Texas Is Losing Out on Millions of Dollars Thanks to Its Defective Property-Tax System

Across the state, private companies are able to slash their property-tax assessments, but homeowners aren’t as lucky with their county appraisal districts.

The case went to the 234th District Court, where "HCAD went full blast on market value based on newspaper clippings. [Houston 8th Wonder] argued uniform and equal and brought in a uniform and equal expert. HCAD had no expert to counter," says Edward. The value sank another $13 million, to $31 million.

HCAD argued to the First Court of Appeals that the uniform and equal provision is unconstitutional. The court disagreed. Again, HCAD appealed to the Texas Supreme Court, which instead of simply denying its petition for summary review issued a petition denied and adopted a decision by the 234th District Court into its own standard in summer 2013.

"Basically, it lets a pseudo-expert give unsupported testimony as to what's comparable," says Robinson, who had transitioned to his new position as deputy director of special projects at the Harris County Budget Management Department by the time the Texas Supreme Court rendered its decision. "You can testify as an expert if you aren't an expert, and there aren't defined guidelines on how you measure comparability and how you make adjustments."

Michael Amezquita, chief appraiser of the Bexar County Appraisal District, says a majority of San Antonio's luxury hotels are ditching millions of dollars in property taxes due to a loophole in the state tax code.
Josh Huskin
Michael Amezquita, chief appraiser of the Bexar County Appraisal District, says a majority of San Antonio's luxury hotels are ditching millions of dollars in property taxes due to a loophole in the state tax code.
District 13 Senator Rodney Ellis (Democrat-Houston) isn't hopeful that the Texas Legislature will take a hard look at the state's property-tax problems, which have been aggravated by the state's lack of sales-price disclosure, during the 84th Legislature in 2015.
Marco Torres
District 13 Senator Rodney Ellis (Democrat-Houston) isn't hopeful that the Texas Legislature will take a hard look at the state's property-tax problems, which have been aggravated by the state's lack of sales-price disclosure, during the 84th Legislature in 2015.

Robinson explains that HCAD can now get dragged into a dark alley when each of Harris County's five refineries files its inevitable lawsuits.

"In any given year, there's going to be at least one, maybe two or more in litigation. Each one of them argues for a different way of determining comparability," Robinson explains. "What's good for Shell might be terrible for Exxon, and what's good for Exxon might be terrible for Valero. But each one says, 'My way is the only way you can do this.' They pick the way that's more beneficial to them."

In the meantime, HCAD will stick to its guns in court and argue that the uniform and equal statute is unconstitutional, even though the agency "keep[s] recycling this old public policy argument and [has] thrown away millions of dollars," argues Edward.

"We haven't changed our view that Section 42.26, Paragraph a3, to the extent that it allows reductions in appraisals without a showing that the property is appraised at a higher percentage of market value than is true for other properties, is unconstitutional," Stiefer says.

On the other hand, Stewart of Olson & Olson says that HCAD may need to reconsider its legal strategies.

"You can argue that the statute, on its face, is unconstitutional — that's a very tough burden to get past — or you can argue that it may not be unconstitutional on its face, but it's unconstitutional as it's being applied," Stewart says. "I think that's the direction that taxing authorities and appraisal districts and everyone else ought to be focused on."
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Given HCAD's struggles with big-time commercial properties, the appraisal district says the opposite occurs with residential parcels. "HCAD does a super job with appraising homes, and they're very consistent with the values," says former HCAD chief appraiser Robinson. "The state's studies continue to show that."

The Texas comptroller's 2013 property value study — the same one that concluded that HCAD is nailing commercial appraisals — found that HCAD appraised residential property at a median level of 97 percent of market value, or only three percentage points from so-called flawlessness.

Not so fast, says O'Connor. The property-tax agent cites Ted Whitmer's cordial but scathing presentation before HCAD in July 2013 — as well as Harris County's decision to hire Whitmer to conduct an independent market valuation study — as indicators that HCAD hasn't been playing by the rules.

"Mr. Whitmer is correct. HCAD's unequal appraisal evidence generates a predetermined value, thus misleading taxpayers and members of the Harris County Appraisal Review Board," says O'Connor. "There is no question in my mind that HCAD management knows they report results that are predetermined and misleading. These types of seeming minor transgressions can be the stepping-stone to more serious violations."

Independent property-tax agent John Osenbaugh, who claims to have evidence of transgressions — ranging from cherry-picking properties in order to achieve higher values to targeting low-income neighborhoods for increases — opines that HCAD may already dabble in white-collar crime.

"There are grievous errors, and the people involved are too qualified for this to have been happenstance. They know what they're doing," Osenbaugh told the Press last year. "It's one thing if it's by accident; that's okay and somewhat forgivable, but when it's clearly not, this is a scheme that makes Enron look like amateurs."

With backlash at a high, some Texas lawmakers have tried to tailor the law to favor appraisal districts and homeowners.

Toward the tail end of the 83rd Texas Legislature, District 10 Senator Wendy Davis (Democrat-Fort Worth) and District 139 Representative Sylvester Turner (Democrat-Houston) co-­authored a Senate bill that would have forced a hard look at the language of the equal and uniform provision and a House bill that could have redefined market value. But each proposed law died with the close of the 2013 session.

Ellis, who's fairly outspoken on property-tax issues, is willing to stick his neck out only so far during the 84th Legislature in 2015.

"I'm perfectly capable of starting forest fires of my own. I've done it for 30 years, since I've been in public office," says Ellis, who adds that he needs the major participants — the chief appraisers in Houston, Dallas, San Antonio and Austin — to team up with him. "I want them to step out there with me, and I'll work with them."

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22 comments
lloydprogroup
lloydprogroup

To be sure Houston isn't alone in this regard.


Atlanta has its share of issues also.


Lloyd Pro Group | Nationwide Insurance
1830 Water Place Suite 105, Atlanta, GA 30339


Bobby Wiggins
Bobby Wiggins

Seems to keep raking in money. "Hey Earl, tell 'um their house is worth 20% more this year, we need some new sports cars for duh powlice."

Real Values for Texas
Real Values for Texas

Statewide, property tax manipulation has cost the people of Texas an estimated $4 billion over the last five years and out of that, schools have lost an approximate $2.3 billion. This not only deprives schools and city services of much-needed funds, it also increases pressure on homeowners and average taxpayers to make up the difference. http://www.youtube.com/watch?v=TTQ-ksLrdPo

atff2003
atff2003

I sat in a conference meeting last year where the Chief Appraiser of one the major county appraisal districts in Texas said his team appraises 850,000 properties per year. He said if he gets 90% of those values right (by test definition an A grade) that means 85,000 properties are incorrect and he needs help from property tax consultants in getting those corrected.


If the chief appraiser says he is content with 85,000 properties being overvalued, then who wants to be the owner of one of the 85,000 properties being assessed in excess of their actual value? 


Not me.


Also, you are going to put a stop to a lot of this when the appraisal districts get off their rear ends and truly enforce the mandatory business personal property tax rendition filings with audits.  This would ensure that the guy with $10M of inventory (which is taxable) that does not report it has to actually pay tax on that value instead of the low ball estimate which the appraisal district guesses that he has and a 10% penalty for non reporting.

jerrysd4398
jerrysd4398

 Same article, different day. You can almost smell the next legislative session in the air!!!  Anyway, if the Appraisal Districts properly appraised properties to begin with I doubt uniform and equal would be much of a problem. I also find it interesting that this article seems to say that the laws need to be changed because HCAD's lawyers keep losing cases in court. Maybe there is a reason they are losing.  And the sales disclosure issue is a little disingenuous considering almost all sales become public through a mixture of appeals, brokers talking, litigation, etc. Besides, the Appraisal Districts essentially have full sales disclosures of residential properties through MLS and they still get those values wrong. Finally, although a small point to belabor, aren't these "pseudo-experts" that Mr. Robinson references the very same appraisers hired by Appraisal Districts across the state?

Jeff Hunter
Jeff Hunter

The problem is the purchasers valued the property at a price and paid it, then argued that they were bad consumers when they went to the hearing.

Mark H. Rogers
Mark H. Rogers

So a business owner protests his rate, goes to a hearing with factual data, and the value gets reduced....... where is the problem?

Lorenzo
Lorenzo

It's ironic that Bexar Chief Appraiser, Michael Amezquito, is photographed for this article in the lobby of the St. Anthony Hotel in San Antonio.  That property was purchased two years ago and has been assessed by Bexar County far above it's purchase price.  Mr. Amezquito knows this, and refuses to change it.  And he wonders why he gets sued.

Owner
Owner

Have you considered that the valuation problem and all of the lawsuits may be the result of a problem with the Appraisal District and the Appraisal Review Board rather than big companies. Homeowners have the same problems but unfortunately are not in the position to file lawsuits and continue the appeal process in court when their valuation appeals are not given proper consideration at the Appraisal Review Board. The mass appraisal process is not perfect. It does not allow, as the tax code requires, that the characteristics of the individual property be considered. That is where the appeal process comes in. Unfortunately, at the ARB the protest often falls on deaf ears. ARB panels are frequently biased in favor of the Appraisal District. This is a change from previous years when improper valuations could be corrected at that level. The increased number of lawsuits is simply a result of over zealous appraisers and a dysfunctional appeals process, particularly in Harris County.

montgomerytxguy
montgomerytxguy

A great debate topic for this Friday's Republican Lieutenant Governor's debate to be broadcast live on television. 

Jim Rassinier
Jim Rassinier

*sigh* no we are not, and this was obviously written by someone not from here.

FattyFatBastard
FattyFatBastard topcommenter

What kind of idiot from the backwards-ass north wrote this article?

daswankone
daswankone

I did not understand that the Press was in the business of doing hit jobs for the government.  Let's look at your first statement:

"After the private company Houston 8th Wonder purchased the former Six Flags AstroWorld site at Kirby Drive and Loop 610 for $77 million in May 2006, the Harris County Appraisal District turned around and said the empty 104-acre lot was worth $74 million. Instead of taking the $3 million savings and going home, Houston 8th Wonder's hired-gun lawyers bulldozed HCAD for the next six years in multiple courts and slashed the AstroWorld site's value to $31 million, resulting in significant lost property-tax revenue for Harris County."

You make it sound like 8th Wonder paid taxes on $31 million for six years.  First off 8th Wonder only owned the property from May 2006 to May 2010.  Now I am not a math expert, but that is not six years.  Now let's look at the value history of that property.  While it is true that in the first year of ownership that 8th Wonder paid taxes on $31 million after litigation.  That is because HCAD was "chasing a sale" which is illegal under our state Constitution and what lead to the equal and uniform statute.  What they are not telling you is that while they placed a value near the sales price for this property that year they left the value per square foot of the surrounding properties at a quarter of this value.  That would be like a homeowner buying a new house in and older neighborhood and HCAD leaving all the other values at what property was selling for a decade ago and placing the new homeowner on at four times the value of his neighbors for comparable properties.  This is not fair to that one owner and it is why this is in our Constitution, to protect from this kind of abuse.  And it is not 8th Wonder's fault that the County or their attorneys never got the proper report.  I can promise you if the shoe was on the other foot that Olson and Olson would file to compel as well and the Press would not be crying about how 8th Wonder got screwed.

But back to the point.  Let's look at what happened in subsequent years for this property in 2007 the value on this property was $ 66,537,435.   From 2008 to 2010 the value placed on this property was $74,668,035 or near the purchase price.  So why did you try to paint the picture that they were at $31 million during this time frame?  And what happened to 8th Wonder?  They bought this property for more than they could make a development deal work.  They sold half of it to the Rodeo and half of it to another developer that has not been able to get money for development either.  And this is one example.  I can give you numerous examples of commercial property owners in the loop that are getting far less that the assessed value when they sell their properties and there are several office buildings that have sold for far less than HCAD has tried to place on them this year. 

One more thing.  There are huge differences between how a house sells and how a commercial office building sells.  There is far more intangible value in a commercial building that has to do with things like the credit worthiness of the tenants, the lengths of leases, the step ups in rents 10 years down the road that are not taxable value because they are intangible value.  These things also effect the risk portion of the capitalization rate investors use to determine the return they need to see for the risk involved.  So if you have a CVS as opposed to a local restaurant in identical spaces in a strip center there is far less risk so you will pay more for the building with the CVS, but they are identical bricks and sticks and should be treated that way. 

This is why HCAD uses what is known as the Fee Simple appraisal based off current rental rates, lease occupancy and current expenses.  It does not take into account the lack of financing cost seen by the REITs that buy these trophy properties that drive the cost up.  It does not take into account what the rents might be 10 years down the road.  It uses a consistent capitalization rate instead of adjusting it for the credit worthiness of the tenants (which has nothing to do with the value of a building).  It looks at what the income and expense was on that building as of January 1st of the current tax year.  This gives us more uniform values and gets rid of much of the intangible value; which I repeat is not taxable.

A good example that a homeowner could relate to might be a quick closing.Let’s say that you are selling your house and the buyer is moving here in two weeks and wants you out.They are willing to pay cash, plus and extra $10,000 for your inconvenience.Should they be taxed more than their neighbors the next year because they paid above market to compensate the buyer for inconvenience?Of course not, but that is what you are doing to commercial transactions when you look at the sales price and do not account for intangible value.

I am not really sure what the Chief Appraisers' goals are in this public relations onslaught that is hitting all the major papers across the state and I really wish that the Press would have interviewed some more respected property tax consultants or attorneys to explain this process and why it may not seem fair on face value.  Hey if I was an unelected official that was the constant whipping boy for elected people who set tax rates, I would want to shift the blame.  But it should not be to the backs of the people that pay millions in taxes on commercial properties.

BTW - you quoted a stat about how residential property owners have a higher percentage of the tax burden than they used to....Did anyone on your staff ever check to see how many homes had been added to the tax roll in comparison to commercial properties?  If you did I would bet that would explain your increase....Lies, damn lies and statistics.

Candyman101
Candyman101

If the appraisal districts weren't so God-Damn greedy then maybe they'd get more compromise and more support from the public as a whole.  There is no way my little slice of heaven off of Washington has doubled in market value since 2011, but HCAD sure as hell thinks it has and wants to tax the bejesus out of me on it.

daswankone
daswankone

I went to check out your site and it would be great if you let us know who you are a front for, but more importantly you make a really silly argument.  Out of one side of your mouth you are arguing that appraisal districts need sales price disclosure and out of the other side you are arguing that properties are assessed at far less than they are on the roll for.  If you don't know what they sold for how do you know this?

daswankone
daswankone

@Owner 

Rather than trying to work to make it a more fair system or explain the nuts and bolts of how commercial properties are traded it is just easier to blame someone else even if it means destroying the system that you are part of. 

ghscott2050
ghscott2050

@daswankone  You have spoken like someone with the full courage of anonymity. The reference to the legal battle involving the Astroworld property in the story was accurate. Period. You can twist all you want and add a few moans, groans, and rhetorical flourishes all you want.  Here are some additional details. HCAD got its butt kicked in district court on that case because it did not prepare for trial with the full range of expert reports it needed.


Rather, it chose to try to rely on attacking the other side's expert; got its head handed to it by inferior legal strategy at the district court level; and then spent years trying to convince the Court of Appeals (where it got its head handed to it) and the Supreme Court (which said HCAD's head was too ugly by then) to cover up for its bad strategy and incompetent approach. 


The court battle was about a single year as the story noted. It was about a law that tilted the playing field in that tax year to the owners of the property. That coupled with a deeply flawed appraisal and legal approach by HCAD proved disastrous for rank and file property owners who don't get such breaks.


This year for the first time, HCAD - as the story accurately noted - seems more determined to contest such lawsuits more aggressively. It reportedly has retained MAI appraisals for most if not all of the Class A properties.  Think it through and the actions this year reflect a tacit admission that it had not done all that it needed to do in  previous years.


I don't know what your background in math is or what independent research you have conducted; however, I am not aware of many people in the industry who seriously dispute the reality that mega-value and major commercial property (and industrial) has NOT been taxed anywhere near as close to true market value as residential properties have been and are.


The total value of all homes and the total value of all commercial or industrial property could be an issue, but it is not the issue of equitable property values for tax purposes relative to true market value.


As the story and numerous of its sources said, the big guys here have had their way too long. So, there is a huge difference between the treatment homeowners get compared to these major property owners.


Moreover, there is an equally profound difference between these mega-value properties and the rank and file, mom and pop, small to middle to higher than average business and commercial property owners. Ted Whitmer, as the story notes, covered that aspect with profound accuracy.


This story, more than any that has been written in the State's media to this point in time, will do more to advance the cause of understanding the significant deficiencies of the property tax system than any hypothetical game of switch and bait analysis an anonymous hero on this website will ever contribute.


I sign my posts.  George Scott



stephenvance_2000
stephenvance_2000

@Candyman101 I think you're missing the point. The reason your value has doubled is because they know they can squeeze money form the little guys, while the fat cats pay less. This is all baked into the system thanks to our super business friendly state government.

daswankone
daswankone

@ghscott2050 @daswankone 

George, if you want to talk about full disclosure why don't you mention here or on your blog that you used to work at HCAD?

daswankone
daswankone

@ghscott2050 @daswankone 

And the regular folks are protected by the same equal and uniform statute.  When I purchased my home at the height of the market before the crash, they changed the CDU factor in order to try to chase the sales price.  This actually put a higher value on my home that the purchase price.  They were hoping the ARB would just put the sales price on it.  By knowing about these things I was able to point out that I was the ONLY home in my neighborhood that was graded above a average grade, but I could show through pictures on HAR that my house was similar to other properties with the average CDU.  Since this happened at the ARB level the CDU was not changed and the next year HCAD used the sales (including mine) to raise the base rate on that neighborhood by $20 a foot.  Doing this put my house at $23 a foot over what I paid for it in a market that had collapsed 4 months before the first of the year.  Again I had to go to the ARB because the HCAD employees are afraid to do the right thing because of the pressure the administrators put on them.  Again the ARB adjusted my value to the CDU of average and again I had to protest the next year because I was significantly over valued from a market and U&E perspective.  So the idea that U&E does not help homeowners is ridiculous.  And just because they might not have the resources to protect themselves does not mean that you should be able to over value commercial properties and use sales that include FF&E and business value or are based off of long term leases by a REIT to try to create some kind of phony populism to promote your blog.

daswankone
daswankone

@johnosenbaugh @daswankone @ghscott2050 

There are many commercial properties that are over appraised as well.  For instance when land value are raised HCAD often changes the valuation method to cost and then makes the argument that there is "value in use" to the improvements.  This again is intangible value.  If the district used proper appraisal practice the value would be the higher of the income value or the land value adjusted to remove the current improvements (this would include buying out leases as well as demolition).  The idea that residential owners are getting screwed because a REIT is willing to pay more for a property than the current fee simple value is a bunch of nonsense.  REITs, sales leasebacks, refinancing, 1031 Exchanges none of these are market transactions of the bricks and sticks and people like George (who know better) are using this as a populist cry to.....well I have no idea what their motives are other than to make noise and make a name for themselves.

johnosenbaugh
johnosenbaugh

@daswankone @ghscott2050 Interesting but drifting off topic.  18 months ago Steve Janson started this epoch with a handful of my residential files which HCAD over-valued via different approaches that would escape notice without MLS access and both property tax methodology & fee appraisal background.

The whole point is that Average Joe couldn't compete with the overwhelming, seemingly pristine evidence which in reality is severely flawed & tilted to justify the highest possible value.

ARB's are only taught what HCAD wants them to know without benefit of counterpoints. Your mention of REIT's, tenant quality, etc are such counterpoints as illustrated in George Scott's coverage of my Westpark HVAC supply warehouse arbitration..


Steve's whole point was to equally give both sides a voice, which he's done remarkably well in this article and the past one.

 
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