Written by Patrick C. O’Connor
The Texas Legislature gave property owners an incredible gift in 2003. While all property owners agree that property taxes are too high, owners become particularly incensed when property taxes are assessed inequitably. Owners don’t mind paying their fair share, but it is unacceptable to pay more than other owners pay for similar properties. For example, Bob owns an apartment complex which he recently purchased for $20,000 per unit. It is assessed at $20,000 per unit. However, most of the neighboring properties are assessed for $15,000 per unit. Bob agrees that his assessment is consistent with the market value based on the recent arms’ length sale; however, he deeply resents being taxed more than his competitors.
How Equity Appeals Reduce Property Taxes
The following example indicates the potential that exists when appealing with assessment comparables; using assessment comparables is sometimes also called uniform and equal (U& E) or an equity appeal. Gary owns an apartment complex, which in 2002 was assessed for $3 million. The 2003 assessment was increased to $5 million. The net operating income for the property supports a value in excess of $5 million; however, the assessments for similar properties support a value of approximately $3 million, based on a per unit basis. Gary’s tax consultant compiled information on the assessment comparables that supported a value of $3 million and presented this information to the Appraisal Review Board (ARB). The ARB panel members asked why the tax consultant did not present information on the income and expense for the property. The tax consultant replied that the market value was not at issue in this appeal; the issue was uniform and equal. After considering the assessment comparables, the panel concluded to a value of $4 million, which generated tax savings of approximately $30,000 for Gary in 2003.
What is Uniform and Equal?
Appealing under equity or uniform and equal essentially involves using a reasonable number of appropriately adjusted comparable properties. The subject property should be assessed for the median level of the comparables after adjustment. The technical aspects of this will be discussed later in this article. However, the essence of an equity appeal is to contrast your assessed value with the assessed value for similar properties.
Benefits of an Equity Appeal
Using assessment comparables to reduce your property taxes can be an effective and cost efficient tool. It increases the number of appeal options by at least double and perhaps six-fold. Equity provides meaningful help when the assessed value is less than or equal to the market value of the property. When meaningful evidence is presented on inequitable assessment, fairness does not need much explanation. For example, if your tract of land is assessed at $4 per square foot and an adjoining parcel with similar functional utility is assessed for $2 per square foot, a tax assessor or appraisal review board member can readily understand an adjustment is warranted. In addition the appraisal district has the burden of proof at an administrative hearing. Whether it is on market value or on equity, you do not have to be an appraiser to prepare or understand an equity analysis. Most owners have historically utilized only an appeal on market value at the informal level of appeal. This essentially gives them only one of six appeal opportunities. Using uniform and equal and using the three appeal levels (informal hearing, appraisal review board hearing and judicial appeal) gives the owner six options to appeal property taxes annually. One setback to appealing on equity is that it can be time consuming to gather and summarize information on assessment comparables. The six appeal options are summarized below:
|Level of Appeal||Type of Appeal|
Further, the value of an account cannot be raised during a judicial appeal that is based upon equity. However, the value can be raised on a judicial appeal based upon market value. Hence appealing on equity gives the owner only up-side and no down-side during the judicial appeal process.
History on Equity
When President Bush was campaigning for governor of Texas in 1996, he made property tax reform one of the key items in his campaign. During 1997, the Texas Legislature passed numerous meaningful changes to the Texas Property Tax Code. These included amending the Code to allow uniform and equal (equity) appeals at both the administrative hearings and judicial appeals.
The legislature effectively wrote the code for judicial appeals but the drafting was unclear regarding equity appeals at the administrative levels (informal hearing and appraisal review board hearing). Subsequently the central appraisal districts generally vigorously fought judicial appeals on equity until 2001 when the Texas Appeals Court ruled in favor of property owners and the Texas Supreme Court declined to hear the case.
Even after the Texas Supreme Court spoke on fairness and taxation, most appraisal districts still declined to consider equity at the administrative appeal process. The typical comment during an administrative appeal on equity was, “You can sue us to get your taxes assessed equitably, but we can’t consider this information at the administrative hearings.”
Nevertheless, many appraisal review boards have been considering uniform and equal for the last several years.
A New Dawn in Texas Property Taxes
The 2003 Texas legislature clarified the Texas Property Tax Code to confirm that property owners can appeal using uniform and equal at the administrative hearings. This will dramatically change the tax appeal process at the administrative level in 2004 and beyond.
When Equity Appeals can be Helpful
Equity appeals are helpful when properties are unequally assessed. A surprising number of properties are unequally assessed. Single-family properties tend to be more consistently assessed. However, apartments and commercial have a high level of dispersion of assessed values for properties which are similar in size, age and location.
“Sales chasing” occurs when an appraisal district focuses on assessing only an individual property at its sales price and not re-assessing other properties in the submarket. When an owner is a victim of sales chasing, equity can be a particularly effective defense methodology.
Equity can also be helpful for new construction. The appraisal district tends to value all properties at construction costs; however, in many cases the market value of a new property is less than construction costs. This can occur because of economic obsolescence which has occurred in Houston due to overbuilding or to a value-in-use issue such as a restaurant or bank building developed in a special architectural format and motif for a particular business enterprise.
Equity appeals can also be very helpful when the market value is greater than the assessed value, and an appeal on market value would not be appropriate or productive.
Finally, appeals on equity can be helpful when the owner or the tax consultant does not have ready access to market value information such as profit and loss statements or rent rolls, but can compile information on assessment comparables for an equity appeal.
Preparing an Equity Analysis
An equity analysis can be prepared for either the land only or for the overall property. A land equity analysis can be prepared regardless of whether the property is improved or vacant land. Appraisal district staff and appraisal review board members both seem receptive to the concept of land equity. It is straightforward, clear and easy to understand, especially when similar adjacent parcels are assessed dissimilarly. An overall equity analysis considers the total assessed value for the property compared to a reasonable number of comparable properties that are appropriately adjusted for differences such as size and age. Making adjustments complies more strictly with the Texas Property Tax Code, but in some cases appraisers and ARB panels are more comfortable with unadjusted data. Adjustments are further discussed later in this article.
Land Equity Analysis
To prepare a land equity analysis, research the assessed value for the land component of your property and of other properties which are on the same street. While it is possible to argue that land assessment comparables on another street are comparable, it is much more straightforward and clearly understood when the parcels are on the same street. Consider preparing a plat showing the assessed value per square foot of the subject property and the assessed value per square foot of adjoining properties. In addition, prepare a summary table listing the property location, key map code (or Mapsco), size in square feet, current year assessed value and assessed value per square foot. In many cases, it is appropriate to propose an appropriate assessed value for the subject land by multiplying the proposed per square foot assessed value times the square feet of land for the subject tract. Consider the following equity analysis for a subject property at 1000 Smith Street:
|Land Equity Analysis|
1000 Smith St.
1010 Smith St.
1020 Smith St.
1025 Smith St.
Median AV/PSF for similar properties is $0.50
100,000 sq. ft x $0.50 = $50,000 recommended assessment based on equity
Preparing a Building Equity Analysis
The Texas Property Tax Code as revised in 2003 (Section 41.43 (b)) for appeals on equity in the administrative hearings is as follows:
(b) A protest on the ground of unequal appraisal of property shall be determined in favor of the protesting party unless the appraisal district establishes that… the appraised value of the property is equal to or less than the median appraised value of a reasonable number of comparable properties appropriately adjusted.
The primary issue is selection of a reasonable number of appropriately adjusted comparables. The first step is to locate a group of comparables to consider. As a property owner, you likely are aware of your direct and indirect competitors. Most presentations on equity use five to ten comparables. In some cases it is appropriate to use more and in some cases there are not as many as five comparable properties which are reasonably proximate. Determining the reasonable number of comparables depends on judgement and the fact situation.
Making appropriate adjustments is a combination of art and science. Real estate appraisers typically make adjustments in the sales comparison approach to adjust for differences in size and age. Preparing an equity analysis for a tax appeal which includes adjustments on age and size is reasonable and appropriate. If the comparables are similarly located and similar in regard to size and age, the economic characteristics should generally be similar. Any differences in economic characteristics are likely the result of business enterprise value as opposed to the value of the apparent real estate. The business enterprise value is not subject to property taxes.
The final step is to prepare a summary of the subject property and the assessment comparables with or without adjustments. In some cases the owners may elect not to make adjustments to the assessment comparables since it takes time and in many cases the appraisal district staff and appraisal review board members can make their own determinations about which comparables are most appropriate and should be given greater emphasis in assessing the subject property. When there are many comparables available, care and judgement should be exercised to find the comparables which are best suited for the analysis.
Practical Applications and Their Impact
Equity appeals are a cost efficient and effective way to reduce and minimize property taxes. For owners who have recently purchased property, the appraisal district may press for a copy of the closing statements. This seems inappropriate and inconsistent with the concept of equity. While one could understand why a closing statement is relevant to a market value appeal, it is inconsistent with and antithetical to an appeal on equity. In some cases, owners may need to provide the closing statement to continue the appeal process even if the closing statement indicates a value higher than the assessed value. However, most appraisal review boards are reasonable and will consider information on equity even if the purchase price supports a higher value. It may not make sense to provide the closing statement if the purchase price is dramatically higher than the current assessed value and an equity appeal supports only a modest reduction in property taxes.
The use of uniform and equal, or appeals on equity, at the administrative hearing process will dramatically change property tax appeals. If you do not consider an appeal on equity for 2004 property taxes on your investment property or home, you will probably overpay your property taxes. This dramatic change in property taxation will cause some chaos as the central appraisal districts work to adapt and consider this new avenue of appeal. There will be varied acceptance of equity appeals among appraisal districts and between the informal, appraisal review board and the judicial appeal phases within individual appraisal districts. For example, some large appraisal districts are still saying “We don’t use that equity stuff,” for judicial appeals even though the Texas legislature passed the equity provision for judicial appeal seven years ago and it has been affirmed by the Texas Supreme Court.
Equity should be considered for all appeals, both at the administrative and judicial appeal levels. Although the Texas legislature has provided property owners six options to appeal property taxes most owners still only use one option (market value appeal at the informal hearing). Using the other five appeal options will result in lower property taxes.
Judicial Appeals on Equity
Many owners of income property have been reticent to file judicial appeals for property taxes. Regrettably, it is not practical for most property owners to ascertain whether their property is equitably assessed or not until after the administrative hearings have been completed. Many properties are inequitably assessed when the initial noticed values are determined. The level of inequity tends to increase during the hearing process because of the differences in appraisers and appraisal review boards. While all the parties are attempting to do the right thing, results can be inconsistent when human judgement is applied. For owners of large income properties, a judicial appeal on equity can be an especially appropriate and effective remedy to minimize property taxes.
The change on equity passed by the 2003 Texas legislature has launched a new era in tax appeals. The ability to appeal on either equity or market value doubles options for appeal. Equity appeals will quench some of the dissatisfaction on property tax. No one wants to pay high property taxes but owners bitterly resent being assessed unfairly and unequally. However, most appraisal districts in the recent past have declined to discuss the level of assessment for neighboring properties at appeal hearings.
Appeals on equity can be challenging to prepare in volume. You should discuss your consultant’s ability to prepare equity appeals and their plan to implement them before the 2004 tax appeal season. Implementing appeals on equity will be challenging and difficult both for tax consultants, owners and for the appraisal district staff. It will be a major adjustment for the staff at central appraisal districts. However, it presents an incredible opportunity for owners to reduce property taxes. Equity provides a good opportunity for tax reduction even when the market value is higher than the assessed value.