Property Tax Appeals - Its Your Money!
Texas property taxes are increasing much faster than real estate values. Self-storage owners are upset, irritated and sometimes bewildered by the relentless pace of increases in property tax assessments. However, an aggressive and systematic approach to appealing property taxes will slow the pace of property tax increases. In some cases, it is possible to reduce property taxes well below the historical level.
Texas property taxes have received more attention and scrutiny during the last five years because of a stealth tax increase. Neither the statues nor the tax rates have increased. (In fact, tax rates decreased in 2006 and 2007.) However, the practice of setting assessed values has changed. Assessors have become much more aggressive in establishing the assessed values for both single family and commercial properties.
Most Texas taxpayers are familiar with Robinhood. This program redistributes property taxes from affluent to poor school districts. A trigger mechanism in Robinhood requires the median level of assessment of properties within a school district to be between 95% and 105%. (The median is the middle record when records are sorted from high to low. The level of assessment is the ratio of the assessed value divided by the market value.)
Appraisal districts previously set assessed values moderately below market value. Since the Texas Property Tax Code created appraisal districts in 1981, appraisal districts have been required to set the assessed value of all property at market value. This includes homes, commercial property, business personal property and minerals. However, 10+ years ago, assessed values were well below market value. Tax entities were content since appraisal districts generated a steadily increasing stream of revenue. Appraisal districts enjoyed the approach since the level of property tax appeals was modest.
Starting about six to eight years ago, the Texas Comptroller started pressing appraisal districts to increase their assessed values. The Texas Comptroller administers the ratio test to determine whether the assessed values within a school district are appropriate. When a school district "fails" the ratio test for 3 consecutive years, the school district loses a portion of its property tax revenue to the state. A number of chief appraisers have reportedly been terminated following unsatisfactory results on the Texas Comptroller's ratio tests. Chief appraisers and appraisal district staff give meaningful and focused attention to performing well on the ratio test.
Constant pressure from the Texas Comptroller has caused appraisal districts to revise their approach. They are now much more aggressive when establishing the initial assessed values. The initial assessed value for many properties exceeds market value. The confluence of increasing market values and assessment rates have effectively caused commercial property taxes to triple while market values have only doubled.
Property owners can reduce their property taxes to the lower quartile of the range of value by appealing annually, whether or not the property tax assessment increases. There are three levels to the property tax appeal process: 1) informal hearing; 2) appraisal review board hearing (aka formal hearing or ARB); and 3) judicial appeal (lawsuit in state district court). Most property owners resolve their appeal at the informal hearing. However, many appraisal districts do not give appeals serious attention until they reach the judicial appeal level.
The informal hearing is usually a meeting with an appraisal district appraiser. Some appraisal districts give appraisers meaningful latitude to resolve property tax protests. Conversely, some provide the appraisers limited latitude which results in many appeals continuing to the appraisal review board. The appraisal review board is purported to be an independent panel of local taxpayers. However, they are hired by the appraisal district's board of directors for two year terms. The board of directors has the option of reappointing them for two additional two year terms, for a maximum of six years. In addition, they are paid and trained by the appraisal district and are supervised by appraisal district staff. This makes it difficult, if not impossible, for them to be impartial. Hence, it is often necessary to continue the appeal beyond the ARB.
Appraisal district staff like to say "each year stands on its own" when discussing the assessed value after a large increase. Practically, the prior year's value is given meaningful consideration when negotiating values. Decreasing the current year's value to the lowest possible level provides a position of strength for negotiating the subsequent year's value.
By statute, assessed value can be appealed on market value and unequal appraisal at each step in the property tax appeal process. In practice, administrative appeals (informal and ARB) tend to focus on market value while judicial appeals focus on unequal appraisal. This is because most appraisal districts do not consider evidence on unequal appraisal at the informal hearing. Similarly, most appraisal review boards ignore evidence on unequal appraisal. (This unlawful practice by ARBs undermines the credibility and integrity of the Texas property tax system. ARBs are required by law to rule in favor of the property owner unless the appraisal district prevails "by a preponderance of the evidence presented at the hearing". Incredibly, ARB members betray the public confidence and their sworn oath by ruling in favor of the appraisal district on unequal appraisal even when the owner presents evidence and the appraisal district does not!) This tendency to ignore appeals on unequal appraisal effectively requires owners to file judicial appeals to address unequal appraisal.
The inconsistent nature of the valuation and informal hearing processes also increases the volume of judicial appeals. Some appraisers work diligently to effect a reasonable compromise while others prefer to "let the board make a decision." Some appraisal review board decisions are reasonable, even when they are a compromise decision. Other ARB decisions are incomprehensible based upon the evidence.
Arbitrary aspects of the valuation and property tax appeal process lead to inequities in the tax roll after the administrative hearing process. The property owner only needs to document that his property is over-assessed compared to "a reasonable number of comparable properties appropriately adjusted" to prevail in an appeal on unequal appraisal. The statue does not require a representative sample. Courts have indicated a reasonable number of assessment comparables is five to ten.
The statutory deadline to file a judicial appeal is 45 days after receiving the written decision from the appraisal review board. This limited deadline makes it difficult, if not impossible, to evaluate the quality of an unequal appraisal appeal. At this point, final hearing results are not available for many properties. (How is it possible to determine if a property is fairly assessed when hearings have not occurred for some properties, hearing values are not available for many appraisal districts and the initial values have not been set for some properties?)
Appraisal districts often use the administrative hearings to filter or screen most of the protests. By playing hardball on market value and ignoring evidence on unequal appraisal, they can dispense with over 99% of the protests! The policy and procedures of appraisal districts and appraisal review boards make filing judicial appeals the most effective option in many counties.
Business owners and investors are often initially reluctant to pursue judicial appeals. The most frequent concerns are the cost, time, uncertainty and stigma of litigation. The cost is not an issue since there are several firms which pursue property tax judicial appeals on a contingency fee basis, with no flat fees or upfront costs. The only fee is a portion of the savings if a judicial appeal is successful. In most cases, a property owner spends only 15 to 60 minutes on a property tax lawsuit. In many cases, the only time required is the time to negotiate a settlement. Property owners are sometimes concerned the ARB value could increase or that appraisal districts will retaliate if they file a lawsuit. The ARB value can increase only if the case goes to trial on market value and the appraisal district prevails. Very few cases go to trial (less than 1%). The cases which go to trial are generally unequal appraisal causes of action. By statute, the trial judge can only reduce the value.
The writer understands the concern regarding the stigma of litigation. However, appraisal districts have made litigation the only viable option in many counties. Owners who are serious about reducing property taxes have no alternative in these counties. Finally, appraisal districts rarely retaliate. Most commercial property owners are represented by property tax consultants. Chief appraisers cringe at the thought of increasing assessed values partially because of the fees consultants will generate in battling the appeals.
The minimum threshold for contingent fee judicial appeals varies from firm to firm. The writer's firm will generally agree to coordinate a judicial appeal for a commercial property with a value of $500,000 or more.
Filing a judicial appeal requires engaging an attorney to file suit in state district court (except for pro se plaintiffs). In some cases, appraisal districts seek to settle soon after a suit is filed. In most cases there is "paper discovery". This includes interrogatories and a request for production. Interrogatories are written questions seeking information from the other party. A request for production is a request for the other party to produce (deliver or make available) existing documents. Most counties do not conduct depositions. Unless the appraisal district settles quickly, the property owner must prepare for trial to be able to negotiate from a position of strength. (Attorneys have a bromide that the best way to settle is to prepare for trial.) At a minimum, preparing for trial involves producing relevant documents that document defects with the property and an opinion of value on market value and / or unequal appraisal along with supporting documents. In some cases, the owner can provide an opinion of value. The practice of the writer's firm is to engage an expert witness from a separate firm. The expert typically is an expert in performing unequal appraisal analysis.
Settlement discussions usually occur: 1) immediately after a suit is filed; 2) prior to expert opinion supplementation dates; 3) subsequent to expert reports being delivered; 4) prior to a deposition or 5) shortly before a trial setting.
Less than 1% of property tax lawsuits go to trial. Settlement negotiations hinge on the quantity and quality of evidence timely produced by each party.
In some counties, appraisal districts work hard to resolve property tax appeals at the informal hearing. When possible, it is likely the best option.
Conversely, when commercial accounts with a value of $500,000 or more have an ARB hearing, owners should consider filing a judicial appeal.
The current year tax savings intutitively seem to be the basis for judicial appeals. However, the primary benefit of an aggressive property tax appeal program is reducing the "base value" used to set the value in subsequent years. An aggressive appeal program will position the owner's property in the lowest quartile of the range of value (relative to similar properties). (Appraisal district appraisers sometimes quip "someone has to be highest." Conversely, someone has to be lowest, and it might as well be you.)
Property taxes will remain a substantial burden for self-storage owners. An aggressive, persistent approach to appealing property taxes will minimize property taxes and provide a favorable position relative to competitors. Many self-storage investors only consider administrative appeals since they are not aware judicial appeals are effective, financially feasible and the only viable option for equitable assessment. Discussions with property tax consultants who coordinate judicial appeals on a contingency fee basis should provide insights into the most efficacious means to reduce your property taxes. Remember - its your money, not the governments!
Patrick O'Connor is president of O'Connor & Associates, a 270-person tax reduction, appraisal and market research firm. O'Connor & Associates, Texas largest property tax consultant, is currently coordinating over 4,000 judicial appeals for property taxes, and handled over 120,000 administrative property tax appeals in 2007, saving clients over $60 million. Additional information on property tax appeals is available at cutmytaxes.com or by calling 877-4TAXCUT.
Member Interviews - Comments
Question: What piece of advice would you give to a property owner who is considering filing a judicial appeal?
Doug Hunt Owners Management Co
"Don't be afraid to sue the tax district. 99% of the time they settle."
Kathy Tautenhahn - Amazing Spaces
" If you don't appeal annually the appraisal district will just keep raising the value each year. It seems each year they (appraisal district) continually increase the values. It doesn't cost you anything to pursue the judicial appeal. It is the only way to get a fair value. I recommend everyone appeal each year. It is easy to do, you can hire an agent and it does not cost you anything."