Commercial Property Tax Protest
Are you used to seeing large numbers in the “property taxes due” column on tax returns? Property owners in Texas, a state with notoriously high property taxes, may be forced to allocate a “large chunk” of their operating budgets each year to property taxes. You should always be looking for a way to increase your return on investment, and reducing property tax expenses can have a significant impact on your bottom line.
Market Value vs. Appraised Value
Many investors have asked why Texas property taxes continue to rise even though their revenues have declined and operating expenses have increased. Since appraisal districts value so much property, they are often unaware of “softness” in a submarket. Also, some appraisal districts have been slow to recognize the huge increases in insurance costs. Since property taxes are such a significant expense, investors have realized that they need to review assessments annually. Most Texas real estate investors appeal their property tax assessment annually.
Why property taxes are important
Property taxes are one of the largest expenses homeowners incur. When trying to reduce excess property taxes, even sophisticated homeowners may not be aware of all their rights. For example, the current Texas Property Tax Code allows property owners to seek an equity adjustment based on comparable properties that are adequately adjusted.
Does unequal evaluation apply to informal hearings?
The legislature also introduced a provision in 1997 that attempts to allow property owners to appeal unequal appraisals during the administrative hearing process (informal and appraisal review board hearings). Unfortunately, the wording of the statute was not clear. Some appraisal districts have chosen not to consider appeals based on unequal appraisals at administrative hearings. It is unfortunate that many appraisal districts reject administrative appeals based on unequal appraisals. Property owners get very upset when they feel they have been unfairly taxed. Fortunately, most cases of unfair evaluation can be resolved through a court appeal.
Why aren’t the properties evaluated equally?
You may be wondering why properties are not evaluated fairly. Reasons include data errors, focusing on recent sales, and inconsistencies in appraisal review board and informal hearings due to the personal element. Since an appraisal district can track over a million real estate accounts, it’s unrealistic to expect all the data to be accurate (the large number of properties also affects your ability to accurately estimate the value of your property). Exaggerating the quality of one property while underestimating the quality of another property could lead to an inequitable evaluation. Sometimes some appraisal districts have concentrated on recent sales without reassessing all the properties in the surrounding area.
Once the preliminary investigation is complete, the owner must determine the market value of the property and whether it is in line with the full assessed value. There are three approaches used to conclude market value: cost, income, and market. Property occupancy rate, rental rate, operating expenses, net operating income and other factors, as well as sales prices of comparable properties, are valuable sources of information in determining market value. If the property owner determines that the appraised value is higher than the market value of his property, he must file a protest with the local appraisal district. This can be done by the property owner or their designated agent. Property tax protests must be filed by May 31 in Texas; deadlines vary by state.
Preparing for your hearing
Once a protest has been filed, a protest hearing will be scheduled. Four types of data should be compiled for the audience: images of the subject property, an income analysis, comparable sales data, and evaluation comparables. The photographs of the subject property must indicate the quality and condition of the improvements to the property. If there is deferred maintenance, please document it with photos and offers. An analysis of income must include a prior year profit and loss statement and a list of income for a date close to January 1 of the current tax year (most states use January 1 as the effective date for income). evaluation). The analysis must also detail market rent, market availability, and market expenses (including replacement reserve) to arrive at the property’s net operating income (depreciation and debt service must not be deducted in calculating income). net operating).
If your property has above-market rental or occupancy rates or below-market operating expenses, you must make adjustments when calculating net operating income. If you operate your own property, your income analysis should include an allowance for labor and management fees (if they are not on the profit and loss statement). Income not directly related to the rental of real estate (box sales, truck rentals, etc.) should be excluded. Related expenses should also be excluded. The net operating income is then capitalized to get an indication of the value of the property.
An appraisal may be appropriate to support the conclusion of value. Comparable sales receive strong consideration in the audience because they are an indication of market value. Comparable property sales data over the last year or two should be collected and reviewed. Testing benchmarks receive strong consideration in some testing districts, but are not considered in others. Images of competing properties that are appraised for less than your property can be an effective tool in lowering your property taxes. Prepare a table summarizing your property and appraisal comparables.
Attend your hearing(s) (Informal and Appraisal Review Board)
Once all the relevant data has been collected and analyzed, the protest hearing process begins. The initial protest hearing is called an “informal” hearing. The informal hearing involves a meeting between the owner, or their designated representative, and an appraiser from the appraisal district. If the owner is not satisfied with the offer made by the appraiser, he can move on to the next level of the protest process, an appraisal review board hearing (in some states this is known as the equalization board). The appraisal review board hearing, also called a “formal” hearing, consists of a meeting with members of the appraisal review board, an appraiser from the county appraisal district (who may be different from the appraiser at the hearing informal) and the owner or his designated representative. The Appraisal Review Board panel may establish a value that is equal to, less than, or greater than the level proposed by the staff appraiser at the informal hearing; therefore, the offer made at the informal hearing deserves careful consideration.
Most protests are resolved during informal and formal hearings. However, in a small portion of the protests, the property owner believes that the assessed value can be lowered further by filing a court appeal. Although few homeowners pursue the ultimate opportunity to reduce their taxes, homeowners do have the option of filing a lawsuit to challenge the assessed value. It is probably financially feasible to file a lawsuit if the court appeal reduces the assessed value by at least $200,000 to $300,000. This general rule is for Texas; it may be higher or lower in other areas. In Harris County, Texas, for example, about 500 to 800 homeowners annually determine that there is still enough of a discrepancy after completing informal and formal hearings to seek an adjustment in assessed value by filing a lawsuit. Litigation in Texas must be filed within 45 days of receipt of written notice of the value established at the formal hearing. This process may result in additional reductions in assessed value; however, it typically takes 12-24 months and requires the services of an attorney and an appraiser. Although relatively few homeowners know how to file court appeals, they can be a very effective tool in reducing property taxes.
Since property taxes account for such a large percentage of operating expenses, a commercial property owner I know was recently elated when his consultant reported that the company saved more than $123,000 in property taxes. Some homeowners will realize less savings than that, but every little bit helps their bottom line.
To view this article and similar articles, visit property tax.