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Property
Tax Appeal Issues
By
Paul Pennington
Prepared
for the 2002 T.A.P.T.P Annual Convention
Assessment
Date: Why is the assessment date of January 1 important?
The
facts of the appeal:
The
appeal involved an upscale high rise apartment complex, which
had not reached stabilized occupancy after a year and a half.
The apprasial district staff and I agreed that the project's
construction cost would be the best way to value the subject
property. An agreement was reached but not executed, awaiting
the property owner's approval. Shortly thereafter the owner
approved agreed upon valuation. The district however decided
to decline any written settlement statement based on the fact
that they discovered the subject property had been placed
under contract to sell as reported in the May issue of a local
business journal. The property owner confirmed that the property
had gone under contract after January 1, 2002, but had not
closed. Further, the closing date had been pushed back several
times and it seemed most likely the soonest the property would
close would be in late June or early July 2002. The district
staff stated that they would recommend to the Appraisal Review
Board (ARB) the original proposed value of approximately $91
million rather than the project's cost of approximately $79
million.
The
issues involved in the appeal were as follows:
- The
proposed buyer intended to change the use of the subject
property from a 600-unit apartment complex to a 600-unit
condominium complex.
- There
had been a previous offer in 2001 from a very large national
multi-family company, which had offered to purchase the
subject for approximately $72 million, but had not been
accepted by the owner. However, on the surface, the offer
suggested that the subject's market value might have been
something less than its construction cost during tax year
2001. This point raises the Principle of Substitution, that
is to say, the price to purchase the land site and construct
the improvements of a property based on the cost approach
versus, would a knowledgeable buyer purchase an existing
property of equal utility based on the sales comparable
approach.
- After
consultation with the property owner and their attorney,
it was agreed that all of the issues should be brought to
the attention of the ARB. However, the overriding issue
was to be valuing the property "as is" as of the
assessment date of January 1, 2002. To support our position
to the ARB, the following points from the Texas Property
Tax Code, court cases, The Twelfth Addition of the Appraisal
of Real Estate, and USPAP were used:
- The
Texas Property Tax Code Section 23.01 states that; "Except
as otherwise provided by this chapter, all taxable property
is appraised at its market value as of January 1."
The Code is effectively saying that the appraisal district
must take a snapshot of a property as of January 1 and
determine its market value at that point in time. This
is noteworthy because questions regarding contracts, leases,
and sales should not be considered after the first of
the year.
- "Except
as statutorily provided, circumstances occurring after
January 1 cannot be taken into account for property tax
purposes." City of Heath v King.
"We
must note that property should be assessed at its value
as of January 1st, and that circumstances developing
or taking place subsequent to January 1st cannot
be considered." -Lo-Vaca Gathing Co. v Matagorda
County
- The
Appraisal of Real Estate, Twelfth Edition, "Date
of the Opinion of Value," states that; "The
date of the opinion of value must be specified because
the forces that influence real property value are constantly
changing. Although conditions observed at the time of
the appraisal may persist for a considerable time after
that date, an opinion of value is considered valid for
only the exact date specified."
- USPAP
Statement of Retrospective Value Opinions states that;
"In the absence of evidence in the market that data
subsequent to the effective date were consistent with
and confirmed market expectations as of the effective
date, the effective date should be used as the cut-off
date for data considered by the appraiser."
During
the ARB hearing the staff continually asked for the contract
price being offered on the subject property, which in fact
was approximately $91 million. The property owner's attorney
stated that a contract price entered into after the assessment
date was not relevant. Further, pointing out that it was unfair
to hold a property at a higher value strictly based on the
fact that it might sell at some point during 2002. Rather
the relevant issue was, what were the existing facts as of
the assessment date. Both the staff and the consultant had
agreed that based on the property's poor performance the project's
cost was the best indication of value.
The
ARB agreed and the value was lowered to the project's construction
cost of approximately $79 million.
Arguing
that a recent purchase price is not the correct market value.
(Fair and Equal Treatment)
The
issues involved in the appeal were as follows:
In
March of 2001 a Dallas metroplex multi-family property was
purchased for $20 million. Investors assumed that the operating
expenses would remain relatively the same after the purchase
date of the subject. The appraisal district picked up the
deed activity and raised the subject's value from approximately
$18 million to $20 million. Additionally, the owner failed
to protest the property timely and was forced to file late
appeals based on Section 41.411 of the Texas Property Tax
Code for failure to deliver notice to the new owner. This
appeal was denied by the ARB. A second appeal was filed under
Section 25.25(d) to correct an error to the appraisal roll
based on our opinion that the subject was over-valued by more
than one third. The ARB granted a hearing based on the second
motion. The owner and consultant decided to pursue the appeal
based on Section 41.43, Protest of Inequality of Appraisal.
The ARB granted the hearing based on the aforementioned motion.
There
were several issues involved in the appeal:
- They
had anticipated the Net Operating Income (NOI) was $1,822,128,
however, the taxes from an increased 2001 valuation would
result in an NOI of $1,670,704. The subject was purchased
on an overall capitalization rate (cap rate) of 9.11%. However,
if the 9.11% cap were used on the actual NOI the value generated
from this calculation would indicate a value of $18,339,231.
- Can
an increased tax burden affect the market value of a property?
We contended it could and according to a recent issue of
Tierra Grande, Journal of the Real Estate Center at Texas
A&M University, our opinion was confirmed. The article
titled "Property Tax Increases Hit Home" by Charles
E. Gilliland, indicates that growing property taxes are
having an effect, "In the long run, competitive pressures
limit an owner's ability to pass the tax to the end users..Despite
that appearance, markets for investment capital again return
the tax burden to the property owner. Investors consider
the return an investment will generate before they commit
capital. Property owners selling real estate must lower
the asking price to compensate for the added tax burden."
- Finally,
the appraisal district apparently was involved in "sales
chasing", based on the fact the value of the subject
was increased due to deed activity and that competing comparable
properties were not raised in value for tax year 2001. An
appraisal was commissioned by the owner and consultant to
determine the correct 2001 value on the subject based on
Section 41.43, Protest of Inequality of Appraisal. Said
appraisal indicated a fair and equitable value of $16,255,396.
The
ARB considered all of the issues noted above and ruled to
sustain the district's value of $20 million. The ARB ruling
was appealed to district court and the 2001 appraised value
was reduced to $17,350,000, based on all of the issues raised
above.
Appealing
Low Income Multi-Family Tax Credit Properties.
The
facts of the appeal:
The
subject property is a newly constructed low income tax credit
multi-family property, which provides affordable housing to
qualified persons for senior assisted living. By agreement,
the owner was required to have a non-profit partner that provides
social services to the tenants. The subject was allocated
low-income housing tax credits. These credits were first authorized
by The Low Income Housing Tax Credit Program (LIHTC), created
by the Tax Reform Act of 1986, and made permanent by the August
1993 tax legislation as contained in Internal Revenue Code
Section 42.
Tax
credits are simply an avenue for the private sector to purchase
ten years of tax credits to reduce an investor's federal income
tax liability at a discounted price. The capital raised by
the sale of tax credits are converted into equity thus resulting
in less debt and more affordable rents on LIHTC properties.
Without raising of the tax credit capital funds to fill the
gap between the loan and equity gap, tax credit properties
would not be built.
The
guidelines for the subject property require that 100% of a
property's units be occupied by households whose annual earnings
do not exceed 60% of the area median income, as determined
by HUD. Furthermore, the owner must enter into an agreement
with a non-profit partner to provide social services to the
tenants. If, at the end of the 15-year deed restricted period,
the property owner decides to sell the subject, they must
offer the right of first refusal to the non-profit partner.
The purchase price would be one dollar over the amount of
outstanding debt on the subject.
The
issues involved in the appeal were as follows:
- The
district's proposed valuation of $16,636,650 failed to recognize
the subject as a deed restricted tax credit multi-family
complex. The district ignored Section 23.21 (Property Used
to Provide Affordable Housing). "In appraising real
property that is rented or leased to a low-income individual
or family meeting income-eligibility standards established
by the owner of the property under regulations or restrictions
limiting to a percentage of the individual's or the family's
income the amount that the individual or family may be required
to pay for the rental or lease of the property, the chief
appraiser shall take into account the extent to which that
use and limitation reduce the market value of the property."
- The
property owner agreed to commission a fee appraisal to establish
the market value of the subject as of January 1, 2002. The
appraisal report concluded that the market value of the
subject was $6,475,000 as of the assessment date.
- The
subject property did not have a stabilized income as of
the first of the year as it was still in a lease-up phase.
The
ARB was informed of all of the aforementioned issues and accepted
the staff's recommendation to value the property at $7,000,000,
which was the indicated stabilized value estimated in the
appraisal report. The ARB decision has been appealed to district
court for tax year 2002 based on the fact that the ruling
was based on a future value and not the market value indicated
in the appraisal as of January 1, 2002.