Written by Patrick C. O’Connor
Texas apartment owners will see lower property taxes as a result of the recent Texas Supreme Court decision in Harris County Appraisal District vs. United Investors Realty Trust (“United Investors”). The Supreme Court’s refusal to hear an appeal of the United Investors case from the 14th District Court of Appeals will allow apartment owners to reduce property taxes by making all three steps in the property tax appeal process viable. Most apartment owners and consultants currently only use the first two steps in the process. The United Investors decision makes appeals at all three levels effective and economical.
Background of Unequal Appraisal
When President Bush was running for governor of Texas, one of his major platforms was property tax reform and relief. During the 1997 legislative session, major changes were made to the Texas Property Tax Code. One of the reforms was the right to appeal property taxes based on inequitable appraisal relative to comparable properties. Harris County Appraisal District chose to vigorously oppose this provision of the tax code. In the United Investors case, the taxpayer prevailed at the district court trial level, even though the property was appraised for less than its recent purchase price. At issue was the lower assessment of similar properties. The taxpayer won at the district court level and the case was upheld by the Texas Appeals Court. The Texas Supreme Court recently declined to hear an appeal of the case making the appellate court decision the law of the land.
Property Tax Appeal Process
There are three steps to the property tax appeal process in Texas. The property owner can use any or all of these methods on an annual basis. Appeals start with an informal hearing, proceed to an appraisal review board (ARB) hearing and the final appeal is a judicial appeal or a lawsuit. Only about 12% of properties in Harris County were protested during 2001. The vast majority of appeals are resolved at the informal hearing process, perhaps 80% to 90%. Of the appeals that proceed to the appraisal review board, only a limited number advance to a judicial appeal.
Historically, property owners in Harris County have filed judicial appeals on only about 500 out of the 1.4 million accounts in the county (0.04%). The decision on United Investors should sharply increase judicial appeals because it allows property owners to appeal inequitable appraisal. In addition, the limited ability to appeal on this basis during the administrative hearings (informal and ARB hearings) will cause equity protests to proceed to a judicial appeal. Appealing based on unequal appraisal is beneficial because it allows an owner to reduce the taxes even if the property is assessed for much less than the market value.
Tax Code for Unequal Appraisal
The relevant portion of the Property Tax Code is section 42.26(d) which reads as follows: “The district court shall grant relief on the ground that the property is appraised unequally if the appraised value of the property exceeds the median appraised value of a reasonable number of comparable properties appropriately adjusted.” The central elements of this section of the code involve “a reasonable number of comparable properties appropriately adjusted.” Making appropriate adjustments for a reasonable number of comparables is a financially feasible exercise. In the past, appraisal districts wanted an appraisal of a subject property and the assessment comps compiled in a ratio study in order to hear an appeal on unequal appraisal. As the court understood in United Investors, this is prohibitively expensive to prepare. The new approach makes judicial appeals financially feasible and effective.
Does Unequal Appraisal Apply at Informal Hearings
The legislature also introduced a provision in 1997 attempting to allow property owners to appeal on unequal appraisal during the administrative hearing process (informal and ARB hearings). Unfortunately, the wording of the statute was not clear. Some appraisal districts have chosen not to consider appeals based on unequal appraisal at the administrative hearings. These appraisal districts have chosen to consider only market value protests at the administrative hearings, deferring appeals on unequal appraisal to the judicial level. Skeptics believe this is a method for denying property owners the opportunity from appealing on unequal appraisal because of the time and expense involved in a judicial appeal.
The short-term result of the United Investors decision on unequal appraisal will be to sharply increase judicial appeals. This should encourage appraisal districts to consider unequal appraisal at the informal and the appraisal review board hearings. Property owners should be aware that the consideration of appeals based upon unequal appraisal at the informal and ARB hearings will be inconsistent from appraisal district to appraisal district and perhaps even within appraisal districts.
Why Aren’t Properties Assessed Equally
You may be wondering why properties aren’t assessed equitably. Reasons include data errors, focusing on recent sales and variations in the informal and ARB hearings due to the personal element. Since the appraisal district tracks 1.4 million real property accounts in Harris County, it is unrealistic to expect all of the data to be accurate. Overstating the quality of one apartment complex while understating the quality of another apartment complex could quickly lead to an inequitable assessment. At times, some appraisal districts have focused on recent sales without reevaluating all the properties in the surrounding area. This leads to assessment at or close to market value for properties which recently sold, while leaving competing properties at significantly lower levels. Since people conduct hearings, there are natural variations in the hearing results during the informal and ARB hearings. Further, even if all properties were assessed equitably at the beginning of the hearing process, they will not be assessed equitably after the administrative hearing process is complete.
Preparing for 2002 Hearings
At this point, you are probably thinking that this sounds great but are wondering how to apply it to reduce your property taxes. The first step in reducing your property taxes is similar to what you would have done in the past: prepare for the administrative hearings by preparing an income analysis and gathering data on comparable sales. In addition, review the assessment for your property as well as the assessments for competing properties. Consider the level of assessment for approximately 5 to 15 competing properties and summarize the data in a spreadsheet. To determine negotiating parameters, begin with setting the lower limit (of assessed value) that is reasonable to request and conclude by setting the highest level of assessment you will accept for the year under appeal (without continuing the appeal process to the ARB and judicial appeal level). You should present information on both market value and unequal appraisal at the informal, and, if necessary, ARB hearings. If you are not satisfied with the assessed value after the ARB hearing, update the assessment comparables in your spreadsheet with post-hearing values. Many of the values will have been reduced during the hearing process. After evaluating the results, analyze whether a judicial appeal on unequal appraisal is appropriate and financially feasible. If you choose to file a judicial appeal, seek professional legal advice, as there are short deadlines and a number of legal technicalities which need to be addressed.
The United Investors case regarding unequal appraisal is a major victory for Texas property owners because it guarantees the right to an equitable assessment. While some appraisal districts have been receptive to appeals on assessment comps for many years, others have vigorously opposed this concept. Now appraisal districts will no longer be able to ignore assessment comps. The final result is likely to include less of a penalty for owners of newly purchased property, more equitable assessment and lower property taxes for most property owners.