PEPennington & Co Property Tax News

Overvaluation of Business Personal Property by Appraisal Districts

Why are valuations of business personal property assessments by assessing jurisdictions not reflective of their actual market value?  The main reason behind this discrepancy is that appraisal districts value these assets based on a mass appraisal depreciation cost schedule with no ties to actual market value.  So how does one change this overvaluation of these assets?  The answer to this question is to take additional steps in promoting change in the current system in order to lower assessments to a more realistic market value.  Keep in mind there are three approaches to value; cost, income, and the sales comparable approach.  The most accurate method for the valuation of business personal property would be the sales comparison approach not the appraisal districts cost approach.

Appraisal Districts are charged to value business personal property at market value as of January 1.  In their attempt to do this, based on the large number of individual accounts and the little manpower given to the districts, they traditionally fall upon the mass appraisal cost method of appraisal.  This method is the most efficient method for appraisal districts; however it is most often the least accurate method of appraising the actual market value of these assets. 

Appraisal District’s cost depreciation schedule is based on acquisition cost including sales tax, installation, and delivery fees.  The district will reduce the assessment based on a broad depreciation schedule indicating the asset is at a percent good based on their certain life schedules.   For example, if you a taxpayer bought a new refrigerator for the purchase price of $2,500 before delivery, installation and sales tax.   The total cost will be depreciated based on a percentage for the year of acquisition around 10% for the first year of ownership.  This means that the $2,500 purchase price will be assessed around the same price after you consider the increased in cost based on sales tax, installation, & delivery.  This method of valuation clearly overstates the value of your used asset.

A more accurate value of your restaurant equipment is most likely some number between what a restaurant equipment reseller would pay for your used equipment and what they would sell it to a used equipment buyer.  The used equipment market exist the same as the buying and selling of used vehicles.  However to date, most appraisal districts are unwilling to not use their cost approach.   It is the owner’s property tax consultant’s responsibility to push other methods of appraisal onto the appraisal district to allow for a more accurate measure of appraisal. 

With this being said, why do appraisal districts get away with sticking to their mass appraisal cost schedule?  I believe that it is because owners do not take a strong enough stance with the appraisal districts.  Owners need to present stronger cases to both the appraisal districts and the appraisal review boards that they are valuing your assets over their market value.  If taxpayers render their assets as normal, no changes will occur in the system.

I would recommend the following methods for presenting a stronger case to the taxing jurisdictions. First I would recommend getting a personal property appraisal by a qualified personal property appraiser with the ASA national recognized designation.  The appraiser will specifically address the market value of your assets on the assessment date.  Second, I would have a resell store come out and give a bid for your assets.   This will give a clear picture that their cost schedule does not match what the market will bear for your assets.  Third, I would bring in examples items for sale or sold that show that the districts cost schedule is inaccurate.  If I bought a refrigerator and saw that same refrigerator selling for less than my assessment, I would present the information to show that my market value is too high.  The reduction you get from the appraisal districts will most likely be tied to how much documentation you can show that their method of valuations is inaccurate. 

To be fair to the appraisal districts, I would not wish the job of valuing all commercial personal property within a county to my worst enemy.  The job is underfunded and unrealistic to do accurately.  Because of their challenges, I feel that personal property departments are more concerned about valuing uniformly based on a cost schedule than realistically valuating the market value of your assets.  Because of this, restaurant owners and tax consultants need to make valuing your assets a priority over a schedule that is not tied to the market value of the assets. 

P.E. Pennington & Company, Inc. announced today that in tax year 2009 they represented $1,548,551,710 in commercial real estate value in Dallas County.  During the 2009 Administrative Remedy these valuations were reduced to $1,325,990,460 or 14.37% in adjusted valuations.  These figures do not take into consideration further reductions achieved through 2009 litigation.

First of all, a taxpayer should understand the nature of property taxes in Texas.  Property taxes are the primary financial resource for the operation of governmental entities in Texas.  This is largely based on the fact that Texas has no state income tax.  Annual valuations are determined by local appraisal districts and taxes are generally levied and collected by counties, cities and school districts.

The Texas Constitution sets out five basic rules in regards to property taxes:

·         Taxation must be fair and equitable.

·         All tangible property must be taxed based on its current market value.  The exceptions to this rule are properties receiving exemptions and agricultural valuations.

·         All property is taxable unless exempted by state and federal law.

·         Taxpayers have a right to reasonable notice of increases in the appraised value.

·         Each property in a county must have a single appraised value

Generally speaking filing a property tax appeal involves the taxpayer’s disagreement with an action taken by the appraisal district.  The taxpayer may be challenging the appraisal district for the following reasons:

• Disagreement over the appraisal district’s opinion of market value.

• The appraisal district’s denial of an exemption or special valuation.

• The property owner feels that their property is not assessed fairly and equitably by the appraisal district.

• Appraisal district did not send the notice of appraised value to the correct property owner, (failure to give notice).

• The appraisal district’s records contain an error, i.e.: a clerical error, multiple appraisals of a property, and the inclusion of property that does not exist in the form or at the location described in the appraisal roll.

 When filing a protest a taxpayer should be aware of the four phases in the property tax process.   The Texas Property Calendar is divided into four sections:January-May (1/1-5/15): The Appraisal Phase. 

·         The appraisal district collects information to appraise properties for the current tax year.

·         Administer exemptions and special appraisals.

·         Update property records.

·         Taxpayers file personal property renditions and appraisal districts set valuations based on those filings.

·         Notices of appraised values are mailed to taxpayers.

May-July (5/15-7/25): The Equalization Phase (The Administrative Remedy).

·         The tax roll is submitted to the Appraisal Review Board (ARB).

·         Taxpayers file protests.

·         The informal and formal appeal process begins.

·         After the appeal hearings the ARB approves and certifies the tax roll on or about July 25.

July-September (7/25-10/1): The Assessment Phase.

·         Taxing entities receive the certified tax rolls.

·         Local jurisdictions adopt budgets.

·         Tax rates are adopted.

·         Taxes statements are mailed to taxpayers.

·         Some taxpayers dispute their ARB rulings and appeal their appraised values to district court for Judicial Review.

October-January (10/1-1/31): Current Collection Phase.

·         Taxes are collected by local jurisdictions.

·         Taxes become delinquent 2/1

Generally speaking, filing a protest in Texas should be done on or before May 31 of the current tax year or after receipt of a Notice of Appraised Value from the appraisal district.  All protest should be executed protest forms provided by the appraisal district or those forms provided by the Texas comptroller’s Property Tax Division.  The forms distributed by appraisal districts and the Comptroller’s office allow the taxpayer to denote the reason for their appeal.

In most Texas Counties the taxpayer and / or the representative are allowed the opportunity to have an informal hearing with the appraisal district staff.  If the taxpayer does not come to a resolution of their appeal they are entitled to a hearing before the Appraisal Review Board (ARB).  Additionally, the taxpayer has the right to seek relief from Judicial Review if the ruling of the ARB is not acceptable to the taxpayer.

The Dallas Morning News reported that the number of DFW foreclosures was up in 2009.

• Apartments up 16%
• Office up 121%
• Retail up 90%
• Industrial up 10%
• Land up 71%

This is yet more evidence that 2010 Texas property tax values will be down in comparison to tax year 2009.

The current commercial real estate crisis has not developed into an “S&L” melt down simply because federal regulators have decided not to push lenders to foreclose on assets which have lost tremendous amounts of value.  The thinking by The Feds is to push lenders to extend loans and pray that economic conditions improve.  This position creates an environment wherein commercial real estate assets are overvalued.  Thus buyers and sellers are disconnected by an artificial market.  Most real estate professionals agree that the market needs to take the valuation hit then over time real property assets will begin to trade based on realistic assumption needed in an efficient market.  Commercial real estate will make a come back in such a market.

In 2010 Texas appraisal districts will assume that the artificial market create by federal government policy represents the reality of the commercial real estate market.  Their position will insure that the number of appeals and litigation will tick upwards in tax year 2010.

Oct. 30 (Bloomberg) — Billionaire investor Wilbur L. Ross Jr., said today the U.S. is in the beginning of a “huge crash in commercial real estate.”

“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate — the return that investors are demanding to buy a property — are going up.”

U.S. commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. The Moody’s/REAL Commercial Property Price Indices already have fallen almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.

• House Bill 8:  Ratio studies conducted by the Comptroller’s Office will be administered biennially.  Previously these studies were conducted annually. 
• House Bill 986:  The deadline for filing suit with the appraisal district has been extended from 45 days 60 days after receipt of the order determining protest. 
• House Bill 1030:  Members on the appraisal review boards of Harris and Fort Bend Counties will be appointed by a local administrative judge. 
• House Bill 2317: The Comptroller’s Office will develop a comprehensive training program for appraisal review board (ARB).  Members must successfully complete the course to be eligible to serve on the ARB. 
• House Bill 2447:  The Board of Tax Professional Examiners will be abolished and its functions will be transferred to the Texas Department of Licensing and Regulation. 
• House Bill 2591: Increases educational requirements for property tax consultants and regulates business solicitations and web sites. 
• House Bill 3612:  Creates a pilot program as an alternative to property tax litigation.  The program gives taxpayers to right to appeal to the State Office of Administrative Hearings.  This new level of appeal is established for Bexar, Cameron, El Paso, Harris, Tarrant and Travis counties. 
• House Bill 1038:  The chief appraiser may not exclude foreclosure sales in determining market value of residential properties.  
• Senate Bill 771:  Attempts to prevent annual revaluations of properties if the value of a property was reduced previously by an ARB ruling or litigation.  The appraisal district must have substantial evidence to raise a value which was reduced in the previous year.  Additionally, the Bill also addresses appraisal methodology.  

Soon 2009 Texas property tax rolls will be certified by apprasail districts.  The tax rolls will then be presented to the counties, cities and schools to develope 2009 /2010 budgets.  The bad news for local jurisdictions will be shrinking tax rolls which will create pressure to raise 2009 tax rates.  Most agree that this problem will become signifiacntly worse in tax 2010 with both residentai and commercial realestate values continueing to decline. 

Dear Commissioners:

Please accept this letter as my rebuttal of testimony present by the Louisiana Assessors Association (LAA) on or about February 12, 2009.

I would like to restate that facts noted in my first letter (Exhibit A).  Notably that LIHTC properties lack liquidity, the use is restricted, operating expenses run higher that conventional multi-family expenses and income is regulated.  I suggest that it is undisputed that these factors adversely affect the capitalization rates for these types of properties.

In the conventional multi-family markets Marcus & Millichap recently reported “…During the past 12 months, Class A assets in primary markets have traded with average cap rate increases of 25 basis points to 50 basis points and 75 basis points in secondary markets. Class B/C assets have sold with average cap rate increases of 100 to 150 basis.”  No one disputes that LIHTC properties do not trade.  However, if one was to argue hypothetically that they do trade, then I would argue that trends we are seeing conventional properties would be greater in would be greater in LIHTC properties. 

Finally, if the LAA wishes to propose capitalization rates for LIHTC properties, one would expect to see generally excepted appraisal techniques utilized.  In proposing the use of capitalization rates of conventional properties on LIHTC properties with no adjustments relating to the differences in characteristics, is in my opinion does not comply with Uniform Standards of Professional Appraisal Practice (USPAP).

 Thank you in advance to consideration of my comments.