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Oct
23

How to Avoid Excessive Property Taxes

Knowing what to look for in monitoring your assessments can help avoid over taxation.  

By Gilbert D. Davila

As robust occupancies and escalating investor demand in many markets drive up property tax bills for multifamily housing, apartment owners must continue to monitor their assessments to avoid overtaxation. Knowing what to look for can ease this task, and the place to start is with a firm grasp of the assessor's methodology.

Many taxpayers are unaware that assessors typically use a mass appraisal technique to derive assessments without referencing or even collecting details about a property's unique characteristics or performance. Property owners who understand the mass appraisal procedure have a distinct advantage in identifying assessment errors, and this knowledge can inform the apartment owner's arguments when they choose to fight excessive valuations.

Rooted in Generalities
The burden on appraisers to generate thousands of property values, often annually, is colossal. For this reason, assessors determine most market values for assessment purposes through mass appraisal, which is the process of valuing a group of properties as of a given date using common data, standardized methods, and statistical testing. Assessors using mass appraisal rely upon valuation equations, tables, and schedules developed through mathematical analysis of market data.

Mass appraisal analysis begins with assigning properties to classes or strata based on highest and best use. Valuation models are created for defined property groups, such as industrial or office, and are then calibrated to reflect the market factors for that specific market or submarket.

The International Association of Assessing Officers (IAAO) sets mass appraisal standards for assessors, by which an assessor can appraise the fee simple interest in property at market value. These standards set the preferred methods for mass application of the three traditional approaches to value (cost, sales comparison, and income). Armed with this information, apartment owners can attack mass appraisal procedures that result in values that don't reflect a property's true market value.

Property Data Errors
IAAO standards dictate that valuation models should be consistently applied to property data that are correct, complete, and up-to-date. However, assessor records commonly contain errors relating to a property's age, total square footage, net leasable area, number of apartments, unit mix, and facility amenities. An error in one of these fundamental property characteristics can significantly increase a property's overall assessment.

When arguing errors in specific property data, apartment owners should be prepared to share a current rent roll with their assessor in order to document the property's square footage, net leasable area, number of units, and unit mix. It may also be helpful to provide the assessor with copies of the property's most recent marketing materials, which show the project's various floor plans and amenities. Finally, pointing out land-size discrepancies or external nuisances such as traffic or airport noise can be helpful in arguing for lower values.

Income Approach
Assessors typically use the income approach in valuing apartments. Mass appraisal application of the income approach begins with collecting and processing income and expense data gathered from the marketplace. Appraisers then compute normal or typical gross incomes, vacancy rates, and expense ratios to arrive at a net income that is capitalized using a market-driven cap rate. This approach is often problematic because it fails to take into account a property's unique economic performance in a dynamic market.

Perhaps the best defense against excessive appraisals is to attack an assessor's mass appraisal income pro forma. Apartment owners should distinguish their property's rental rates and expense ratios from market data by providing current and prior-year operating statements if the numbers support a value reduction. Assessors often overestimate rent and underestimate expenses.

Owners should also provide occupancy reports to portray the property's occupancy trends, compare the property's occupancy level with market comparables, and outline any concessions and allowances the owner provides renters to maintain occupancy. The standardized vacancy and collection loss factor used in a mass appraisal income approach rarely captures the true physical and economic occupancy of a project.

Finally, owners should refute cap rates derived from sales of properties that aren't comparable to the subject.

Mass appraisal is a necessary evil that apartment owners should guard against. Knowing how assessors apply the procedure will help taxpayers in their continued fight to reduce property taxes.


Gilbert Davila is a partner in the law firm of Popp Hutcheson PLLC , the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
Sep
14

Are All Bricks Created Equal?

Proper functional obsolescence may not be factored into the estimates provided by the cost estimating services.

By Kirk Garza, MAI, CCIM, CMI, Joseph Jarrell, and Jordyn Smith

Appraisal districts across Texas often use the cost approach to determine market value for property tax purposes, and when valuing certain commercial properties via the cost approach, county appraisers frequently use cost-estimating services. These services enable appraisers to estimate the cost of the subject property's improvements as if they were new, as well as determine the depreciation to apply to the subject.

Cost estimators can be a great resource and valuation tool, but the appraiser is likely to reach an incorrect value conclusion using estimates from one of these services without also incorporating proper analysis of functional obsolescence.

Functional obsolescence is one of the three types of depreciation that measures a building's function and utility against current market standards. Given this, placing all weight on a service's depreciation estimates could lead to incorrect assessments that ignore functional obsolescence within the property's total depreciation.

The Trouble With Tables

Cost-estimating services typically provide depreciation tables that contain depreciation data for multiple commercial property types. County appraisers often cite these tables as their main source of depreciation support when using the cost approach.

It is important to know that these tables typically assume that all components of the improvements for the various property types depreciate equally across time. So for example, a brick used in a multifamily or office development will depreciate at the same rate as a brick used in a fast-food restaurant or movie theater.

Often-overlooked warnings from these services point out that certain real estate product types are subject to functional obsolescence that occurs rapidly and can significantly reduce the economic lifespan conclusion for the applicable property type. Given this information, a determination of total depreciation for the subject property must include an appropriate functional obsolescence analysis.

Evaluating functional obsolescence involves an analysis of the utility of the improvements, and how that degree of usefulness affects total depreciation. As an example, consider the fast food industry, which has evolved drastically over the past few decades.

As fast-food real estate models from the 80's and 90's continue to become obsolete, new models have appeared to attract and retain the millennial and Generation Z customer base. Because of this, it is common practice for fast-food companies to refresh their store models every five to 10 years, with a complete rebuild taking place every 20 to 25 years.

This refresh-and-rebuilding cycle is necessary to fit ever-changing consumer tastes and demands for this real estate product type. While the store refresh may include new flooring, additional exterior decoration and color schemes, a complete rebuild is necessary when the utility of the building no longer fits the current design standards demanded by the market. An economic life of 20 to 25 years may be appropriate to capture the potential functional obsolescence associated with this industry.

Picture A Theater

Movie theaters are another competitive product type that may be subject to functional obsolescence outside standard physical depreciation. Theaters built in the 1990s and 2000s may struggle to compete with the eat-drink-and-play models that continue to increase in popularity. Across Texas, select stand-alone theaters that lack dining, bar, and event options continue to see revenues decline.

Theaters without these features often lack the capacity to add a commercial kitchen, bar service, or bowling alley into their existing structure, which limits the utility of the property based on market tastes and preferences. These older theaters may also contain large projection rooms that were previously used to house large equipment and film reels. Given the arrival of digital cinema, most projection rooms now require less space to house and project content into the auditorium.

Auditorium spaces are also evolving, based on the capacity to house premium luxury sections or reclining seats with independent power modules. These popular seating features have resulted in auditoriums having less seating capacity, given the additional space required for each seat. Clearly, it is important to analyze and recognize any applicable functional obsolescence that could affect this property type.

Real estate product types continue to evolve along with consumer standards and tastes; it will be important to consider the impact these requirements have on a building's utility over time.

Cost-estimating services are a great tool that is used frequently for valuation, but it is important to know what is – and what is not – reflected in their information. Once assessors realize this distinction, they can apply proper analysis of total depreciation in their cost-approach determination of a property's market value.


Kirk Garza holds the MAI designation of the Appraisal Institute and has earned the CCIM designation through the CCIM Institute and the CMI designation from the Institute of Professionals in Taxation (IPT). Kirk is a Director and licensed Texas Property Tax Consultant with the Texas law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Joseph Jarrell and Jordyn Smith are graduate students at Texas A&M University's Master of Real Estate program. They may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
Sep
12

Oversupply, Taxes Choke Self-Storage Growth

 According to Gilbert Davila, principal at Popp Hutcheson PLLC, an Austin-based law firm specializing in property taxes, the hikes are primarily attributable to basic increases in construction and investment in self-storage properties across Texas. Based on how pricing for commercial real estate in Texas has generally skyrocketed in recent years, appraisal districts are now able to derive very low cap rates for many of the properties they assess. In addition, Davila says appraisal districts are only just beginning to have access to comprehensive data to use in valuing properties in this sector. "Prior to the last couple years, appraisal districts weren't very aggressive on self-storage owners, and now they're playing a  game of catch-up" he says. "However, we should be past the worst of the exponential increases and should see more stagnant property tax valuations for the year 2018."

Davila also points out that many self-storage owners are now protesting their assessments in court. Because Texas law requires all properties within a certain jurisdiction to be assessed equally and uniformly with facilities of similar sizes, this litigation should help lower the median level of valuation for self-storage assets.

Jul
27

Not All Bricks are Created Equal: How Functional Obsolescence Affects Property Taxes

Appraisal districts across Texas often use the cost approach to determine market value for property tax purposes. When valuing certain commercial properties via the cost approach, county appraisers frequently use cost-estimating services. These services enable appraisers to estimate the cost of the subject property's improvements as if they were new, as well as determine the depreciation to apply to the subject.

Cost estimators can be a great resource and valuation tool, but the appraiser is likely to reach an incorrect value conclusion using estimates from one of these services without also incorporating proper analysis of functional obsolescence.

Functional obsolescence is one of the three types of depreciation that measures a building's function and utility against current market standards. Given this, placing all weight on a service's depreciation estimates could lead to incorrect assessments that ignore functional obsolescence within the property's total depreciation.

The trouble with tables

Cost-estimating services typically provide depreciation tables that contain data for multiple commercial property types. County appraisers often cite these tables as their main source of depreciation support when using the cost approach.

It is important to know that these tables typically assume that all components of the improvements for the various property types depreciate equally across time. So for example, a brick used in a multifamily or office development will depreciate at the same rate as a brick used in a fast-food restaurant or movie theater.

Often-overlooked warnings from these services point out that certain real estate product types are subject to functional obsolescence that occurs rapidly and can significantly reduce the economic lifespan conclusion for the applicable property type. Given this information, a determination of total depreciation for the subject property must include an appropriate functional obsolescence analysis.

Evaluating functional obsolescence involves an analysis of the utility of the improvements, and how that degree of usefulness affects total depreciation. As an example, consider the fast food industry, which has evolved drastically over the past few decades.

As fast-food real estate models from the '80s and '90s continue to become obsolete, new models have appeared to attract and retain the millennial and Generation Z customer base. Because of this, it is common practice for fast-food companies to refresh their store models every five to 10 years, with a complete rebuild taking place every 20 to 25 years.

This refresh-and-rebuilding cycle is necessary to fit ever-changing consumer tastes and demands for this real estate product type. While the store refresh may include new flooring, additional exterior decoration and color schemes, a complete rebuild is necessary when the utility of the building no longer fits the current design standards demanded by the market. An economic life of 20 to 25 years may be appropriate to capture the potential functional obsolescence associated with this industry.

Theaters undergo sea change

Movie theaters are another competitive product type that may be subject to functional obsolescence outside standard physical depreciation. Theaters built in the 1990s and 2000s may struggle to compete with the eat-drink-and-play models that continue to increase in popularity. Across Texas, select stand-alone theaters that lack dining, bar, and event options continue to see revenues decline.

Theaters without these features often lack the capacity to add a commercial kitchen, bar service, or bowling alley into their existing structure, which limits the utility of the property based on market tastes and preferences. These older theaters may also contain large projection rooms that were previously used to house large equipment and film reels. Given the arrival of digital cinema, most projection rooms now require less space to house and project content into the auditorium.

Auditorium spaces are also evolving, based on the capacity to house premium luxury sections or reclining seats with independent power modules. These popular seating features have resulted in auditoriums having less seating capacity, given the additional space required for each seat. Clearly, it is important to analyze and recognize any applicable functional obsolescence that could affect this property type.

Real estate product types continue to evolve along with consumer standards and tastes; it will be important to consider the impact these requirements have on a building's utility over time.

Cost-estimating services are a great tool that is used frequently for valuation, but it is important to know what is – and what is not – reflected in their information. Once assessors realize this distinction, they can apply proper analysis of total depreciation in their cost-approach determination of a property's market value.



Kirk Garza holds the MAI designation of the Appraisal Institute and has earned the CCIM designation through the CCIM Institute and the CMI designation from the Institute of Professionals in Taxation (IPT). Kirk is a Director and licensed Texas Property Tax Consultant with the Texas law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Joseph Jarrell and Jordyn Smith are graduate students at Texas A&M University's Master of Real Estate program. They may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
May
24

Use obsolescence to lower hospital property taxes


Becker's Hospital Review originally published this article in the May 18, 2018 issue of Becker's CFO Report.

Property taxes based on excessive valuations are smothering traditional hospital owners.

All too often, tax assessors ignore functional and economic obsolescence that increasingly afflict hospitals, instead treating these assets as financially productive institutions that hold their value. Hospital owners, however, can leverage obsolescence to reduce taxable values and property tax bills.

Click the link below to continue reading.

https://www.beckershospitalreview.com/finance/use-obsolescence-to-lower-hospital-property-taxes.html

Daniel R. Smith, Esq., is a principal with and general counsel for Austin, Texas law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Kevin Shalley, CMI, is a tax consultant and manager with Popp Hutcheson PLLC, specializing in healthcare properties.

 Contact Daniel at This email address is being protected from spambots. You need JavaScript enabled to view it. and Kevin at This email address is being protected from spambots. You need JavaScript enabled to view it..

Apr
03

Consider Appealing Assessments to Hurricane-Damaged Property

Owners of such damaged property need to explore a number of issues to ensure that their assessments reflect their losses.

Severe flooding and wind dam­age from Hurricane Harvey wrought widespread property damage across Southeast and Central Texas in August 2017. Several large counties, including Harris and Mont­gomery, sustained severe losses. As the deadline for property tax appeals approaches, there are several things to keep in mind, particularly if you own property that was damaged by the storm.

Texas law allows for reassessment of property damaged in a disaster area. A city, county, school district or other taxing jurisdiction may request a reappraisal, and the cost of the reappraisal must be covered by the requesting jurisdiction. The benefit for reappraised properties would be a proration of taxes based on the pre- and post-disaster values.

Only a handful of jurisdictions have approved a reappraisal at this time,but if your property was damaged during Hurricane Harvey, it would be wise to contact the appraisal dis­trict to see if any of the jurisdictions that tax the property have approved a reappraisal. That would take care of any relief that is available for tax year 2017. For 2018, assessed values are based on the condition of the property as of Jan. 1, 2018.

This time of year, appraisal districts across the state are working on their mass appraisal models and conduct­ing field inspections. The 2018 prop­erty tax values may reflect recent flood or wind damage that was not repaired. However, since the dam­age from Hurricane Harvey was vast and widespread, it remains uncertain whether affected counties will be able to adequately capture and reflect the effect of the storm damage in valua­tions. For that reason, it is important for property owners to be on the lookout for the Notice of Appraised Value and appeal that value during the appeal window if the valuation seems exces­sive or unfair.

Deadline Shortened

The property tax appeal deadline has changed from May 31 to May 15. Given the deadline has been moved up two weeks, now is the time to pre­pare for your 2018 property tax ap­peal by gathering the pertinent infor­mation that will be useful in fighting your assessed taxable value. It will be important to assemble documentation that shows the ex­tent of damage sustained due to the natural disaster. Taxpayers will find it beneficial to keep the appraisal dis­trict informed of any changes to the property.

Appraisal district websites have added features to allow property owners to submit information regard­ing damage to their property due to the storm. Keep detailed records of the extent of the damage, along with the cost of repair.

Demonstrating the condition of the property after the storm will go a long way toward ob­taining tax relief, so photographs of the damage are critical. If you hold any inventory or other personal property and typically elect a Sept. 1 inventory appraisal date, you may have suffered significant losses as of that date. If so, it will be especially important to provide records of the goods lost, and docu­ment whether any of the inventory was salvageable as of Sept.1.

If you are a commercial real estate owner and have tenants that were affected by the hurricane, keep track of any concessions in the way of free rent or tenant improvements that you may have given as relief. For owners of hotels or apartments, keep in mind two main consider­ations:

First, if there was damage, the loss in revenue and ability to produce future income may be significant fac­tors that the appraisal districts would be willing to consider and account for.

Second, if your property is undam­aged and in or near an affected area, you may have seen an uptick in rev­enue at the end of the year due to in­ creased demand for temporary hous­ing. The increase in revenue is not realistic stabilized income, however, and shouldnot be used to derive your 2018 taxable property value.

Further even if your property did not sustain physical storm damage, appraisal districts will be consider­ing the effect of flooding and damage to neighborhoods and surrounding properties when making market ad­justments to your property. It is im­portant to consider this when determining whether or not to appeal the value for tax year 2018.

The amount of property tax relief provided in the wake of Hurricane Harvey will largely depend on the amount of damage and where prop­erty owners were in the rebuilding process on Jan. 1. However, to obtain the best result, protest your appraised value on time, keep detailed records of both the damage sustained and the repair cost, and track concessions to tenants and lost income. And remember that, as a general rule, the more detailed and specific your records are, the better they will support a request for a lower prop­erty tax value.

Jul
01

Are You Leaving Property Tax Savings On The Table

" In Texas, don't fail to appeal your assessment because the state gives taxpayers unusual advantages as a tax protest. "

Texas enjoys one of the most fair property tax protest systems in the country.

Suing to appeal an unsatisfactory appraisal review board decision is straightforward in Texas. The state property tax system provides taxpayers with a pragmatic approach to air their valuation disputes before the courts, without the delay and headache frequently experienced in other types of litigation. Yet many taxpayers choose not to appeal, relinquishing the opportunity to achieve significant tax savings. Do not be so shortsighted.

Texans enjoy one of the most fair property tax protest systems in the country, beginning with the right to  contest their appraised values through an administrative process. If they do not like the result, they can file a law-suit that provides a fresh start, turning the valuation issue over to a judge or jury, whichever the parties prefer. And if the taxpayer is unsatisfied with the court's decision, he or she can seek review from a state appellate court and even the State Supreme Court.

Not all states provide such a favorable review process. Texas is special.

Built into the Texas Tax Code are processes and requirements that make litigating property tax appeals more efficient and less procedurally burdensome for taxpayers, even if an appeal advances to the state's highest court. Here are a few of Texas' answers to common taxpayer worries.

Are you concerned that your property tax appeal will be a years-long slog?

Property owners who have been involved in lawsuits before may fear that a property tax appeal means protracted litigation, mired in delay and gamesmanship. Fortunately, the Texas Tax Code limits such behavior by providing numerous tools that can help bring the litigation to a quick resolution, like the ones mentioned below. These features do not apply in the initial filing to appeal an assessment, and are peculiar to property tax lawsuits.

Was your lawsuit filed in the wrong property owner's name?

In most types of litigation, a defect in parties could be fatal to a claim, especially if there is a tight window of time in which to file the lawsuit. In Texas, however, a property tax appeal continues despite having the wrong plaintiff so Tong as the property itself was the subject of an administrative order, the lawsuit was filed on time and the lawsuit sufficiently describes the property at issue. There is no jurisdictional problem.

Did you miss the deadline to protest the appraised value?

There are deadline-driven, jurisdictional prerequisites to pursuing a property tax protest, but Texas law provides some limited "back stop" protection in the event these deadlines are missed. For instance, at any time before Feb. 1, when the taxes become delinquent, a property owner may file a motion with the appraisal district to change an incorrectly appraised value that exceeds the correct appraised value by one-third. This is consistent with other statutes designed to be fair, so that property owners can efficiently challenge excessive appraised values.

Would you like to have something akin to a trial, but not necessarily be bound by the result?

The Texas Tax Code allows a property owner to take the dispute to non-binding arbitration. This is particularly helpful when the parties would like to get a sense of what might happen if the matter goes to trial. An independent, third-party arbiter decides who is right and issues a ruling on the valuation question. This procedure can drive more serious settlement discussions. Although the result is non-binding, it may nonetheless be admitted into evidence at trial for the judge and jury to see.

Would you like the appraisal district to meet with you early in the case to discuss settlement?

Upon written request by either side, the parties or their attorneys must meet and make a good-faith effort to resolve the matter. The meeting must take place within 120 days after the written request is delivered. If the appraisal district cannot meet this deadline, the deadline for property owners and the appraisal district to meet will be moved closer to the trial date — 60 days before trial for parties seeking affirmative relief to their complaint, 30 days before trial for all other experts. This allows more time for the parties to discuss settlement with a temporary reprieve from the pressure of having to engage experts and pay for costly appraisals.

Would you like to ensure that both sides produce their expert reports at the same time?

Property owners can do this by, within 120 days of filing suit, making a written settlement offer and identifying which cause of action is the basis for its appeal, meaning a claim for either excessive appraisal or unequal appraisal. At this time, the taxpayer must request alternative dispute resolution, such as mediation.

By triggering this process, property owners may protect their expert's valuation work from being used against them by the appraisal district's expert appraiser when preparing an opposing report. If property owners had to produce their expert appraisal reports first, the appraisal district's expert would likely try to discredit them in its opposing analysis. This "simultaneous exchange" requirement removes the unfair advantage that the appraisal district would otherwise have.

Property owners should not hesitate to continue their property tax protests beyond the appraisal review board level. In Texas, litigation adds numerous tools to the taxpayer's toolbox that can help property owners achieve fair property tax assessments.

 

daniel smith active at popp hutcheson

Daniel R. Smith is a principal with and general counsel 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 (APTC), the national affiliation of property tax attorneys. He represents commercial property owners in property tax appeals across the state, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Oct
10

Beware of RevPAR in Property Tax Valuations

When comparing hotels for valuation purposes, a common method of making adjustments for the difference between properties is to examine revenue per available room (RevPAR), a measurement of hotel performance.  If executed poorly, these calculations can distort property value and lead to unfairly heavy tax burdens on hospitality owners.

There are two different ways to calculate RevPAR.  The first is to multiply the average rental income per room by the number of rooms occupied, then divide by the number of days in the period.  The other method is to divide total guestroom revenue by the number of available rooms and divide that figure by the number of days in the period.

In an article titled “Using RevPAR as a Basis for Adjusting Comparable Sales,” published in February 2002 by HospitalityNet.org, appraiser Erich Baum voiced a common argument shared by appraisers who advocate for RevPAR adjustments.  Baum contends that the adjustments are appropriate because the revenue a hotel generates is tied to its location and the quality of its product.

The question in valuation for property taxation is whether or not RevPAR incorporates additional, non-real estate values such as quality of brand, management, goodwill, etc., and whether or not the RevPAR adjustment reflects those non-real estate items.

If the appraiser’s purpose is to compare values of hotels as a going concern, including all tangible and intangible items, this adjustment may make sense.  If, however, the purpose is only to value the tangible real estate and exclude intangible business value, as in an ad valorem tax valuation, a RevPAR adjustment may be inappropriate.

Appraisers generally accept that there is intangible value associated with the going concern value of a hotel.  The Appraisal Institute discusses this concept further in the 14th edition of The Appraisal of Real Estate (2013) Chapter 35, “Valuation of Real Property with Related Personal Property or Intangible Property.”  This is important in the world of ad valorem tax valuations because intangibles are not taxable.

Determining Values

To understand whether RevPAR adjustments are appropriate in a property tax setting, consider a nationally branded hotel that loses its brand.  Compare the hotel to its closest competitors using a RevPAR adjustment both with and without its flag.  Conversely, look at a non-branded hotel that becomes a nationally branded hotel and adjust its competitors’ RevPAR -using the same metrics.

Source Strategies produced a study to determine brand values by tracking the subsequent difference in revenue realized by hotels in Texas that gained or lost a nationally branded flag.  A detailed examination of the study appeared in the summer 2012 edition of The Appraisal Journal.

Researchers compared hotels on the basis of their RevPAR index, which measures a hotel’s performance relative to its competitive set.  An index of 100 indicates that a subject hotel is get-ting its fair share of revenue in comparison to its competitors.  An index higher than 100 indicates the subject is realizing more than its fair share of revenue and an index below 100 indicates the subject is realizing less.

Gaining or Losing a Brand

The study tracked five different brands of hotels in Texas between 1990 and 2010 and found that properties which gained or lost a national brand saw a respective drop or increase in their RevPAR index by as much as 40 percent.  Two hotels from the brand study provide an opportunity to test the utility and appropriateness of RevPAR adjustments.

One of the hotels studied was a Hampton Inn in San Antonio.  In 2004, its second-to-last year as a Hampton, the hotel was outperforming its competitive set.  This is indicated by a RevPAR index of 109.  The hotel’s average daily rate (ADR) was $55.60, or 9.4 percent higher than its competitors’ average of $50.82.

The year after the hotel lost its Hampton Inn brand, it operated as a non-branded hotel.  That year the same competitive set outperformed the now non-branded hotel.  The subject saw its RevPAR Index drop to 64, and its average daily rate fall to $39.89, or 35.7 percent lower than the $62.12 average in its competitive set.

Using a RevPAR adjustment would require a positive adjustment of 9.4 percent in one year and a 35.7 negative adjustment just two years later for the same real estate.

Now consider the effects of a RevPAR adjustment to a hotel that starts out as an independent hotel and then becomes nationally branded.  The study showed that one such hotel in Houston went from unbranded to being a Holiday Inn Express.  In 2004, its last year as an independent, this hotel generated less revenue than its competitors, as evidenced by the subject’s RevPAR index of 51.  The competitors’ average daily rate was $29.52, or twice that of the subject’s $14.72 ADR.

The year after the subject became a Holiday Inn Express it outperformed the same competitive set, as evidenced by the increase in its RevPAR index to 129.  As a nationally branded hotel, the subject’s ADR was $40.76, or 29.7 percent higher than the competing set’s $31.43 ADR.

In both cases the RevPAR index changed significantly for the subject properties, while the real estate remained unchanged.  The comps and methods of comparison remained the same.  The only change was the removal or addition of the brand and its resultant change in revenue.

These results indicate that the revenue shift reflects the change in brand and possibly management or goodwill, none of which are a part of the real estate.  Rather, they are separate and intangible components of the going concern.  Because these items are tied to RevPAR, a RevPAR adjustment will entail adjustments to the differences in both the tangible real estate and intangible items such as brand, management and goodwill.  RevPAR adjustments are therefore inappropriate when calculating only the tangible real estate value of a hotel. 

greg hart active

kevin sullivan active

Greg Hart is an attorney and tax consultant at the Austin, Texas law firm of Popp Hutcheson, PLLC, and Kevin Sullivan is an appraiser and tax consultant with the firm.  Popp Hutcheson PLLC represents taxpayers in property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Hart can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Sullivan at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

May
17

Property Taxes And The Growing Millennial Impact On The Retail Sector

As researchers continue to debate how market conditions affect the value of commercial real estate, one thing is certain: Appraisal districts across Texas are recalculating taxable property values. To ensure fair tax assessments, it is crucial for retail property owners to monitor demographic and technological changes that can disrupt retailers’ sales and a shopping center’s overall income potential.

Here are a few points for taxpayers to broach when helping assessors determine correct taxable property value.

Consumers spent more on dining out than at the grocery store last year, a historical first, according to Marcus and Millichap’s 2016 U.S. Retail Investment Forecast. With millennials dining out more than other age groups, this trend will likely continue. Some landlords are shifting the balance of stores, restaurants and bars at their properties to lure millennia) shoppers.

Conversely, changing consumer demand is weighing on outdated shopping centers that require significant renovation to remain relevant. Even with the right updates, a center could suffer from external obsolescence, or conditions outside the property that reduce its value.

Millennial Impact

The growing influence of millennials has also increased demand for convenience commerce.

Businesses such as Instacart now enable consumers in some markets to order groceries and goods directly from major grocery chains using smartphones, to be delivered to their home in as little as one hour.

E-commerce companies are adapting services that were once accessible only in a retail space and delivering those conveniences to the consumer. Entrepreneurs have already begun to experiment with mobile services ranging from dog grooming, manicures, hair styling and even massage therapy.

As the availability of services grows in step with millennials’ disposable income, owners of shopping centers offering similar services may see a decrease in foot traffic within their developments.

Shopping centers with tenants that cannot adapt to this service delivery model may be exposed to significant vacancy risk.

Adapting to the Market

Many national retailers adapting to e-commerce growth have announced store closures in 2016. Many of these retailers are investing significant capital into their omni-channel platform, suggesting that additional store closures are still to come.

With the continued growth of e-commerce, some industry observers believe that retailers will reduce the size of their showrooms or sales floors to allow more square footage for warehouse fulfillment space.

More warehouse space would allow retailers to process merchandise for pickup or delivery without interfering with the shopping space for customer foot traffic.

In this scenario, market rental rates that represent part showroom and part warehouse space would be appropriate for assessors to use when applying the income approach to value.

Adapting to Change

Taxpayers must always ensure that assessors use correct rates and values as comparables, otherwise the assessor could reach an improper value.

Additionally, as retailers across the nation continue to experiment with smaller store footprints, assessors must consider the potential for that trend to reduce the market value of large boxes and inline spaces, with a corresponding impact on property values.

Shifting demographics, the evolution of convenience commerce and retailers’ adaptation to e-commerce can profoundly increase or decrease a retail property’s value.

These trends demand that assessors carefully analyze a property’s individual characteristics as well as the market area in which the subject is located.

Apparel tenants may be the most at risk of losing sales, but landlords must also consider the viability of other tenants that could occupy the retail space at market rents.

The assessor should consider this uncertainty when selecting capitalization rates. Also discuss with the assessor year-over-year changes in income and expenses, and in tenant health, within the subject property.

By protesting property taxes, landlords can pass any tax savings onto their tenants, who typically reimburse the landlord for taxes, depending on the terms of the lease. In addition, a successful tax protest may enable the landlord to quote lower operating expenses, which can help attract and retain retailers. Correct analysis can identify any obsolescence that may exist, enabling the assessor to adjust taxable value accordingly.

And with a more accurate picture of the property’s marketability, the assessor will be in a better position to judge proper market rents, vacancy and collection loss, and capitalization rates. Only with all these essential pieces can the assessor correctly determine a retail property’s taxable value. 

kirk garza activeKirk Garza is part of the Member Appraisal Institute and a licensed Texas Property Tax Consultant with the Texas law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Sep
01

Texas Legislature Retains Equal and Uniform Property Tax Remedy

Tax relief was a hot topic from the very beginning of the session, with lawmakers submitting bills in both the House and the Senate proposing property tax, sales tax and franchise tax relief.

The 84th Texas legislative session followed a pre-session spectacle that seemed to promise heated debates over property tax issues, but ended with no casualties or otherwise drastic changes to the state’s property tax remedies and system.

Legislators submitted some 332 property tax bills. Among those were several bills addressing grumblings raised in the news media as to the equal-and-uniform remedy, unique to Texas and instrumental in granting its taxpayers property tax relief. The remedy holds that a property’s appraised value must be equal to or less than the median appraised value of a reasonable number of comparable properties appropriately adjusted.

In the end, the legislature passed about 65 bills, granting tax relief to property owners, making tweaks to the property tax system and leaving the equal-and-uniform remedy intact.

Tax relief was a hot topic from the very beginning of the session, with lawmakers submitting bills in both the House and the Senate proposing property tax, sales tax and franchise tax relief. Eventually, the legislature increased the homestead exemption for school district property taxes from $15,000 to $25,000, effective for the 2015 tax year. In addition, the legislature reduced franchise taxes by 25 percent.

In another effort to grant property tax relief, the law will now require a taxing entity to achieve a 60 percent majority vote, rather than a simple majority, to adopt a property tax rate that exceeds the effective tax rate. The effective rate is the tax rate that would achieve the same amount of revenue as the previous year’s taxes. Additionally, the interest rate taxing entities must pay on refunds resulting from the final determination of a taxpayer’s property value increased to 9.5 percent until the refund is made.

As expected, the equal-and-uniform tax relief provision garnered considerable discussion. In recent years, countless articles and interviews criticizing commercial property owner’s “abuse” of the equal-and-uniform remedy circulated in the industry. Although the Constitution guarantees equal and uniform taxation, opponents alleged the remedy had shifted the property tax burden from commercial property owners to homeowners.

On the reverse side, commercial property owners advocated fair and equitable treatment in a district’s valuation of their property, and wanted a right to pursue their equal and uniform remedy through litigation, just like homeowners do.

The equal-and-uniform remedy for commercial property owners was at risk going into the session, and a few lawmakers introduced a handful of bills that would have substantially limited or completely eliminated the remedy for commercial property owners. Those bills failed to gain momentum, however, and none passed out of committee.

Instead, to address both appraisal district and taxpayer concerns over the perceived misuse and the general preservation of the equal and uniform remedy, lawmakers eventually passed a compromise bill. House Bill 2083 amending the tax code provides that any equal-and-uniform analysis must be based on the application of generally accepted appraisal methods and techniques.

At the same time, it recognizes a property owner’s right to give an opinion as to the value of his own property. While increasing the standard under which an equity analysis must be prepared and reviewed, the new law leaves the equal-and-uniform remedy in place for all taxpayers.

Several other measures adopted during the legislative session seek to secure taxpayer access to relief. The legislature expanded the availability of arbitration as an alternate means to appeal property values, for example.

Now, commercial property owners with a property appraised at $3 million or less may appeal directly through binding arbitration instead of having to file an appeal in district court. This replaces the previous $1 million threshold, making the remedy available to more commercial property owners.

Another new law aims to facilitate the process for lawsuit settlement by requiring parties to attend settlement conferences before incurring unnecessary expenses. And lawmakers passed other laws directed at addressing taxpayer concerns over exemptions, applications and other procedures.

A legislative session is sometimes more notable for the measures that failed to pass. At least one failed bill proposed to allow appraisal districts to recover their attorneys’ fees should they prevail in district court, as taxpayers are currently allowed. Another would have provided for a 5 percent appraisal cap on all property, disregarding studies suggesting that caps are ineffective tax relief measures that run contrary to equal-and-uniform taxation. Neither these nor some of the more curious bills received much attention.

Ultimately, despite warnings of the looming collapse of the equal-and-uniform remedy, the bills that passed were uncontroversial. The equal-and-uniform remedy for commercial property owners remains secure, and other passed amendments will generally benefit property owners.

MelissaRamirez150Melissa Ramirez is a principal with the Austin law firm of Popp Hutcheson P.L.L.C., which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Ms. Ramierz can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

American Property Tax Counsel

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