought with them a list of demands to serve their logistical plans, however. Their preferences typically included locations close to major transportation corridors, proximity to their customers for deliveries, high ceiling heights and other traits necessary for handling the rapid growth of logistics-related technologies.

For 2021 industrial property tax appeals, it is important to understand that not all industrial real estate is equally suited to meet the demands of e-commerce operations. In practice, occupier demand that makes some properties more valuable will often lower the marketability and value of properties not fitting that demand. This, in turn, can affect a property's taxable value.

A Checklist for Appealing Tax Assessments on Industrial Property

The following are issues to consider in 2021 industrial property tax appeals:

Pick the right approach. There are several appraisal methods that assessors can use to value a property, but taxpayers should pay special attention in 2021 to the sales comparison approach. Though Texas is a non-disclosure state, meaning the state does not require a buyer to reveal the purchase price for acquired real estate, assessors have tools at their disposal to obtain or back-into purchase prices.

For tax year 2021, it will be important to note that although there may have been a few transactions, overall industrial sales volume generally declined from the prior year's numbers among the major metropolitan markets. In the second quarter of 2020 especially, the drop off in sales indicate that lenders and investors had to reevaluate the market and their underwriting assumptions.

For the sales comparison approach to value properties accurately, the properties and transactions used as evidence need to be comparable to the subject property. If that is not the case, calculations may place an unnecessary premium on the property.

For example, sales of warehouses with cold storage capabilities should not be directly compared to a conventional warehouse without a cold storage component. Thus, if an assessing jurisdiction raises an assessed value based on limited sales information, chances are the sale is not representative or comparable to the taxpayer's property. The taxpayer should consider raising this issue in their property tax appeal.

Consider property age and class. The industrial real estate sector serves a wide variety of uses that require special buildouts or designs that must be completed for the intended tenant to conduct their business effectively. For example, older, Class C industrial buildings tend to have smaller square footage and lower ceiling heights than more modern spaces. With the rising cost of transportation and emphasis on logistical efficiency, these attributes make Class C properties less marketable than newer, Class A or B industrial buildings.

According to CBRE, the warehouses built in 2019 are typically greater than 100,000 square feet and have ceilings that average 3.7 feet higher than warehouses built between 2002 and 2007. The increased space is primarily for more inventory and reverse logistics for returns. The newest buildings also feature more bay doors and parking space for large trucks. If the assessor is comparing properties and valuing a 2002-built warehouse the same way as the newer product without adjustments for class and age, the taxpayer may have an additional issue to raise in their appeal.

Location is critical. Location is becoming more important than ever to the tenant. Since land is more expensive the closer it is to the central business district of any city, the potential for using the space efficiently becomes more crucial as well. Assessors may increase the value of properties that are close to these markets.

E-commerce businesses demand locations that can speed last-mile deliveries to consumers. Proximity to transportation corridors is a significant advantage for tenants because it improves the timeliness of the supply chain. If an industrial property does not meet current demand because of its location, that may be an avenue for relief from increased property tax valuations.

Is rent paid, or deferred? Governments have deemed some industrial real estate tenants to be essential businesses during the pandemic, and this has limited the disruption of rent payments to certain landlords. During property tax appeals, it will be important to highlight the properties that suffered decreases in net operating income and occupancy, so they are not treated like the properties that saw no disruption in rent payments.

Owners of industrial properties may be able to fight and defeat the property tax increases potentially heading their way. Keys to winning assessment appeals will include following the industrial trends and being able to distinguish the taxpayer's property from the desirable properties that are trading, possessing evolving technology, being in the right location, andcollecting strong rents. 

Valuation and procedural changes that were implemented in 2020 may have significant effects on owners' 2021 tax liabilities.

Expertly managing property tax liability is more important than ever in 2021. The COVID-19 pandemic pummeled both real estate and business personal property values in the past year, forcing local jurisdictions to overhaul procedures that had been in place for decades. Many of those procedural changes will likely continue this year as assessments finally register the pandemic's full effect. Understanding the procedural changes made by local jurisdictions, and new valuation considerations for both real and personal properties, will be key. 

New Procedures Volatile 

When the pandemic hit, neither appraisal districts nor property owners knew how long the crisis would last. Most appraisal districts closed their doors to the public and quickly converted all informal and formal meetings to telephone or video conferences. Moving into 2021, much of that uncertainty remains. Most jurisdictions will likely continue to rely upon virtual formats for this year's informal meetings and hearings, which generally begin in April and continue throughout the summer. Property owners should be prepared, however, for procedural changes that may be implemented as conditions change. Communication with assessors will be vital, and taxpayers should make sure to provide all requested documentation in a timely manner. Communicating early and often about the valuation and protest will ensure no deadlines are missed and no procedural changes are overlooked.

Managing Real Estate Taxes 

While the fundamental valuation and appeal process for real property will remain the same in Texas, procedural changes initiated in 2020 will likely continue in many appraisal districts. Assessments will reflect the property's value as of Jan. 1, 2021, and notices will likely be mailed in mid-April as usual. The deadline for property owners to protest their 2021 real property values will be unchanged at May 15 in most cases, or 30 days after receipt of the notice of appraised value. 

Property owners can expect the continued option to protest assessments online, as well as telephone and video conferencing options for hearings. While these procedures were enacted and refined in 2020, the combination of virtual hearings and a potentially increased volume of protests in 2021 may push hearing schedules past their typical end (in June or July) and into the fall.

A Real Impact on Values 

Undoubtedly, 2020 was a unique year for property performance. Some property types sustained disastrous effects from the pandemic and stay-at-home orders while others fared the year well. Because Texas' valuation date for the current tax year is Jan. 1, 2021, many valuation methodologies will rely upon a property's performance over the 12 months preceding that date to inform their value metrics. 

Shopping centers, restaurants, theaters and hotels are among those properties that suffered greatly in 2020. Sadly, many closed their doors for good after struggling to perform this past year. Hotels saw revenue dip as much as 80 percent. Restaurants and theaters experienced government-ordered closures for most of the year, and capacity restrictions for the remainder. 

The resulting drag on potential rents, occupancy and cap rate assumptions has pushed down values. Property owners should see some recognition of value decline in these most-affected property groups, but to what extent remains to be seen.

Business Personal Taxes 

On the business personal property front, we expect deadlines to mirror the statutory language for filing exemptions and rendition reports, which list owned machinery, furniture, equipment, vehicles, merchandise and other business personal property. Due to COVID-19, many large appraisal districts extended the rendition deadline for all taxpayers in 2020, but we expect the typical formal extension request process to be back in place for 2021. All extension requests must be made in writing to the appraisal district before the statutory deadline of April 15. An approved extension allows the taxpayer an additional 15 to 30 days past the statutory deadline. 

Taxpayers with significant business personal property investment need to thoroughly analyze how COVID-19 limited or otherwise compromised the usage of their income-producing assets. Assessors and appraisers rely almost exclusively on the cost approach to value business personal property. In this climate, however, the simple depreciation they normally apply will not capture pandemic-related losses to produce an accurate market valuation.

To account for the loss in value, owners should consider developing an additional obsolescence factor to apply after typical depreciation. The Texas Property Tax Code allows for the inclusion of all forms of depreciation including economic obsolescence, which occurs when factors or trends occurring outside the property reduce its value. 

Each owner will require their own, unique obsolescence factor to measure economic impact. There are many ways to calculate an economic obsolescence factor, depending on the taxpayer's core industry. Analyzing production versus capacity is most often beneficial for manufacturers, for example, while income metrics are better suited for some retailers and medical providers. 

We recommend also doing a lookback for at least three years to properly illustrate the COVID-19 impact. The property tax team must truly understand the business in order to arrive at the proper factor.

What About Tax Rates? 

In addition to assessed value, the second piece of a property owner's tax liability is the tax rate. Taxing entities set their tax rates in the fall, after appraisal districts determine property values. 

Should 2021's overall property valuations decline, property owners should not expect an exactly equal decline in their tax liability. If the total tax levy falls significantly due to the valuation factors affecting property values as of Jan. 1, 2021, it is possible — and maybe even likely — that tax rates will rise. 

No one can predict tax rates with certainty, but owners would be wise to budget conservatively for anticipated tax liabilities. A 40 percent decline in revenue may not translate to a 40 percent decline in the assessed property valuation or tax liability for 2021.

Partnership is Key 

Navigating property taxation in a COVID-19 world can be overwhelming. It can be particularly challenging to stay on top of frequent procedural changes, and to understand the sometimes unique valuation metrics affecting real and business personal property. Partnering with an experienced property tax team can give owners peace of mind in a tumultuous year.

Leaders from five central appraisal districts share how COVID-19 drove procedural changes, some of which may be here to stay.

In early 2020, the rapidly unfolding pandemic threatened to derail Texas' property tax assessment and appeal process. 

With stay-at-home orders being issued at the same time that appraisal districts were sending out initial values for 2020, uncertainty cast doubt on how the process would proceed, or even whether it would proceed at all. Taxing entities were concerned with revenue impacts, and taxpayers were concerned about their ability to pay.

Every year, Texas launches the property tax cycle every Jan. 1 with a revaluation of property. In most jurisdictions, taxpayers expect to receive notices of appraised value sometime in April, with the deadline for protesting the appraised value typically falling in May. Under normal circumstances, these dates begin the property tax protest cycle for the year.

On March 31, 2020, however, the "typical year" quickly became anything but.

Appraisal districts faced the nearly impossible task of navigating an unprecedented scenario with limited time and resources. Their success in maintaining a functioning appeals process is a testament to the professionalism of the state's chief appraisers and personnel and to the fundamental strength of Texas' property tax system.

We queried chief appraisers and commercial supervisors from several appraisal districts about their experiences from the past year and their expectations for the property tax protest process in 2021 and beyond. 

Their observations provide not only a summary of their responses to the crisis, but also offer a blueprint for a successful appraisal and appeals system.

Popp Hutcheson: What were some initial challenges for you and your personnel when the stay-at-home orders were first announced?

Michael Page, Director of Appraisal, Hays Central Appraisal District: "When the stay-at-home orders hit in Hays County, we were just a few weeks away from our scheduled date to send notices. Our first challenge was to complete the notice process and simultaneously ensure the majority of our staff could work from home."

Scott Griscom, Assistant Chief Appraiser, Bexar Appraisal District: "Waiting on guidance from state officials with regard to the 2020 reappraisal effort pushed back our mailing dates for notices… The delay in mailings pushed back the protest deadline for all properties this year."

Jack Barnett, Chief Communications Officer, Harris County Appraisal District: "The Harris County Appraisal District was faced with two major challenges that resulted from the pandemic – avoiding transmitting the diseases in the building and social distancing."

Popp Hutcheson: Once it was clear the process was not returning to "normal" in 2020, what were the largest challenges in moving forward with protests?

Brent South, Chief Appraiser, Hunt County Appraisal District: "Logistical matters were the biggest challenge. Coordinating remote hearings and scheduling panels, conducting hearings remotely or telephonically/videoconferencing."

Ken Nolan, Chief Appraiser, Dallas Central Appraisal District: "Notices were mailed one month later than normal. No in-person, informal meetings with appraisers were allowed. One-member ARB [Appraisal Review Board] panels were used, and no in-person hearings were held until after certification. All hearings during the summer were by telephone."

Michael Page (Hays Central): "Our next challenge was to devise a way to conduct hearings if we were unable to reopen the office. My staff went to work investigating how to do this, starting from scratch as we had never conducted virtual hearings before."

Jack Barnett (Harris County): "Within approximately 60 days, the creation of virtual hearings went from an idea to reality – through development, which included submitting evidence; writing the instructions for appraisers, the ARB members and property owners; testing; and getting the instructions to the property owners."

Popp Hutcheson: What were some major successes from the 2020 property tax protest process?

Jack Barnett (Harris County): "The major successes were keeping employees healthy and employed and keeping the virus out of the building… Another big success was the development of virtual meetings with appraisers and ARB hearings. Even with a record number of protests this year, the ARB turned over the appraisal records for certification in August so the district could get the appraisal rolls to the jurisdictions."

Ken Nolan (Dallas Central): "Certifying the appraisal roll during the summer, successfully implementing the 'Tax Transparency Website' on time and limiting the spread of the virus."

Brent South (Hunt County): "Having the ability to provide the taxing units (with) a certified estimate was a major success. Without this most CADs would not have been able to provide entities a timely appraisal roll."

Scott Griscom (Bexar): "We found that working remotely with agents and the public proved to be far more efficient than we had ever dreamed… Even though we sent notices later, we were able to certify at over 90% complete on July 25."

Popp Hutcheson: Do you expect any of the procedural changes to stay in place in 2021 and beyond?

Ken Nolan (Dallas Central): "We will once again limit in-person informal meetings with appraisers and stay focused on online protests and telephone meetings to resolve protests. We will probably revert to in-person hearings, since it allows many more hearings to be scheduled each day."

Scott Griscom (Bexar): "We fully intend to continue to offer appearance at the ARB via Zoom as well as telephone and electronic meetings/hearings that have been met with favorable comments from owners, agents, and staff alike. We will continue to expand the online protest option for nearly all properties and encourage the use of it to resolve protests as well. We plan to stay closed to the public for the foreseeable future due to the upswing in positivity rate experienced within the community at large."

Jack Barnett (Harris County): "We will continue to offer and improve the virtual meetings and give property owners more options to work with the district from their homes or other off-site locations."

Michael Page (Hays Central): "Feedback from property owners shows that many like the ability to attend a video conference hearing without actually traveling to the district office. I foresee us continuing to offer this option to owners in the future as a way to provide improved customer service."

Moving forward
Along with the challenges COVID-19 forced upon the property tax system, appraisal districts discovered tremendous opportunities to innovate and take advantage of their successes in adapting to change. The efficiency with which appraisal districts revolutionized processed that had been in place for decades - in a significantly short time - is commendable.

And moving forward, the procedural transformation we witnessed in 2020 will continue to redefine the working environment within the property tax system.

​What do you need to know to fight excessive increases in Texas this year and next?​

As if a global economic contraction and what is most likely an unfolding recession across the United States were not enough, many commercial real estate owners across Texas have seen their taxable property values increase this year. While many of these owners are calling for property tax relief to offset the financial burden they are suffering due to stay-at-home orders and business closures triggered by the COVID-19 pandemic, they may be unsure of potential remedies to pursue or arguments to make.

Given that the date of valuation is Jan. 1, 2020, property owners searching for relief are limited as to the information that appraisal districts will consider for this tax year. Potentially limited relief in 2020 does not mean taxpayers lack options, however.

There are three key strategies that commercial property owners need to implement in 2020 if they want to maximize reductions in taxable value for this and future years.

1. Consider filing a 2020 appeal – even if the taxable value did not increase from the prior year. The state was already shutting down non-essential activities as appraisal districts were preparing to mail out their 2020 Notices of Appraised Value. Most appraisal districts delayed the mailings while exploring various options, including freezing property values and granting temporary exemptions for properties affected.

In the end, most appraisal districts conducted reappraisals as originally planned and the Texas Attorney General shot down the idea of temporary exemptions as, in his view, the statutory authority allowing issuance of exemptions did not cover purely economic, nonphysical damage to property. The result of this was that, in the majority of cases, the values sent out had no consideration for losses due to the pandemic.

A taxable value that did not increase year over year in an up market may not warrant an appeal during ordinary times, but these are not ordinary times. In 2020, such appeals are important to taxpayers for several reasons.

First, the focus on the pandemic has shifted the narrative that dominated the news cycle in the months in and around the date of valuation. Does anyone remember the retail apocalypse? According to Business Insider, over 9,300 stores closed in 2019 and thousands more were slated for closure in 2020. This was all before COVID-19. If your property was affected by this or other economic factors, a freeze in value may not appropriately reflect the market value of the asset.

Secondly, appealing now may be a sound decision because the 2020 value may be used as a benchmark for future relief. In Texas, each year stands on its own and is valued independently of prior years. However, given that the effects of the pandemic are unlike anything we have seen before, it is reasonable to predict that in order to track the decline in value, appraisal districts may look to the 2020 appraisal roll as a starting point.

In Texas, the deadline to appeal property tax values is May 15, or 30 days from the date the Notice of Appraised Value was delivered to the property owner. Given that some jurisdictions delayed their mailings, it is important to review your Notice of Value to determine your deadline to appeal.

2. Consider the tax rate as well as taxable value. It is important to remember that a value freeze without a freeze in tax rates may still result in an increase in taxes. While actions taken by the Texas Legislature in 2019 promised relief by addressing tax rates, even those measures are currently up for debate as local districts are questioning whether the pandemic allows them to exceed the revenue-raising limits put in place by the Legislature.

Texas may not resolve this dispute until it assesses the full extent of economic damage and weighs it against the needs of the taxing units to meet their budgets. The appeals process will still be the first avenue for relief, but a very close second will be to lobby the local taxing jurisdictions to not raise, and perhaps even lower, property tax rates.

3. Keep track and provide documentation of COVID-19 losses. Even though COVID-19 losses may not be fully considered for tax year 2020, taxpayers need to initiate conversations about the economic impact to the property's financials so that appraisal districts can start building the valuation models for 2021 with these factors in mind.

In 2021, property owners should be ready to present documentation demonstrating any declines in occupancy or revenue, as well as any bankruptcies affecting the property. If the taxpayer's current record keeping does not reflect slow-paying or non-paying tenants, consider tracking those items. Changes to business models, such as adding patio seating or curbside pick-up lanes, may also affect the ultimate indication of value for 2021, so keeping track of those expenses will be equally important.

As property owners go through the 2020 appeals process, it may be beneficial to consider keeping the option open to file a lawsuit in district court to seek additional relief. The longer the property owner and its advisors have to gather information and calculate the depth of the economic impact, the better positioned the team will be to obtain a fair 2020 value.

In the end, being proactive during these times is essential to obtaining relief where it appears there may be no relief in sight.