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Another item for the city’s legislative wish list

Loren Steffy brings up a familiar issue that has added salience now as the city tries to deal with its long term finances.

Across the city, prime office buildings are selling for far more than their tax values, leaving billions in potential tax revenue on the table at a time when city and county budgets are stretched. It’s almost as if there’s two sets of books: one for the buyers and sellers, and one for the tax man.

A random sample of more than 40 office buildings that sold in the past five years found 2011 appraisals trailing market value by about 40 percent, or more than $1.6 billion in unrecognized taxable value.

“It’s been going on for several years and it’s gotten steadily worse,” said Jim Robinson, the chief appraiser for the Harris County Appraisal District. “We’ve gotten so far away from the concept of market value.”

Unlike residential appraisals, which are adjusted to reflect sales prices, state law requires that appraisal districts value commercial properties based on what’s known as a fee-simple appraisal. That means they must consider the physical building and the surrounding area, and then assign a value based on average sales prices and occupancy rates, but they aren’t allowed to consider many of the intangibles that factor into sales prices. In other words, appraisers can’t use the same criteria in valuing a property that the market uses.

HCAD’s average occupancy rate for the hottest segments of the market – the Central Business District, the Galleria area and the Energy Corridor – was 93 percent last year for the newest buildings or those with the most modern amenities. The average rental rate for downtown was $28 a square foot a year; slightly higher for the Energy Corridor and slightly lower for the Galleria area, according to HCAD.

When a building is sold, though, other intangibles – if it’s fully leased or has one major tenant on a long-term lease, for example – can attract a higher market price.

“We can’t take into consideration the actual leases an individual property may have,” said Guy Griscom, HCAD’s assistant chief appraiser for commercial properties.

Steffy cites the sale last year of Heritage Plaza as an example. Its sale price was $322 million but its 2011 appraisal was for only $211 million. I’ve discussed this issue before. Steffy is quite right to point out that the city, the county, and the school districts all could have a lot more revenue right now than they currently do, if only properties like these could be appraised accurately. State Rep. Mike Villarreal has been a legislative proponent of sale price disclosure, which would help with commercial properties as well as for high end residences. The phrase “fee-simple appraisals” is one I don’t recall hearing before, but it’s clearly a big part of the problem as well. I point out stuff like this because I want to emphasize that the city’s financial situation has many facets. There’s been a lot of focus on the pension issue – it’s practically an obsession for some – but all that attention in one place distracts from the fact that there are other dimensions to the city’s financial situation, and we should avoid being myopic lest we wind up with distorted solutions.

Now that Steffy has pointed out this problem, the question that was left unanswered in his column was how big the effect of it is. His property survey showed that there’s quite a bit of market value being left unaccounted for, but how much actual tax revenue does that translate to? Going by the rates on the Tax Assessor’s property tax page, I calculated that Houston, Harris County, and HISD lost the following, based on Steffy’s 40-property survey and the $1.65 billion in under-valuation he found:

Houston – $10,539,375
Harris County – $6,454,305
HISD – $19,085,550

That’s not nothing, especially when you consider it’s only 40 or so properties. The real total may be quite a bit more than that, and given that this is an annual payment, it adds up quickly. Now it’s true that this can go both ways, though I rather doubt there’s all that much over-valuation, and it’s true that this by itself would not be enough to fix the budget issues these entities have faced the last couple of years. It’s still a factor, and it needs to be a key part of the discussion. This isn’t just a Houston problem – every city, county, and school district in the state is potentially losing out. The city needs legislative help to deal with the pension issue anyway. We should be pushing for reform to the appraisal process as part of the solution. A few million here, a few million there, and maybe we can obsess just a little bit less about pension costs.

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