PEPennington & Co Tax News

Bloomberg reported  Josef Ackermann, chief executive officer of Deutsche Bank AG concerns over the state of commercial real estate.  “Commercial real estate was a bright spot in the economy, serving as a buffer against the declining housing market.”  New York University economist Nouriel Roubini thinks there are reasons for concern.  He believes we might be on the verge of a “Double-Bubble Crisis”.  His thinking goes follows the line of commercial real estate needing a strong housing market because of its relationship to to retail.  Additionally, if the economy continues to goes south companies will not be expanding and their need for office and industrial space will decreases.  Easy credit in previous years probably funded transactions which may not survive the economic downturn.

Commercial real estate tends to lag behind housing trends which is in crisis.   Investment in nonresidential structures declined 6.2 percent in the first quarter of 2008.  “It is quite possible that the tighter credit conditions and economic slowdown has barely started to filter through,” Merrill Lynch & Co. economists Sheryl King and David A. Rosenberg recently wrote.

The Collin Central Appraisal District stated yesterday that Collin County is still booming,  both commercial and residential properties.  Just think this county apparently is not tied to the global economy, the national economy, the credit crisis, the the sub-prime, uptick in bankruptcies, etc…  I discussed earlier my assumption that appraisal districts would probably grant relief to residential property owners and not to commercial property owners in 2008.  I must admit that I was completely caught off guard by Collin County’s comments.  I believe later in the summer, during the appraisal review board hearings facts will come out which might give Collin County a better perspective of the economic landscape.

Bloomberg reported that Warren Buffett stated had the Fed not intervened with Bear Stearns other investment firms would have collapsed the next day.  Banks and investment firms have taken $312 billion in write downs thus far and “there’s going to be more pain,” .

RealShare reported today that the sixth annual RealShare Net Conference that sale-leasebacks will increase due to the slow economy.  Panelist on the Town Hall Meeting titled, “State of the Net Lease Market,” made many predictions going forward:

1. “We will see a return to fundamentals with strong tenants and strong locations,” said Andrew Kroll, a director of the investment banking group at SunTrust Equity Funding. ”

2. Robert Micera, SVP and national head of net lease investments at First Industrial Realty Trust, noted that “the slower the economy, the more sale-leasebacks pick up, so I think you will see more opportunities going forward.”

3.  Lorissa Belova, a VP at Lexington Realty Trust, said that, “looking ahead one year from now, I still don’t thing we are going to be smiling. I think we will be the same.”

4. Robert Micera, also said, ”that cap rates will creep up and those who have resources will get things done.

Additionally, The Dallas Morning News reported today that J.C Penny Co. CEO Myron Ullman predicted 10 to 20 retail chains will fail before the ecomony turns around.

Finally, Bloomberg reported that Sam Zell chairman of Equity Residential said,“I believe the overall market has already started to ease,” and that   “Is it in large volumes? No. Is it the first natural step in the evolution? Yes.”

 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.

The Texas Property Tax 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 of those filings.

·        Notices of appraised value 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 jurisdiction adopted 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

Yesterday both the Dallas Morning News and Dallas Business Journal ran articles about the “Margin Tax.”  This tax is assessed to business owners and who will be remitting their first payments within 30 days.  Companies are complaining that the tax is unfair for various reasons.  I believe businesses  assessed by this tax would agree it is a corporate income tax which is prohibited by the Texas Constitution.  I am sure lobbyist for Texas business interest will lobby the Legislature next session to address issues which have arisen with this new tax.

I believe the larger question which needs to be addressed is how do we in Texas continue to become less dependant on property taxes to produce revenue for county, cities and school districts.  There is currently a group which is pushing a plan to use sales tax to replace property taxes.  On the surface that seems to me to be great idea if the state wants a recessive tax and wants to create black markets to avoid increased sales taxes. 

I think we as Texans should examine all state and local taxes (SALT) to provide more revenue.  When one examines all fifty states we find that Texas actually ranks low in comparison to the other states in its SALT.  Another group has been and continues to call for a cap all property tax real estate values as was done in California under Proposition 13.  This resulted in drastic cut back in local jurisdictions abilities to provide goods and services,  not to mention the effect it would have on municipal bond holders.  Additionally, it transfered local control of revenue to the State of California. 

If we Texans really want to reduce property taxes I believe the answer lies in increasing other SALT taxes and local fees for goods and services.   The voters would need to decide if the alternative of paying increased SALT and fees would be more palatable than paying ever increasing property taxes.  Or we Texans could created a state income tax which would effectively cut property tax rates in half.  This would require a constitutional amendment and would in my opinion be resit-ted by all taxpayers.  Additionally, it would result in more control by the state in local county, city and school issues and operations.

The Texas Legislature during the 2006 Special Session passed and phased in a school tax rate reduction over 2006 and 2007.   It sounds good except that real estate values increased significantly in 2006 and 2007, which translated into higher taxable values.  Homeowners were somewhat protected by a cap of 10% on their taxable values, which commercial property owners do not have.  This would account for the fact that businesses pay the majority of property taxes paid in Texas.   Everyone knows that the legislature would not cut the school tax rates without creating a new source of revenue to replace it which they did.  Business owners are now preparing to pay  their tax bills created by the new “Margin Tax.”  The Margin Tax is in fact a state corporate income tax which replaced the old Texas Franchise Tax.  In-short, Texas businesses paid for the 2006-2007 school tax rate reductions.

So what happens now?  As I have stated in earlier blogs homeowners will probably receive tax relief in 2008 based on the fact that the “Sub-Prime Crisis”,which has been well publicized has created a terrible residential market which has left homeowners watching the value of their homes decrease.  Commercial property taxpayers will not be as lucky.  I believe that generally speaking appraisal district will not giving relief to commercial real estate owners because their crisis has not been well publicized by the media.  If you were to ask a professional in commercial real estate about their industry I believe you would find that their environment has changed dramatically since late 2006.   Additionally, appriasal districts tend to be behind the curve when markets change.

The answer for commercial property taxpayers in 2008  should be in my opinion to state the obvious in their 2008 property tax appeals. 

1. We are in a recession.

2. We are in the middle of a credit crisis.

3. The days of unprecedented appreciation growth in commercial real estate value are over. 

4. Real estate is tried to the economy and-so as goes the economy so goes the value of real estate.

5. Present a well documented professional assessment of the value of you commcial property using sales comparables, income data, cost data and a equity study of the assessments comparable properties.

In an interview today on Bloomberg, Phil Dow, Director of Equity Strategy, RBC Rauscher discussed his view of the credit crisis.  He stated that in his opinion Wall Street investment banks had addressed their loses in the sub-prime crisis and would probably regroup and turn-the-corner.  However he was not so optimistic in his predictions of the future of commercial banks.   He discussed the perception that loses on commercial real estate loans could cause bank failures.  This is something the FDIC has already predicted.  Additionally, he said that Wall Street is not sure which specific category of  commercial real estate will generate these loses.

I found the comparisons listed below very interesting.  There are several efficiency comparisons which can be made between the five appraisal districts.  I found Harris County to be the most surprising. 

Just as corporations have boards of directors, so to do appraisal districts.   The major difference between a private sector board and an appraisal district is that politicians, assessors and /or ex-technocrats make up their boards.   There has been proposed legislation which would seat non-political taxpayer representatives on the board of directors of appraisal districts. 

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.