Shakedown: The HCAD Appraisal Game
Missouri City resident Glynda Williams, a career letter carrier for the United States Postal Service, has invested a little here and there in real estate. Nothing fancy for the African-American woman who isn't raking in the big bucks — just some small houses in Harris County's foreclosure-driven markets that include a property in the Northglen subdivision.
Even though some of the homes in the blighted neighborhood, located near Barker Cypress Road and FM 529, are worth $50,000 on average, the Harris County Appraisal District valued Williams's parcel at $60,000. By law, when sales data are available, every appraisal district in Texas is supposed to compare homes of similar size, age and condition to determine the market value of a selected property.
"If the appraisal district says your house is worth more today than yesterday, you might go, 'Wow, that's great news,'" says John Osenbaugh, a real-estate consultant who represents clients in fighting property-tax issues.
"It's not great news," Osenbaugh says. "The news is that you're being taxed as if it were worth that much more. If you had proper representation, which you can't afford in the first place, you wouldn't be paying that tax."
Houston Texans vs. Arizona Cardinals
TicketsSun., Nov. 19, 12:00pm
Rice Owls Football vs. North Texas
TicketsSat., Nov. 25, 12:00pm
Houston Texans vs. San Francisco 49ers
TicketsSun., Dec. 10, 12:00pm
Houston Texans vs. Pittsburgh Steelers
TicketsMon., Dec. 25, 3:30pm
Houston Open - Good Any One Day Grounds
TicketsSun., Apr. 1, 11:59pm
An extra $10,000 might not seem like a big deal, but the additional tax burden could turn into a small fortune for somebody at Williams's income level. Not only that, but HCAD is "running a scheme that makes Enron look like amateurs," and the public hasn't got a clue that it's happening, Osenbaugh says.
While HCAD raised the market value of Williams's humble residence, Brookfield Properties, in 2011, successfully protested HCAD's appraised value of One Allen Center — the circa-1972 34-story skyscraper at 500 Dallas Street — to the tune of $36 million in reduced market value — which translates to about $855,733 off of its tax bill.
Instead of paying taxes based on HCAD's appraised value of $145.2 million, Brookfield gamed the mass appraisal property-tax system and successfully knocked down the certified value by 25 percent to $109.3 million.
In 2011, the New York-based company cost Houston Independent School District more than $1.8 million and the City of Houston more than $1 million in lost tax revenue. Along with One Allen Center, Brookfield is the owner of Three Allen Center, Heritage Plaza on 1111 Bagby Street, Total Plaza on 1201 Louisiana Street, the former Continental Center at 1600 Smith Street and a handful of other downtown high-rise office towers.
A portion of the Allen Center's savings, for instance, could have prevented some of the nearly 3,300 Houston-area teachers from losing their jobs in the 2010-2011 school year.
A months-long investigation by the Houston Press finds that Brookfield isn't the only mega-dollar company that's sitting pretty with a momentous tax break.
According to a June 2012 Service Employees International Union report, corporate giants such as Chevron, Exxon and Hines Real Estate Investment Trust successfully protested the appraised value of 350 large commercial office properties in Harris County. The impact: a total reduction of more than $2.4 billion in tax base on which tax liability is calculated.
Critics of HCAD — which is responsible for valuing a complex mix of 1.4 million parcels in no-zoning Houston that includes Baytown's ExxonMobil, the largest refinery chemical complex in the country — say the agency has purposely and knowingly shifted the tax burden from the filthy rich onto folks who own homes that cost under $150,000.
That's "a false issue," according to Jim Robinson, HCAD's chief appraiser since 1990. Guy Griscom, HCAD's assistant chief appraiser, also fervently denies the claim.
"No. There's no truth in that," says Griscom, who adds that in 2013, HCAD has increased the value of 12.2 percent of the homes in the $80,000-to-$150,000 range.
Instead, HCAD, the third-largest appraisal district in the country, points a finger at the Texas Legislature. In 1997, a provision was added to the Texas state tax code that cripples the ability of appraisal districts to hold the true market value of high-end commercial property, Griscom explains.
"Not only do they have to be valued at market value, but the value has to be uniform and equal. But the measure of equity that's in the tax code is really junk science [because] it isn't statistically based," says Griscom. Texas is one of the few states that don't require sales-price disclosure on taxable property, which means appraisal districts around the state rely on private contracts to compile sales data that are often incomplete.
"[The tax code] says the median value of a group of comparable properties properly adjusted, whatever in the world that means. Obviously, you can have major disagreements over what are comparables," explains Griscom, who thinks that a bill filed recently in Austin aimed at changing the equity provision might not have any traction.
In the meantime, lawsuit-prone corporations and their attorneys are beating up HCAD and taking its lunch money. "When you're talking about major commercial or industrial properties, those property owners have deeper pockets than the appraisal districts," Griscom says. Vinson & Elkins and Fulbright & Jaworski are two Houston-based international law firms that have represented class A property owners in successful property-tax protests and lawsuits.
Due to the manipulation of the system by the rich and powerful, in 2011 alone, the City of Houston and Harris County lost out on $15.4 million and $9.4 million in tax revenues respectively, while the Harris County Hospital District was deprived of more than $4.6 million in revenue. Local school districts, including Alief, Spring Branch and Katy, were shorted $29.1 million in property-tax revenue.
The tax relief has been quite a savings for downtown building owners who, for four months last summer, wouldn't budge on raising janitors' pay from $8.35 to $9.35 an hour.
"There are billions of dollars cumulatively that are not on the tax base that should be there. It would pay for teachers, firemen and pensions," says George Scott, a former HCAD employee who blogs about property tax issues on his Web site, George Scott Reports. "With the refineries in mind, it is like a reverse Robin Hood — taking from public school finance to give a financial largesse to the owners of the most valuable taxable properties."
In Osenbaugh's estimation, the real victims in this complicated and multi-pronged issue are homeowners like Williams who are forced to cut additional corners to free up money to pay more property taxes.
"Not only is the public being shafted, but there's professional malpractice at the bottom of this," he says. "That's what really stinks."
Houston doesn't provide water to Saul Flores's Mount Houston Road property near Highway 59. His skinny parcel, which resembles a shooting range, is located next to single-family homes that are worth between $23,750 and $25,000.
When HCAD appraised Flores's property in 2012, they came up with $34,133. That was just for the land and the house. With the improvements, HCAD's final appraised value was $55,720, a ridiculous sum, according to Osenbaugh.
"These are grievous errors, and it's not by accident. The people at HCAD are too qualified for this to have been happenstance. They know what they're doing," says Osenbaugh, who has filed formal complaints with the Texas Department of Licensing and Regulation against Robinson, who has been with the district since 1985; Griscom, a 26-year veteran of the agency and Montgomery County's original chief appraiser; and other HCAD personnel, including deputy chief appraiser Sands Stiefer.
"How are these people going to defend themselves? There's no way," Osenbaugh says about Flores and his other cash-strapped clients.
In the 1960s and 1970s, Texas's tax appraisal system resembled a rat's nest. Just about any agency could appraise property, which meant that a property owner who lived in a city, county and school district might be forced to pay taxes on three different values.
In 1979, the Wayne Peveto Bill revolutionized the Ouija board system by creating tax appraisal districts in every Texas county. The Harris County Appraisal District, which staffs more than 620 employees at its offices located off of Highway 290 near Langfield Road, is the state's largest.
In July 2006, widespread abuse of Harris County's property-tax appeal system came to light when the Texas Comptroller of Public Accounts, acknowledging that HCAD faces a tremendous burden in appraising more than 1 million parcels every year, found that HISD had lost out on millions of dollars of tax revenue due to "the increasingly innovative and novel approaches to value that are presented by property owners or their agents and accepted by [appraisal review boards]."
For the 2011 tax year, if the owners of a class A skyscraper or office complex protested HCAD's appraised value in front of HCAD's appraisal review board or district court, they were 77 percent likely to have the value cut (and almost always by millions). By contrast, only 55 percent of owners of single-family homes won their appeals with HCAD.
According to the SEIU report, originally compiled to support the Houston janitors during their summer 2012 strike, the biggest offender is Hines Interest. Durrel Douglas of Texas Organizing Project says the Houston-area landlord — which owns the JPMorgan Chase Tower, Texas's tallest building, at 600 Travis Street — won all 13 of its property-tax protests and cost the city, hospitals and schools close to $7 million in tax revenue.
"While Texas ranks dead last in the nation when it comes to health care, wealthy property owners in Houston dodged over $58 million in taxes [in 2011] by appealing for a reduction in their tax appraisals," explains Douglas, who works for the nonprofit outfit that advocates for low- and middle-income families in Texas.
He adds, "To the Harris County Appraisal District, Hines is saying that their property values are much, much lower and arguing for a reduction in their taxes, then [they] turn around and say to their Securities and Exchange Commission that their buildings are worth much, much more to boost investor confidence. So which is it?
"This is not just a reporting discrepancy. At best, this is a corporate strategy in which you try to cheat taxpayers or inflate your valuation, depending on which lie you're trying to tell."
Robert Mandala, a local handyman and contractor who rehabs office buildings and homes for a living, recently purchased a 1,446-square-foot home in the foreclosure-littered neighborhood of Greengate Place in Spring. Out of 57 comparable properties, instead of evaluating the median values, HCAD chose the most expensive properties in the neighborhood (up to $92,000) and snubbed the lower-valued parcels (as low as $38,900).
Mandala lost his appeal to HCAD's appraisal review board. The construction worker is now stuck with paying additional property taxes on a property that Osenbaugh says is overvalued at $59,500.
In 2009, Wells Fargo Plaza, the second-tallest building in Texas and the 14th-tallest in the country, received a tremendous tax exemption when the Italian marble, stainless steel and glass beauty, which occupies an entire city block at 1000 Louisiana Street, decreased its appraised value from $300.4 million to $239.3 million. From 2006 through 2011, after lawsuits and negotiated settlements, the 71-story monolith — home to energy company Dynegy, the Houstonian Lite Health Club and some of the best views of central Houston — saw its assessed valuation reduced by approximately $380 million.
Scott says that only a few weeks into his stint with HCAD, which began in April 2007, he discovered major systemic problems with his employer, especially when it came to achieving true market value on mega-value-dollar office buildings as well as Harris County's five refineries.
"I hadn't been on the job for ten days and I'm already going to the senior appraisers and saying, 'What is going on? What is this?,'" says Scott, the former president of the defunct Tax Research Association and ex-owner of the Katy News.
"They put the public policy guy and a journalist by training in staff meetings, where the lawyers got to talk to me. Because I have an IQ above 22 and some experience, I didn't have a real steep learning curve," adds Scott, who was hired by Robinson to help senior appraisers and attorneys compile evidence packages for use in defense strategies.
According to Scott, the real eye-opener occurred when Houston Refining, tightly clutching the equity provision in the tax code, made a pure equity-based argument before the appraisal review board in July 2011. Valero helped set the standard in 2009 when the San Antonio-based energy company was able to slash the assessed market value of its East End refinery by nearly $75 million. In 2010, the Fortune 500 corporation again battled HCAD and reduced the assessed value of that same refinery by an additional $72 million.
"Houston Refining said, 'Exxon, Shell and Pasadena are worth this,' and they came up with a formula about output, even though each refinery is different and outputs different kinds of products," Scott remembers. "They said, 'Here's the median value and this is the highest you can value us because here's the median; we're above the median and you've got to adjust [down].'"
"If you're HCAD, you have to be prepared to go to court to spend a million or more dollars to try and win," says Scott. "That's why Galveston loses, why they've lost in the Golden Triangle and why there's been a diminution of market value in Corpus Christi."
The giant energy companies aren't just ganging up on HCAD. In February, Valero reduced the 2011 assessed value on its Texas City refinery by $189.38 million when a civil district jury ruled against the Galveston Central Appraisal District, which means that Texas City ISD must repay approximately $2.5 million to Valero in overpayments it made. That came on the heels of a 2009 decision that forced Texas City ISD to reimburse Valero nearly $2.4 million following its property-tax protest victory over GCAD.
As more of these issues came into focus, Scott implored HCAD's higher-ups to go public with the injustices. "Bottom line," Scott says, "is it never happened."
"Inside of the big house, there's a universal recognition that equity, absence in sales disclosure, judicial standards and governing rules are keeping the Harris County Appraisal District and central appraisal districts from valuing these high mega-dollar properties at market value," he says.
"[HCAD] has all of the data, information and everything they need. They could have led a public information campaign to make the public aware of why this entire thing is happening," says Scott, who quit HCAD in May 2012.
Aside from some quotes here and there in various media outlets, HCAD still hasn't gone public. Instead, the biggest news out of the HCAD offices came in a January press release when the agency announced the retirement of 72-year-old Robinson effective May 31.
Meanwhile, the manipulation of the equity provision has gotten so out of control that 70 percent of large downtown commercial office property owners filed property-tax lawsuits against HCAD for the 2012 tax year, according to SEIU analysis.
Griscom admits that HCAD is at a disadvantage because the few independent equity-analysis experts, who might be able to help the agency in court cases, are often hired away — sometimes in cutthroat fashion — by the big guns and their big money.
For instance, HCAD is currently in litigation with Houston Refining, which is protesting HCAD's appraised value of its 700-acre Houston Ship Channel facility.
Valero, which is also suing HCAD over market value, discovered the identity of HCAD's hired expert in the Houston Refining case and coaxed the specialist into working with Valero against HCAD. "We can no longer use that expert," says Griscom.
As an investment, Richard and Trayn Hodella bought a duplex-style patio home off of Highway 6 on the Harris County-Fort Bend County line. Instead of grabbing Fort Bend County sales down the street from the Hodellas' property, HCAD used Harris County figures in completely different neighborhoods, located two and four miles away, to establish an appraised value of $70,975.
Osenbaugh, noticing the odd strategy, persuaded Robinson (as explained in an e-mail acquired by the Press) to consider the Fort Bend County sales, which amounted to about $53,300. Osenbaugh says he was led to believe that he would get a rehearing in front of the appraisal review board; however, he received a letter, sans explanation, from an HCAD lawyer denying his request
"Now we're stuck with the higher value and my client is stuck with higher taxes than he should be paying," Osenbaugh says. "John Q. Public is being steamrolled."
Osenbaugh's family has been active in Houston-area real estate since 1889, when Osenbaugh's great-grandfather, who spoke Czech, Polish and German, helped bring European settlers to Fort Bend County. While Osenbaugh, a licensed professional since 1971, knows property-tax issues inside and out, his clients, who own residential property in the $50,000-to-$100,000 range, don't and likely never will.
"[The average homeowner] is going down there and going, 'Oh, I guess it's really worth that much,' and he won't know any difference," says Osenbaugh. "He'll never know that he left a 20-percent reduction on the table that he was owed. He'll never know that."
That's not the worst of it. Osenbaugh says that HCAD flat-out ignores the lower-valued homes in a given neighborhood in order to capture the highest-valued properties. This is why Mandala, the Houston construction worker, is saddled with more taxes to pay, says Osenbaugh.
"If you have 30 ascending sales, you'd take sales 11 through 20. HCAD takes six, ten and the balance of 20 through 30," he says. "The pattern, unfortunately, consistently occurs. Anything can happen accidentally...but in this case, they're trying to uphold an image of a market being higher than it really was."
There are other arbitrary ways in which HCAD determines market value on residential properties, Osenbaugh says.
In order to help fund their kids' education, Sushanta and Minakshi Ghosh purchased a landlocked parcel on Wirt Road north of Interstate 10. The 450-foot-deep tract of land isn't large enough for a house — the only potential user is a nearby church, which could turn the dead space into a greenbelt.
Without a solid comparable property in the area, HCAD appraised the dead space at the laughable amount of $59,264, says Osenbaugh, who represented Ghosh and successfully reduced the value to $36,230.
"You believe what you read in the report and you don't have time to get a broker's pricing opinion or an appraisal for your property. It's the furthest thing from your mind," Osenbaugh says. "The point is that you're carrying, on your shoulders, the holiday that they're getting downtown on One Shell Plaza," which recently reduced its market valuation by $34.7 million.
Dan Hart, chairman of the watchdog organization Taxpayers for Equal Appraisal, says the average homeowner, who doesn't have the heft or the funds to bully HCAD, is further oppressed by the absence of an appraisal manual for residential properties.
"Would the interscholastic league allow each county in Texas to make up and modify the rules for high school football?" asks Hart, a former athletic director and football and basketball coach at Houston's Kinkaid School who has been a thorn in HCAD's side for decades. "People wouldn't put up [with that] for one second if we had a playoff game between Dallas and Harris county schools and Dallas whipped out some extra rules. Appraisal districts do this continuously."
On March 7, the last day bills could be filed in the current session of the Texas Legislature, Senator Wendy Davis of Fort Worth and Representative Sylvester Turner of Houston, both Democrats, unveiled a bill that would challenge the equity loophole in the tax code. At press time, a hearing hadn't been scheduled, which pretty much kills the proposed legislation.
Griscom believes that any future like-minded bill won't have any legs. "The problem is that there are a lot of people representing property owners via their lawyer or tax consultants that are making a lot of money off of that statute," he says. "They obviously don't want it changed."
In his opinion, Texas's appraisal districts need to adopt a scientifically reliable statistical measure, like that employed by the International Association of Assessing Officers (IAAO), an independent organization that measures equity by using ratios and mathematical formulas. However, Griscom doesn't see that happening anytime soon. He believes it's going to get worse.
"Every time somebody wins an adjustment, it changes the equity. If everybody protested and everybody had a hearing, the last guy is going to get the best deal because it's going to continually spiral down," says Griscom. "As a mathematical formula, it would go to zero at some point and that cannot be acceptable over the long term."
In the meantime, some of Houston's most impressive architectural behemoths are getting killer deals on their property taxes.
The majestic 64-story Williams Tower at 2800 Post Oak at The Galleria, a Hines-owned property that Texas Monthly once called "the skyscraper of the century," was originally appraised at $251.8 million, but had its assessed value decreased by 22 percent to $196.6 million in the 2012 tax year.
That same year, the 56-story postmodern Bank of America Center at 700 Louisiana Street, which architects Philip Johnson and John Burgee swathed in Napoleon red granite that was quarried in Sweden and finished in Italy, dropped from $219.4 to $172.3 million.
Despite all this, Texas Comptroller of Public Accounts Susan Combs gave HCAD a perfect score in 2012 "in a comprehensive review of the district's compliance with state laws, regulations, appraisal practices and operating best practices."
On March 26, HCAD announced that it's raising the market values on many of Houston's class A buildings by more than 50 percent for 2013. Scott believes the decision can level the cockeyed playing field, but is wary of the possibility that HCAD will once again cave in to building owners' value-lowering demands.
Says Scott, "It's like the car-rental episode of Seinfeld where [Jerry Seinfeld] says, 'You know how to take the reservation; you just don't know how to hold the reservation.' Will [HCAD] actually be able to hold market value?"
What about homeowners like Glynda Williams, Saul Flores, Robert Mandala, the Hodellas or the Ghosh family, who, by the time this story is published, should have received their 2013 property value notices from HCAD? They're probably too busy delivering mail, repairing leaky roofs and trying to earn enough money to put their kids through school to have time to worry about it.
Get the ICYMI: Today's Top Stories Newsletter Our daily newsletter delivers quick clicks to keep you in the know
Catch up on the day's news and stay informed with our daily digest of the most popular news, music, food and arts stories in Houston, delivered to your inbox Monday through Friday.