Menu

Property Tax Resources

Aug
03

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

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

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

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

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

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

Procedures have changed

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

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

Affordable housing performance suffered

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

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

Property tax valuation outlook

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

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

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

Address tax rates, too

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

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

Managing Property Taxes

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

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

Continue reading
Apr
06

Industrial Landlords: Beware of Higher Property Tax Assessments

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. 

Darlene Sullivan is a partner in Austin, Texas, law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel.  Justin Raes is a tax consultant at Popp Hutcheson.
Continue reading
Mar
11

The Property Tax Response to COVID-19

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.

Rachel Duck, Esq.
Lisa Laubacher, Esq.
Lisa Laubacher, CMI, is a director and senior property tax consultant specializing in business personal property. Rachel Duck, CMI, is a director and senior property tax consultant specializing in real property. Both are at Austin, Texas, law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
Continue reading
Dec
11

Property Tax Process Adjusts to Pandemic

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.

Rachel Duck, CMI is a Director and Senior Property Tax Consultant at the Austin, Texas, law firm Popp Hutcheson PLLC. Popp Hutcheson devotes its practice to the start to finish representation of taxpayers in property tax matters and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
Continue reading
Jul
08

ATTN OWNERS: BEWARE OF PROPERTY TAX INCREASES DURING COVID-19

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.

Darlene Sullivan is a Principal in Austin, Texas, law firm Popp Hutcheson PLLC, which represents taxpayers in property tax matters. The firm is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
Continue reading
May
04

Texas' Taxing Times

​How changes to the Texas property tax law may impact you, and how COVID-19 plays a role this season.

Property taxes are big news in Texas. Last year, property taxes were a primary focus of the 86th Legislature, and Gov. Greg Abbott deemed property tax relief so important that he declared it an emergency item.

The 2019 legislative session produced significant modifications to tax law. Here's a rundown on the most noteworthy changes affecting taxpayers in 2020, along with a look at how fallout from the COVID-19 pandemic may complicate the taxpayer's position.

Removing the Veil

Property taxes are not only big news, but they are also confusing, particularly given the "Texas two-step" appraisal and assessment process. After an appraisal district values a property, taxing entities separately tax that property based upon the final determined value. For a single property, a taxpayer may owe five or more taxing entities spread among three assessors' offices. Understanding the ultimate tax liability for such a property can be a monumental task for taxpayers.

Senate Bill 2 addressed the confusion and promoted transparency and truth in taxation, earning it the title of "The Texas Property Tax Reform and Transparency Act of 2019." Each appraisal district is now required to maintain a website with useful information that allows taxpayers to better understand their tax bills. The website must include the three pertinent tax rates summarized in the table below (the names of which Senate Bill 2 also revised for clarity). Additionally, appraisal districts will calculate the effect that each taxing entity's proposed rate would have on its overall tax collection and include an estimate for any proposed increase's effect on a $100,000 home. Finally, the websites must provide the date and location of public hearings to address concerns with any proposed increases.

 Revenue Increase Limits

In addition to transparency, lawmakers fought to create some avenue of property tax relief. What ultimately passed between Senate Bill 2 and House Bill 3 was a limit on tax revenue increases by jurisdiction. This restricts the amount that taxing entities can increase revenues through tax rate setting.

Beginning in 2020, most taxing entities will have a maximum revenue increase limit of 3.5% year over year. To adopt a tax rate that increases revenue over 3.5%, that taxing entity must call an election for approval. This new cap is significantly lower than the prior law, which allowed for up to an 8% increase in tax rates year over year without voter approval. Junior college districts, hospital districts and other small taxing units including those with tax rates of 2.5 cents or less per $100 of valuation retain their 8% permitted increase. (For clarity, this article expresses tax rates in dollars per $100 of assessed value.)

Relief from school district taxation falls under a separate calculation, which was revised by House Bill 3. For the 2019-2020 school year, maintenance and operations (M&O) rates will be compressed by 7%. For school districts with a Tier 1 $1.00 M&O rate, the rate drops by 7 cents to 93 cents on the dollar.

For 2020-2021, local school district rates will compress by an average of 13 cents, based on statewide property value growth exceeding 2.5%. The M&O rate caps will vary across school districts, and the Texas Education Agency will publish all maximum compressed rates.

Other Relevant Procedures and Policies

While tax system demystification and revenue increase limits were the major reforms, lawmakers enacted many administrative and procedural changes as well. Administrative process changes now prohibit value increases at an Appraisal Review Board (ARB) hearing, add ARB member training requirements, and create special ARB panels to hear protests for complex properties. Additionally, the business personal property rendition date moved to April 15.

In a win for those litigating appraised values, the state revised Section 42.08 of the property tax code, allowing a taxpayer to pay less than the full amount of tax on a property with pending litigation. Previously, if the final property value from a lawsuit resulted in a tax burden exceeding the amount originally paid, the taxpayer incurred delinquent penalties and interest on the remaining amount owed. The revision removes the taxpayer's risk for attempting to discern where a litigated value may settle by eliminating the possibility of penalties and interest on the additional tax due.

Uncertain Times

Despite changes enacted in the 2019 Legislative Session, at least some of those reforms are on hold as the state and its communities respond to the coronavirus pandemic. Gov. Abbott's Mar. 13 disaster declaration allows cities, counties and special districts to use the old 8% threshold on revenue increases rather than the new 3.5% limit.

Further, the governor has the authority to change deadlines during a disaster. As of Mar. 19, Texas had suspended in-person Appraisal Review Board hearings and may extend that suspension into the normal administrative protest season.

Rapid developments may continue to disrupt the property tax assessment and appeal process in 2020. How the disaster will ultimately affect the 2020 property tax cycle remains to be seen, but the recent changes enacted in law will shape the property tax process in Texas for years to come.

For more detailed information on property tax law changes, please refer to the 2019 Texas Property Tax Code, additional resources on the Texas Comptroller's webpage, and consult with a property tax professional.

Rachel Duck, CMI, is a Director and Senior Property Tax Consultant at the Austin, Texas, law firm Popp Hutcheson PLLC. Popp Hutcheson devotes its practice to the representation of taxpayers in property tax matters and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
Continue reading
Nov
06

Retail Property Taxes Will Rise

​Unless assessors can recognize the challenges facing shopping centers, taxes will increase dramatically.

As retailers rise and fall in the age of Amazon, property taxes remain one of the retailer's largest operating expenses. That makes it critical to monitor assessments of retail properties and be ready to contest unfairly high taxable valuations.

Assessors – and property owners attempting to educate those assessors – must understand how the changes taking place in the retail sector affect property value. Assessors must adjust their models to reflect new market realities, and property owners or their representatives must be able to explain why previously held valuation assumptions could no longer be valid.

No going back

Changing consumer tastes have always required retailers to adapt in order to survive, but traditional retailers are facing a different kind of challenge today. The increasing role of e-commerce in overall sales reflects a fundamental change in consumer behavior that will not reverse course with the whims of fashion. The ability to shop online is resetting consumer expectations, and retailers are struggling to adapt and stay competitive.

This struggle is evident in store closings that in 2019 are outpacing closings from the prior year. In addition to the threat of e-commerce, some economists believe a recession is coming in 2020. Falling retail sales, rising assessed property values and changing consumer demographics could combine to accelerate store closings in the years to come.

With millennials and Generation Z mixing into the workforce and increasing the demand for online shopping, retailers and property owners are facing new challenges in catering to consumer expectations unique to these generations. Strategies range from adjusting store buildouts to completely changing the store footprint to fulfill online orders as retailers do what they can to compete with online sellers. In addition to these changes, many property owners are stepping away from traditional big box retailers and are instead looking to restaurants and entertainment venues to anchor shopping centers and drive customer traffic.

Restaurants and experiential retail

Across the nation, retail property owners are working to fill vacant spaces with tenants that will offer millennials and Generation Z an exciting and unique shopping experience. In doing so, these owners are attempting to "e-commerce proof" their centers by shifting from big box anchors to an experiential model. Some retailers catering to these two tech-savvy generations are using tenant improvement allowances to build out highly specialized spaces, while others focus on social media. Select retailers even offer discounts to shoppers who share photos of their store or products on platforms such as Instagram.

Retail developments that once contained 40% to 50% restaurants are now filling as much as 70% of their spaces with restaurant operators in an attempt to drive traffic. A rising threat to this strategy are food delivery services such as Grubhub, Uber Eats, and Door Dash, which are collaborating with major restaurants that have previously had no food delivery. Pizza chains and other food-delivery-based retailers losing market share must now re-think their strategy and even partner with these third parties to expand their customer base.

Home food delivery partnerships continue to evolve as well, with restaurant operators looking into cloud kitchen concepts. These allow restaurant operators to operate from industrial space, avoiding retail rents and the need to pay back above-market tenant improvement allowances. Once the cloud kitchen space is running, the operator can rely on third-party delivery services to get the product to the consumer. This is a growing risk to shopping centers that rely on a restaurant tenant base to draw customers.

Clicks and bricks

Physical retailers attempting to compete with Amazon's fast delivery have introduced buy online pick-up in store (BOPIS). Many sellers have found BOPIS difficult to implement due to expensive software that tracks live inventory and requires staff training. Essentially converting a retail-only property into a retail and warehouse hybrid, the method may require modifications to the real estate. This reclassification should be discussed with assessors, because retail space typically commands higher rental rates than warehouse space.

Grocery anchors have also begun to adopt the BOPIS model, and some are finding the logistics a challenge given their existing footprint. As a result, some stores are expanding into smaller, adjacent in-line suites to offer this service. Where this happens, a property owner that was once receiving all in-line rents may now collect reduced rents for these suites, given they are now part of the anchor space. In this scenario, it is important for the valuation to weigh the potential grocer expansion into these in-line suites and adjust as needed.

Assessors must understand the changes rapidly taking place for this product type and their implications for valuation metrics. Given millennials' and Gen Z's familiarly with the internet, e-commerce as a percentage of retail sales is expected to continue to rise.

As property owners increase tenant improvement allowances so retailers can keep up with changing consumer tastes, appraisal districts need to consider how above-market tenant improvement allowances affect the lease rate the tenant is responsible for paying. Assessors must analyze the rental rate to factor in these build out costs and, if needed, adjust rent over the least term to reflect the portion that is paying for more costly buildouts. Only then can the assessor conduct a proper rental analysis for the subject property.

Nuanced classification

In addition to thoroughly analyzing rental rates and vacancy risk, assessors must also consider retail classification. With restaurants stepping into the anchor role in many shopping centers, increased traction by cloud kitchens may pose a threat to these tenants' long-term strength. Struggling retailers attempting to implement BOPIS compound this uncertainty, particularly with a potential recession on the horizon. Assessors must consider these factors before selecting appropriate rental rates, capitalization rates and vacancy and collection loss inputs to calculate taxable value.
Kirk Garza is a Director and licensed Texas Property Tax Consultant with the Texas law firm 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 was assisted by Sam Auvermann and Krishtian Bazan, summer interns with the firm.
Continue reading
Apr
18

Protect Your Rights To Protest Tax Assessments In Texas

Learn best practices for meeting property tax deadlines and handling property tax appeals.

Beset by ever-increasing tax assessments, Texas property owners are allowed to seek a remedy by protesting taxable property values set by appraisal districts. The property tax system can be intimidating, however, and the process is complex and fraught with pitfalls.

To maximize results, taxpayers must understand the assessment process and the deadlines governing filings and protests. What follows are best practices for protecting the right to protest in Texas, along with some tips for meeting key deadlines. And remember, deadlines are subject to exceptions and may change for specific properties, so consult the Texas Property Tax Code or a property tax professional to verify applicable dates.

Learn the appeal timeline. 

Strict filing deadlines govern renditions, protests, litigation appeals and tax payments. Failure to comply with these deadlines may be devastating, resulting in forfeiture of the taxpayer's appeal rights and incurring substantial penalties and interest.

Meet protest deadlines.

Texas appraisal districts value real and personal property annually, usually as of Jan. 1. For commercial real estate, appraisal districts are required to deliver notices of appraised value by May 1 or as soon thereafter as practicable. Taxpayers in most jurisdictions can expect to receive notices of appraised value sometime in April. The deadline for protesting an appraised value is the later of May 15 or 30 days after the date the notice was delivered to the property owner.

In certain situations, appraisal districts are not required to send notices of appraised value, such as when the appraised value of the property did not increase from the prior year. A best practice is to track all documents and follow up with the appraisal district if you have not received a notice by late April to ensure you have the relevant information prior to the May 15 protest deadline. Keep in mind that it is the taxpayer's responsibility to inform the appraisal district of the taxpayer's current address.

When is the business personal property rendition deadline? 

Taxpayers are required to render information regarding their business personal property to appraisal districts annually, generally by April 15. Appraisal districts may extend the deadline until May 15 upon written request by the property owner, a common practice. This deadline can vary, however, depending on whether a Freeport exemption for the property is allowed.

Determining rendition deadlines can be complex and property owners should make sure to communicate with appraisal district personnel about deadlines early on in order to avoid penalties for late reporting. Penalties generally equal 10 percent of the total tax due.

Prepare for hearings. 

After filing a protest on time, property owners are scheduled for a formal hearing before the Administrative Review Board. Often the appraisal district will schedule an informal hearing with an appraiser prior to the formal hearing. Most formal and informal hearings take place between April and July of the tax year in question, and many protests are resolved during this process. Preparation is the key to success.

More deadlines: 

The review board will determine a property value and issue an "order determining protest." Document the date the order is received and follow up with the appraisal district if you do not receive appropriate documentation within a few weeks of the formal hearing date. A property owner has 60 days from receipt of the order to file suit in district court appealing the review board's results.

Taxing entities are required to mail tax bills by Oct. 1 or as soon thereafter as practicable. Taxes become delinquent if not paid before Feb. 1 of the year following the property valuation. That is, for the 2019 tax year, taxes are due on or before Jan. 31, 2020. An active protest or lawsuit does not excuse a property owner's obligation to pay taxes prior to the delinquency date, and failure to pay taxes in a timely manner forfeits the right to proceed with an appeal in court. If an owner prevails in its appeal, the overpayment will be refunded.

Best practices for appeals

Regardless of appeal status, communicate early and often with the appraisal district and provide requested documentation and information. Informal settlement conferences are good opportunities to get to know the appraiser assigned to the protest and to understand the assumptions supporting his or her analysis.

Be prepared with all required documentation including hearing notices, property-specific information and any appointment-of-agent forms. Consider further protecting appeal rights by filing an affidavit stating the taxpayer's position in advance of the formal hearing date. An affidavit on file protects the taxpayer in the event that they are unable to attend the hearing.

What if I miss my deadline?

Let's assume a taxpayer purchased a retail center for $2 million in December 2018. The appraiser valued the property at $3.5 million for 2019, but the owner believes the purchase price reflects market value. The taxpayer missed the May 15 protest deadline, however.

Fortunately, there is an additional, backstop remedy. Property owners may file a motion to correct the appraisal roll, provided that the assessor's value exceeds the correct appraised value by more than one-third. For our hypothetical retail center, the correct appraised value would need to be less than $2.625 million for the motion to succeed.

The motion to correct the appraisal roll can be filed through the date that the property taxes are due, which in this scenario would be Jan. 31, 2020. Like other protests, the review board's ruling on a motion to correct the appraisal roll may be appealed to district court.

Taxpayers should pay attention to the details of protest procedures and deadlines or hire the right team with the expertise and experience to do so. Otherwise, the owner may get burdened with an excessive appraisal due to missed deadlines or mismanaged internal procedures. Protecting appeal rights is essential to properly managing property tax expense.


Rachel Duck, CMI, is a senior property tax consultant at the Austin, Texas law firm Popp Hutcheson PLLC and Kathy Mendoza is a legal assistant at the firm. Popp Hutcheson devotes its practice to the representation of taxpayers in property tax matters and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
Continue reading
Dec
21

Beware of Double Taxation on Personal Property

While Texas solved the problem, your state may not have addressed the issue.

Many states tax business personal property, a classification that includes furniture, fixtures, equipment, machinery and, in some states, inventory. Whatever the jurisdiction, the values of business personal property and real estate can easily be conflated in ad valorem taxation, unfairly burdening the taxpayer with an additional appraisal and/or taxation.

If you live and work in a state that doesn't tax business personal property, it may be included with the taxes on your real estate anyway. If you are in a state that taxes personal property, you might be taxed for it twice. While it seems contrary to acceptable appraisal practice to include personal property in the real estate value and then to additionally appraise and/or tax the same items, it does happen.

The Texas Legislature wrestled with this problem of additional valuation and taxation for more than a decade. That process and the resulting tax law offer important lessons that may help taxpayers and lawmakers in other states.

Texas gets personal

In 1999, the Texas Legislature enacted Section 23.24, titled "Furniture, Fixtures and Equipment," as a new statute in the State Tax Code. Prior to its enactment, furniture, fixtures and equipment were often included in the appraised value of income-producing real estate for ad valorem taxation. They were also subject to a separate business personal property tax. Section 23.24 eliminates this double taxation as long as the method used to value the real estate takes the business personal property into account.

There are many different kinds of property but only a few approaches to valuation. When the values of real property and personal property are mixed, it is usually because they are being assessed as components of an operating business using the income approach. Hotels and motels, nursing homes, restaurants and convenience stores are among the property types at greatest risk of having real estate and personal property values combined.

An assessor valuing the real estate component of an operating business will likely use the income approach. This method bases value on the income stream a business can generate using the real estate and personal property as components of a business enterprise.

A hotel doesn't have a business without beds, and a restaurant doesn't have a business without tables and chairs. As such, a value determined using the income approach is going to include the value of the real estate and the personal property, as both contribute value to the enterprise's income stream. It's clear to see how using the income approach can conflate real and personal property value into one.

The cost approach keeps those values separate. Using this method, an assessor or appraiser looks only at the value of the land as if it were vacant, then adds the value of improvements based on the cost to construct those improvements minus any depreciation. There is no accounting for, nor any risk of conflating, the business personal property within the real estate while using this approach.

In many instances, however, appraisal districts that were not using the cost approach – or had switched from the cost approach to the income approach from one year to the next – were still additionally appraising and even maintaining a separate account for the business personal property. This would seemingly violate Section 23.24.

Many appraisal districts disagreed, claiming that a separate account for business personal property enabled them to deduct that amount from the real estate. In doing so, they believed that there would be no additional burden on the owner, who would only be paying taxes once on the personal property.

While the tax liability may not be increased, an appraisal district with a separate account for personal property still creates burdens for the owner. The taxpayer is required to file a rendition on the personal property stating either "the property owner's good faith estimate of market value of the property or, at the option of the property owner, the historical cost when new and the year of the acquisition of the property."

If owners fail to file this rendition on personal property already being accounted for in the value of the real estate, they are subject to a penalty that increases their tax liability by 10 percent. It hardly seemed fair that the taxpayer should have these obligations and liabilities regarding property that was already intertwined with the value and tax for the real estate. Two consecutive legislatures agreed.

In 2009, lawmakers created a subsection to Section 23.24. This statute intended to exorcise the appraisal districts' method of having a second account for the personal property and/or attempting to separate or subtract the value of the personal from the real when both values had already been combined in the real estate. Some appraisal districts were still requiring renditions (and seeking penalties for failure to do so) on property value already captured with the real estate.

In 2011, the next legislature removed the additional and needless burden to render business personal property that is not to be appraised separately from real property in the first place. The law now says that if business personal property is being appraised under Section 23.24, then the owner is not required to render anything.

Implications for other states

Check your state's laws regarding the taxation of personal property and make sure you're not already paying those taxes on the real estate.

Texas and Oklahoma tax inventory as well as business personal property, and not only is the tax present, it's prevalent. In 2016, personal property tax made up 12 percent of the property tax base in Texas and nearly 23 percent of Oklahoma's property tax base.

Whether personal property tax is present and/or prevalent in your state, make sure you are not paying personal property taxes where it isn't taxable, or paying it twice in jurisdictions where it is taxable.

Greg Hart is an attorney in the Austin 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.
Continue reading
Dec
03

Texas Hotel Owners: Proceed with Caution

Confusion Regarding Tax Code's Rendition Requirements Creates Penalty Trap

A provision in the Texas Property Tax Code requires hotel assessments based on an income analysis to include personal property. However, misunderstanding associated rendition requirements can cause unexpected penalties for hotel owners.

In Texas, both real and personal property are taxed at 100 percent of assessed value. Prior to 1999, a hotel's real and personal property were valued under separate accounts. A hotel's income and expense stream, however, incorporates value generated by both real and personal property.

For instance, a nightly hotel room rate covers the rent for the real property (the room itself) as well as personal property (the furniture and fixtures in the room). This blended income formerly created unique challenges when using the income approach to value hotels for property tax assessments.

In a move toward simplification and to protect against potential double taxation, lawmakers added Section 23.24 to the tax code in 1999. This provision prevents furniture, fixtures and equipment included in a real property valuation from being taxed a second time under a separate, personal property account. The statute was amended in 2009 to stipulate that, for properties such as hotels, the value of real and personal property must be combined into one assessment if the assessor uses an income analysis.

Specifically, Section 23.24(b) states that "in determining the market value of the real property appraised on the basis of rental income, the chief appraiser may not separately appraise or take into account any personal property valued as a portion of the income of the real property, and the market value of the real property must include the combined value of the real property and the personal property."

Section 23.24 simplifies the valuation process for hotels valued under an income analysis, presuming that total income reflects the contributory value of the real and personal property and that separating the two is an unnecessary step when both portions are taxed at a 100 percent assessment ratio.

The legislature amended Section 22.01 in 2011 to include subsection "m," which provides that "a person is not required to render for taxation personal property appraised under Section 23.24."

Taxpayer pitfall

As a result of these provisions, many hotel owners assume that their personal property will be included in the real property assessment and do not submit annual renditions to county appraisal districts. But what happens if a jurisdiction does not value a hotel using the income approach?

The caveat in Section 23.24 is that the property is valued "on the basis of rental income." Because the income approach is just one of three recognized approaches to value, this statute does not eliminate the independent consideration of personal property in ad valorem taxation for hotels in Texas.

Although assessors value most hotels based on income, there are several common scenarios in which they may use an alternative method, triggering the creation or continuation of a separate personal property account.

Jurisdictions often value newly constructed hotels using the cost approach during the first one to two years of operation, prior to stabilization. Harris County almost exclusively values hotels on the cost approach for the first year following construction.

Hotels that have been in operation for some time but have reached a point of significant renovation or decline in value may also be valued using the cost approach. In such scenarios, the assessor will value personal property under a separate account, and may require the property owner to submit a personal property rendition report.

Failure to render in a timely fashion results in a penalty equivalent to 10 percent of the total taxes due. Unfortunately, the hotel owner is often unaware of rendition requirements until they are penalized for a late rendition.

Rendition required

The following example illustrates how incorrect assumptions about an assessor's valuation methodology can result in unexpected rendition penalties.

Let's assume the assessor has valued a hotel under an income analysis since the taxpayer acquired it in 2010. Based upon this history and prior interactions with the assessor, the owner did not file a personal property rendition with the county appraisal district for tax year 2018.

The property had suffered a significant decline in performance over the past few years despite dramatic increases in land value in the area. After reviewing the documentation provided, the assessor decides to value the hotel at land value, with a minimal contributory value assigned to the improvements.

Since this approach is based upon a cost analysis and not an income approach as in prior years, Section 23.24(b) no longer applies. The switch in methodology triggers the creation of a separate business personal property account for the hotel.

Because the taxpayer's discussions with the assessor begin at an informal hearing after the rendition deadline, the owner does not learn of the change in methodology or resulting new personal property account until the opportunity to comply has passed. Consequently, the taxpayer incurs a 10 percent penalty for failure to file a timely personal property rendition.

An ounce of prevention

It can be challenging to establish complete clarity on an assessor's methodology prior to the rendition deadline. As in the previous example, scheduled discussions with assessors often occur after the deadline. A hotel owner may choose to file a protective rendition to avoid the possibility of unexpected penalties.

In any case, the key to avoiding unnecessary penalties is to communicate as early and often with the county assessor as possible, or hire someone who is able to do so on the taxpayer's behalf. With a thorough understanding of the property tax code and clear communication with county assessors, hotel owners in Texas may bypass the penalty trap.

Rachel Duck, CMI is a tax consultant at Popp Hutcheson PLLC, which represents taxpayers in property tax matters and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
Continue reading

American Property Tax Counsel

Recent Published Property Tax Articles

Property Tax Relief for the COVID Years

Strategies for getting value adjustments on assets impacted by the pandemic, from attorney Cynthia Fraser.

Last January I penned an article for this publication titled: "Will 2021 Bring Property-Tax Relief?" I never imagined we would enter a second phase of outbreaks and continued economic fallout related to COVID-19.

Because most states assess...

Read more

Understand the Impact of Intangibles

How to use these factors to reduce a senior living property's tax assessment.

The longstanding debate over intangible value in commercial real estate taxation rages unabated, and nowhere is the squabbling fiercer than in valuing seniors living facilities. Because these properties generally transact based on income from a going concern rather...

Read more

Self-Storage Property Taxes: How Assessments are Made and Ways to Potentially Lower Your Bill

Self-storage has become a hot investment and values are up, but many owners find themselves with excessive property-tax bills that eat into their cash flow. Here's an overview of how tax assessments are made and some ways to potentially lower your bill.

Self-storage facilities continue to command great cash flow, but...

Read more

Member Spotlight

Members

Forgot your password? / Forgot your username?