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Property Tax Resources

May
04

Three Keys to Protesting Retail Property Tax Assessments

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

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

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

Evolving trends

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

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

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

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

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

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

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

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

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

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

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

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

Sam Woolsey is a property tax consultant at Austin, Texas, law firm 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.
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Nov
29

Pandemic Hits Movie Theater Property Values

But taxpayers can take certain measures to get a fair shake on their tax assessments.

Diminishing tax liability may offer a silver lining amid a horror show of declining property values playing out for owners of silver screen properties across the nation. Many theater owners will pay more than their fair share in property taxes, however, unless and until they educate local tax assessors of the sinister influences that oppress their businesses.

Movie theaters have been one of the hardest-hit industries during the COVID-19 pandemic. Spaces where the big screen once lit the faces of attentive viewers fell dark and silent, to sit lifeless for months. Studios released only 23 films in 2020, the fewest since 2003, and box offices sold less than 225 million tickets (see chart, Annual Ticket Sales Plummet).

As regulations eased, cinemas emerged far behind the pack of other businesses in a race to resume normal operations. Now, most states are allowing 100% occupancy in movie theaters; however, this does not mean movie-goers are rushing back to theaters. What is there to attract them? Some of the most anticipated new movies had their 2020 premiere dates pushed to middle or late 2021, with some even transitioning directly to streaming platforms like HBO.

On top of the lack of content, theaters are wrestling with new consumer preferences developed during quarantine. Streaming services such as Netflix and Hulu posed a threat to in-person cinemas long before COVID-19 ever indirectly accelerated the preference for home movie viewing. On the flipside, drive-in theaters saw an uptick in attendance during the pandemic, showing that consumers still enjoy watching a movie in an atmosphere specifically tailored for films.

While most industries are asking "Where do we go from here?" the big question for real estate professionals is "How does this shift in the economy affect property value?" As for movie theaters, there seems to be an opinion divide between optimistic hope for a rebound and a pessimistic expectation for further decline.

Cinemas were already difficult to value because of their unique usage and a lack of comparable transaction data across the country; now, weak ticket sales give appraisers and tax assessors a bigger hurdle in valuing movie theaters. Theater amenities are evolving to match consumer demand with reclinable chairs, full dining and drinking experiences, and higher-quality digital screening. Older theaters face design issues that deter conversion to modern cinemas. As a result, the total number of theaters in the United States has decreased by over 25% since the late 1990s (see chart, A Quarter-Century Contraction).

Theaters also present red flags to investors seeking properties for conversion to other commercial uses. Most theaters are constructed with sloped floors and high ceilings, for example. While those conditions are ideal for audiences to enjoy a film, few businesses would find those characteristics appealing for their own use. Most organizations would consider those building features detrimental and deduct the cost to remove them from the purchase price.

This illustrates a re-use utility issue with movie theaters – not many enterprises can utilize the real estate efficiently as is. To an investor in any industry outside of cinema or live entertainment, modifications to the theater would be required to make the space usable, decreasing the price that they would pay to purchase the building. The appraisal industry describes this as a Highest and Best Use issue, because a movie theater is arguably not the most efficient or profitable use of the space.

An investor would expect the property to require a large and costly conversion to make the space suitable for its most efficient and profitable use. These renovations would entail many risks. Movie theaters tend to be a riskier investment in general due to the specialization of the industry, but adding on the unknowns of transitioning the building to a more efficient use increases the risk to an investor.

Give Assessors the Facts

A theater owner should be aware of these issues when reviewing their property tax assessments. As county assessors value buildings using mass appraisal methods or software, they are unlikely to consider all the pressing issues that cinema owners face.

While a shift in the current market is inevitable, not all hope is lost in the movie theater industry. In an article by Bloomberg CityLab, K.C. Conway, chief economist of the CCIM Institute, shared some promising opportunities for the reuse of outdated theaters. As Conway observes, adaptive reuse can create affordable housing, reduce blight, and put old retail stores back on the property tax rolls. Some of the adaptive reuse opportunities already put into action include turning former cinemas into offices, e-commerce warehouses, and fulfillment centers. In Goodyear, Arizona, a nine-screen theater was repurposed to serve as the Arizona Department of Transportation's headquarters and Motor Vehicles Division office.

Although adaptive reuse offers some opportunities to reduce the number of vacant, outdated movie theaters in the market, the industry will still have a fundamental supply and demand problem – the supply of movie theaters surpasses the demand from moviegoers, operators, and investors. Changes in movie viewing preferences were already in motion when COVID-19 accelerated those trends.

As many outmoded movie theaters currently sit, physical obsolescence inhibits their transitioning either to a modern cinema or to a new use. The theater industry will continue to face obstacles, including finding investors to take on the risk of purchasing vacant theaters. And owners must educate tax assessors using factual information to demonstrate the profound decline in market value that some movie theaters have sustained.

 Molly Luhrs is an intern with Popp Hutcheson PLLC and a graduate student at Texas A&M University's Master of Real Estate program. Popp Hutcheson PLLC focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. 

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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.
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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.
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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.
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Dec
03

Office Trends Raise Property Tax Concerns

During the pandemic, landlords and tenants need to track and document all issues affecting net
operating income to help with the property tax valuation process.

With property taxes comprising a significant portion of the real estate operating budget at most companies, both tenants and landlords need to understand how trends sparked by COVID-19 can impact their property tax valuations.

The pandemic has spurred governments to impose unprecedented restrictions on office capacity and fueled widespread uncertainty among companies that own or lease office space. Organizations are asking if, when, and how they will use their offices in the months ahead, and are scrutinizing expenses to reduce costs.

Many businesses are reevaluating their space requirements after adopting work-from-home initiatives, while greater familiarity with Zoom and other applications that support remote training and online collaboration has firms reconsidering their ongoing need for conference or meeting space. It is essential for real estate decision makers to monitor the effect of such trends on taxable property values.

Office demand evolves

In the early 1990s it was common for companies to occupy 350 square feet of office space per person. This requirement changed as some businesses sought to maximize density and encourage collaboration.

In a COVID-19 world where social distancing precludes density, many companies are limiting the number of employees returning to the workplace. Some companies have adopted permanent work-from-home policies. If this trend continues, office tenants may renegotiate leases to occupy smaller spaces, or decline to renew.

Taxpayers working with assessors need to understand renewal probability, which measures the likelihood of a tenant renewing their lease during the holding period. Before the pandemic, renewal probability in a given market may have been 80% to 90%, while a post-COVID renewal probability could well be 50% or less.

Because assessors typically value property annually, they seldom consider renewal probabilities. Given the uncertainty of a pandemic, however, property owners need to discuss renewal plans with any tenants that have leases expiring within the next twelve months, and then share that information with assessors. If there are a significant number of tenants at risk of vacating, and this is a trend that is being observed in the market, the assessor may need to adjust the capitalization rate used in the income approach to value the property.

Adjust assumptions

Owners of office buildings operating at a stabilized occupancy level for their market must work with assessors to evaluate and analyze their vacancy risk. Buildings that lack stable occupancy as of the valuation date will face additional challenges as the pandemic continues.

When working with assessors, owners must properly forecast an appropriate absorption period for their vacant office space, in addition to projecting appropriate costs to build out spaces for occupancy. With the volume of office space offered for sublease increasing at a record pace across the nation, and often at below-market rental rates, taxpayers and assessors must consider an additional layer of competition that could create downward pressure on rental rates for direct office space. An office building that may have reached stable occupancy in 12 months in a healthy real estate market could now require 24 to 36 months to stabilize.

COVID-19 has also ushered in new health and safety measures that office owners and operators may be required to address when building out office space. Touchless entry systems, improved HVAC and filtration, and antimicrobial construction materials are just a few build-out responses companies are evaluating to bring workers back into the office safely.

If these additional costs become standard, they must be considered in a lease-up analysis. Furthermore, these calculations must include any additional time needed to complete build outs at a time when construction crews across the nation are operating under their own COVID policies.

Office protocols will likely continue to evolve into 2021. That makes it important for users of office space to save all documentation that may have a bearing on the property's net operating income. This includes rent relief agreements, renewal information, relocation requests, lease terminations, build out costs and other records to help ensure the assessor can properly consider all factors affecting the valuation for the upcoming tax year.

For the next few years, office space will remain at risk for declining values at least until a vaccine can be developed and properly administered across the nation. In this challenging period, it will be critical to ensure that assessors appropriately weigh all relevant documentation when selecting metrics in property tax valuation models.

Kirk Garza 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. Valarie Bradley and Caleb Snow, summer interns with the firm, are students at Texas A&M University's Masters of Real Estate program.
Valarie Bradley
Caleb Snow
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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.
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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.
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Nov
21

Achieving Fair Taxation Of Big Box Retrofits

Issues to address to ensure a big box retrofit doesn't sustain an excessive tax assessment.

As more and more large retail spaces return to the market for sale or lease, creative investors are looking for ways to breathe new life into the big box. These retrofits saddle local tax appraisal districts with the difficult task of valuing a big box in a new incarnation.

When the appeal season approaches, it is important to look for key changes to the appraisal district's valuation model for the existing structure to ensure that the property is being assessed fairly after the retrofit. Whether the jurisdiction employs the income or cost approach to value commercial property, having the correct classification, effective age, effective rent and correct net rentable area are among the most important factors for an accurate assessment. In addition, the assessor will need to account for functional obsolescence and the possible existence of surplus land.

Valuation models previously used by taxing authorities likely factored in a single-tenant building. If the new use converts the building to a multitenant structure, the assessor should factor in the conversion. Perhaps the appraisal district previously classified the use as Freestanding Retail or Big Box Retail, and now it is a Call Center, Church, or Gym. Ensuring that the classification of the property is correct is the first step in getting a more accurate assessed value for property tax purposes.

Next, it will be important to note the effective age the appraisal district is using to value the newly retrofitted box. Appraisal districts often use the effective age of a building, based on its utility and physical wear and tear, rather than the actual number of years since the construction date. Was there a significant adjustment made to the effective age based on a remodel or tenant improvements? Has the retrofit enhanced the utility of the structure?

There is no doubt that transforming vacant big boxes requires great expense. Big boxes are generally considered to be mediocre-quality buildings. Many times, big boxes are cookie-cutter structures and not necessarily constructed to last more than 30 years without a major overhaul. Typical big boxes have a linear alignment of lighting and structural bays, and if the box is subdivided for multitenant use, there is a good chance that additional electrical work, plumbing and HVAC may be required.

Converting a box from single to multitenant use may also require additional exterior entryways. If the property is being valued using the income approach, keeping track of the expense required to convert the box into another use will be important so that an effective rental rate can be later calculated. On an income approach, if an appraisal district appraiser does not account for the cost of the retrofit in some way, the assessed value may be overstated.

Another challenge with big box retrofits is the depth of bays. Oftentimes, even after what can be considered a successful adaptive reuse, portions of the building may never be used again by the new user. The appraisal district should factor decommissioned square footage into the valuation model and make a distinction between gross building area and net rentable area. If there is square footage that is unusable or used for storage or warehouse purposes, it may warrant a different rental rate than the main portion of the converted space.

The fact that big boxes are generally build-to-suit properties should also be considered. Though costly, it may be easy to remove the previous user's brand from the interior of the building, but what about the exterior? Big box retailers purposefully built their boxes in a manner that would allow passersby to identify them instantly. The new owner is then left with the difficult task of getting rid of the very recognizable trade dress that the original owner required. Regardless of the new use, there is likely functional obsolescence created by the original user's specific branding and needs. Functional obsolescence can be due to size, ceiling height, ornamental fronts or various other factors.

An additional factor that may be relevant to the valuation of the retrofit for property tax purposes is the land. Big boxes typically require large parking lots and infrastructure that other users may not need. Analysis can determine whether the new user is left with surplus land. If the extra land cannot be sold separately and lacks a separate highest-and-best use, the appraisal district may be able to adjust the land value.

Ensuring that a big box is accurately valued for property tax purposes in the first year after a retrofit will have a long-term impact on the asset's tax liability. It is, therefore, worthwhile to invest the time it takes to review the assessment and the methodology used to arrive at the assessed value. 

Darlene Sullivan is a partner in Austin, Texas, law firm 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.
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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.
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