Top6ThingsCommercialPropertyOwnersNeedToKnow ToReduceCommercialPropertyTaxes
ThereAre6ThingsThatCommercialPropertyOwners CanDoToReduceCommercialPropertyTaxes.
Areyouaccustomedtoseeinglargenumbersinthe “propertytaxesdue”columnoftaxstatements?
CommercialpropertyownersinTexas,astatewith notoriouslyhighpropertytaxes,maybeforcedto budgeta“bigchunk”oftheiroperatingbudgetseach yearforpropertytaxes.
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1.MarketValuevs.AssessedValue
ManycommercialpropertyinvestorshaveaskedwhyTexaspropertytaxeskeepincreasingeven thoughtheirrevenuehasdeclinedandoperatingexpenseshaveincreased.Sinceappraisal districtsvaluesomanyproperties,theyareoftennotawareof“softness”inasubmarket.In addition,someappraisaldistrictshavebeenslowtorecognizethehugeincreasesininsurance expenses.Sincepropertytaxesaresuchamaterialexpense,commercialrealestateinvestors haverealizedtheyneedtoreviewassessmentsannually MostTexasrealestateinvestors appealtheirpropertytaxassessmentannually Appealingeveryyearhelpstoreduce commercialpropertytaxesandexpenses.
2.WhyPropertyTaxesareImportant
Propertytaxesareoneofthelargestlineitemexpensesincurredbyself-storage,retail,and multifamilypropertyowners.Whenattemptingtocutexcesspropertytaxes,evensophisticated propertyownersmaynotknowalltheirrights.Forinstance,thecurrentTexasPropertyTax Codeallowspropertyownerstoseekanequityadjustmentbasedoncomparablepropertiesthat areappropriatelyadjusted.
3.DoesUnequalAppraisalApplyatInformalHearings?
Thelegislaturealsointroducedaprovisionin2003toallowpropertyownerstoappealon unequalappraisalduringtheadministrativehearingprocess(informalandappraisalreview boardhearings).Someappraisaldistrictshavechosennottoconsiderappealsbasedon unequalappraisalattheadministrativehearings.It’sashamethatmanyappraisaldistricts rebuffadministrativeappealsbasedontheunequalassessment.Propertyownersbecomevery angrywhentheyfeeltheyhavebeentaxedunfairly.Fortunately,mostcasesofinequitable assessmentcanberesolvedthroughajudicialappeal.
4.WhyAren’tPropertiesAssessedEqually?
Youmaybewonderingwhypropertiesaren’tassessedequitably.Reasonsincludedataerrors, focusingonrecentsales(“saleschasing”)andinconsistenciesintheinformalandappraisal reviewboardhearingsduetothehumanelement.Sinceanappraisaldistrictmaytrackovera millionrealpropertyaccounts,itisunrealistictoexpectallofthedatatobeaccurate(alarge numberofpropertiesalsoaffectstheirabilitytoaccuratelyestimateyourproperty’svalue). Overstatingthequalityofonefacilitywhileunderstatingthequalityofanotherfacilitycould leadtoaninequitableassessment.Attimes,someappraisaldistrictshavefocusedonrecent saleswithoutreassessingallthepropertiesinthesurroundingarea.Oncethepreliminary researchiscompleted,theownershoulddeterminethemarketvalueofthepropertyand whetheritisinlinewiththetotalassessedvalue.
Threeapproachesareemployedinconcludingmarketvalue:
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1.Cost,
3.Market.
Formanycommercialfacilities,theappraisaldistrictprimarilyreliesupontheincomeand marketapproachestovalue. Therefore,theproperty’soccupancyrate,rentalrate,operating expenses,netoperatingincomeandotherfactors,aswellassalespricesofcomparable properties,arevaluablesourcesofinformationindeterminingmarketvalue.Iftheproperty ownerdeterminesthattheassessedvalueishigherthanthemarketvalueofhisproperty,he shouldfileaprotestwiththelocalappraisaldistrict.Thiscanbedoneeitherbytheproperty ownerorhisdesignatedagent.
PropertytaxappealsmustbefiledbyMay15inTexas;deadlinesvarybystate.
5.PreparingforYourHearing
Onceanappealhasbeenfiled,ahearingwillbescheduled.Fourtypesofdatashouldbe compiledforthehearing:
1.Picturesofthesubjectproperty,
2.Anincomeanalysis,
3.Comparablesalesdataand
4.Assessmentcomparables.
Picturesofthesubjectpropertyshouldindicatethequalityandconditionoftheimprovements ontheproperty.Ifthereisdeferredmaintenance,documentitwithpicturesandbids.Besureto requesttheappraisaldistrict’sevidencepackageaswell.
Anincomeanalysisshouldincludeaprofitandlossstatementforthepreviousyearandarent rollforadatenearJanuary1ofthecurrenttaxyear(moststatesuseJanuary1astheeffective dateforassessment.)Theanalysisshouldalsodetailmarketrent,marketvacancyandmarket expenses(includingreserveforreplacement)toderivenetoperatingincomefortheproperty (neitherdepreciationnordebtserviceshouldbedeductedwhencalculatingnetoperating income).
Ifyourpropertyhasabove-marketoccupancyorrentalratesorbelow-marketoperating expenses,youshouldmakeadjustmentswhencalculatingnetoperatingincome.Ifyouoperate yourownproperty,yourincomeanalysisshouldincludeanallowanceforlaborand managementfees(iftheyarenotintheprofitandlossstatement).Revenuenotdirectlyrelated torealestaterental(boxsales,truckrentals,etc.)shouldbeexcluded.Relatedexpensesshould alsobeexcluded.Thenetoperatingincomeisthencapitalizedtoderiveanindicationofvalue fortheproperty.Anappraisalmaybeappropriatetosupportthevalueconclusion.Comparable salesaregivenstrongconsiderationatthehearingbecausetheyareanindicationofmarket value.
Datafromsalesofcomparablepropertiesforthepastyearortwoshouldbecollectedand reviewed.Assessmentcomparablesaregivenstrongconsiderationatsomeappraisaldistricts butnotconsideredatothers.Picturesofcompetingself-storagebuildingsorretailcentersthat areassessedforlessthanyourpropertycanbeaneffectivetoolforcuttingyourpropertytaxes. Prepareatablesummarizingyourpropertyandtheassessmentcomparables.
6.AttendingYourHearing(s) (InformalandAppraisalReviewBoard) Onceallthepertinentdatahasbeencollectedandanalyzed,theprotesthearingprocessbegins. Theinitialprotesthearingiscalledan“informal”hearing.Theinformalhearinginvolvesa meetingbetweentheowner,orhisdesignatedrepresentative,andanappraiserfromthe appraisaldistrict.Iftheownerisnotsatisfiedwiththeoffermadebytheappraiser,hemay proceedtothenextleveloftheprotestprocess,anappraisalreviewboardhearing(insome statesthisisreferredtoastheboardofequalization).Theappraisalreviewboardhearing,also referredtoasthe“formal”hearing,involvesameetingwithmembersoftheappraisalreview board,anappraiserfromthecountyappraisaldistrict(whomaybedifferentfromtheappraiser attheinformalhearing)andtheownerorhisdesignatedrepresentative.TheAppraisalReview Boardpanelmaysetavaluewhichisequalto,lowerthanorhigherthanthelevelproposedby
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thestaffappraiserattheinformalhearing;therefore,theoffermadeattheinformalhearing deser
Themajorityofprotestsareresolvedduringtheinformalandformalhearings.However,ina smallportionofappeals,thepropertyownerbelievestheassessedvaluecanbecutfurtherby filingajudicialappeal.Althoughfewownerspursuethefinalopportunitytoreducetheirtaxes, ownershavetheoptiontofilealawsuittocontesttheassessedvalue.Itisprobablyfinancially feasibletofilesuitifthejudicialappealwillreducetheassessedvaluebyatleast$200,000to $300,000.ThisruleofthumbisforTexas;itmaybehigherorlowerinotherareas.
InHarrisCounty(Texas),forexample,about2,000propertyownersannuallydeterminethereis stillenoughdiscrepancyaftercompletingtheinformalandformalhearingstofurtherpursuean adjustmentintheassessedvaluebyfilingsuit.LitigationinTexasmustbefiledwithin45days ofreceivingwrittennotificationofthevaluesetattheformalhearing.Thisprocesscanresultin additionalreductionsintheassessedvalue;however,ittypicallytakes12to24monthsand requiresservicesfrombothanattorneyandanappraiser.Althoughrelativelyfewowners understandhowtopursuejudicialappeals,theycanbeaveryeffectivetooltoreduce commercialpropertytaxes.
Withpropertytaxesmakingupsuchalargepercentageofoperatingexpense,acommercial propertyownerIknowwasrecentlypleasedwhenhisconsultantinformedhimthatthe companysavedover$123,000inpropertytaxes.Someownerswillrealizelesssavings,but everylittlebithelpsyourbottomline.
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By:PatrickO'Connor|Postedon01/16/2019with2comments
SaiGundavellisaid: July7,2019at5:40pm
JamesKartersaid: October27,2021at2:42pm
Withpropertytaxesmakingupsuchalargepercentageofoperatingexpense,acommercialproperty ownerIknowwasrecentlypleasedwhenhisconsultantinformedhimthatthecompanysavedover $123,000inpropertytaxes.
