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Compromise property tax appraisal bill signed

It’s better than nothing, though not by that much.

Gov. Greg Abbott has signed a bill that partially closes a loophole that allowed a powerful oil company to take back millions in tax dollars from Houston-area school districts while draining hundreds of millions more from local government coffers.

The measure that won final approval, HB 2083, from the Republican-controlled Legislature doesn’t go nearly as far in reforming the law as the Legislative Budget Board wanted. The board noted earlier this year that the law is costing the state $70 million to $80 million a year because Texas has to help maintain a certain level of funding at school districts, which are having to repay companies winning court cases based on a 1997 amendment to the state’s tax law.

When the measure takes effect in January next year, though, companies for the first time will be forced to use generally accepted appraisal methods in court cases challenging assessed values under the 18-year-old “equal and uniform” clause of the tax law.

The bill was pushed by county appraisal districts, who complained that often questionable methods were being used during tax appeals to arrive at appraisal values, said Charles Gilliland, a research economist at Texas A&M’s Real Estate Center at College Station.

“I think it will have some effect on it. How much … depends on how much unconscionable activity has been going on,” Gilliland said.

The new standard could give an advantage to appraisal districts, he said. “If they see the numbers being cooked, it gives them ammunition to raise that issue without going to district court,” Gilliland said.

The tax code section at issue gained attention after the Valero oil company forced the Port Arthur school district to refund about $30 million in taxes and other fees, and the Texas City school district about $5 million.

“I think the law was so bad that anything they could do was an improvement,” said Harris County chief appraiser Sands Stiefer, whose county school districts lost $685 million from 2011 to 2014 because of the loophole.

Stiefer, who took part in negotiations over the bill, said the measure leaves much to be desired. He said the issue will be revisited next legislative session. “We would like to see more done,” he said.

See here for the background, and here for a reminder of just how badly the current system is rigged. This bill will help a little, and that’s a good thing. Real Value$ for Texas calls it a “step forward”. I would agree with that and I appreciate the hard work they did to get that step forward taken. My concern is that now that we have taken this step, the perception in Austin will be that the problem is solved, and there will be no appetite to do anything further. I hope I’m wrong and that this is indeed just a first step. Be that as it may, I’m glad to see us get this far. It will make things a little fairer, and that’s never bad news.

How the appraisal game is rigged

The Observer tells the tale of how we got to where we are with the appraisal process and how easy it is for the big boys to get their taxes drastically reduced.

BagOfMoney

At the heart of Valero’s lawsuits in Moore County was a complicated question: What is a refinery worth? For that matter, what is any property worth?

Since most litigation against appraisal districts settles out of court, juries rarely get to answer that question. But that’s what a Galveston jury did in 2013 when it lowered the tax value of Valero’s Texas City refinery from $527 million to $337 million, though Valero had agreed to the higher number only two years before. A local jury, in a town far from rich, sided with the world’s largest independent refiner in its perennial quest to drastically cut the taxes it owes to public schools and local governments.

Appraisal district officials across Texas were flabbergasted. Refineries are a complicated, opaque business, and the technical testimony took a whole mind-numbing week—“a battle of experts,” said Ken Wright, the chief appraiser for the Galveston Central Appraisal District. Yet members of the jury took only four hours to decide in Valero’s favor. It proved what every trial lawyer knows, that the battle is almost always won by the side that not only tells its story best, but has the simplest story to tell. “It’s taken me many years to figure this out,” said a rueful Wright, who is retiring this year.

The story, Valero’s whole case, depended on a one-sentence amendment to the property tax code that whisked through the Legislature in 1997. The details of how that happened are hazy—the legislator who introduced the amendment died years ago—but the man who wrote it is a respected Austin tax attorney, Jim Popp. His firm, Popp Hutcheson, has represented some of the most prominent plaintiffs in lawsuits against appraisal districts, among them Western Refining, the JW Marriott hotels, H-E-B, Walgreens, the Formula 1 racetrack in Austin and Valero.

There are basically two ways to challenge a tax appraisal—on value and on unequal appraisal. The first claims that a property has been appraised above market value. The second claims that while a property may be appraised at market value, others like it are appraised for much less. Before 1997, an unequal appraisal claim required an expensive property analysis called a ratio study, and it was seldom used.

Popp’s amendment created an easier, cheaper way to claim unequal appraisal and gain an automatic reduction in value—so easy that it is now routinely used in tax protests and dominates big-ticket litigation. You simply select a “reasonable” number of “comparable” properties (available on the appraisal district’s website), adjust their values up or down (your house has a swimming pool, mine doesn’t) and find the median—the middle number on the list. What’s reasonable or comparable isn’t spelled out. Market value is beside the point. If your valuation is higher than the median, it gets lowered to that number. The amendment is now called the equity statute, or simply “equal and uniform,” echoing the Texas Constitution’s dictum that taxation be “equal and uniform.”

David Hugin, a Popp Hutcheson lawyer, argued the case in Galveston. Fairness was the theme: The appraisal district had wronged Valero by overvaluing its refinery, and the law showed the jury exactly how to set things right. It produced a breathtakingly simple answer to the vexing question of worth.

All the jury had to do was look at the comparables, the other two refineries in Galveston County—Marathon’s little 84,000-barrel-per-day plant, which processes only light sweet crude oil, and BP’s 451,000-barrel-per-day behemoth (now also owned by Marathon), which runs all kinds of crude oil, sprawls over 1,200 acres and is one of the largest, most complex refineries in the U.S. It had been appraised for $800 million more than the smaller refinery. “They are massively different,” said Wright. “Like comparing a corner grocery to a Kroger’s.”

Read the whole thing. If your blood isn’t boiling by the end of it at the ease with which the lucky few can screw the rest of us, you’re probably one of the lucky ones making a killing off of this. The Legislature could of course fix this, but we all know what the odds of that are. In the meantime, cities, counties, school districts, hospital districts, and ordinary homeowners are all getting squeezed.

Collier hits the road

Talking taxes, and our state’s screwed-up appraisal process.

Mike Collier

Mike Collier

With about as many local candidates as voters in attendance, the Travis County Democratic Party hosted a “town hall” on property tax reform Friday morning, where everybody agreed with would-be County Commissioner (Precinct 2) Brigid Shea: “The appraisal process is broken.” To fix it – in the current state political climate – will take some doing.

The event, introduced by TCDP Executive Director J.D. Gins, was headlined by Shea and Mike Collier, candidate for state Comptroller, who each spoke briefly and then responded to audience questions. Among the several dozen attendees, Newsdesk counted at least a dozen local candidates – most of them for Austin’s fall City Council elections – and among them likely County Judge Sarah Eckhardt, who took the mic for a moment to rattle off some estimates of the financial benefits to county homeowners of substantial tax reform. The forum was also webcast across the state; Shea introduced a brief video produced by Real Values for Texas, a new statewide coalition “taking action to expose the impact of our state’s broken property tax system on homeowners, kids, and local communities.”

The gist of the problem, reiterated Collier and Shea, is that the property tax appraisal system has been allowed to become radically inequitable – even unconstitutional, said Collier. Under the Texas Constitution, properties are required to be assessed at market value for taxation purposes. For individual homeowners, said Collier, that’s mostly what happens; but big industrial and commercial property owners have managed, over the years, by various mechanisms – e.g., limiting exposure, concealing sales prices, and using greater resources to appeal – to be taxed at much lower valuations.

According to Real Values for Texas, the result is a system that, statewide, taxes major commercial and industrial properties at roughly 60% of market value, thereby moving much of that additional burden onto residential homeowners. Shea said that during her campaign visits, the subject is on everyone’s lips (especially in Travis County, where property values continue to surge). “It is hurting people all across our state,” Shea said, “literally driving people out of their homes.”

Collier noted that statewide, the problem must be addressed by the Legislature, which has largely relied on across-the-board spending cuts – especially to public schools – instead of attempting to make the system more equitable. He recommended three basic fixes: 1) tightening the definition of capital property; 2) requiring some form of sale price disclosure (as is required in 46 states); 3) addressing the imbalance in “negotiating power.” Commercial property owners, he pointed out, not only have teams of lawyers to appeal their valuations, but also, if they should win a lawsuit, the appraisal districts must pay any legal costs (not so in reverse). As a result, appraisal officials are motivated to capitulate rather than risk losing contested appeals.

Collier acknowledged that substantial reform will require legislative action, but the comptroller has a “voice, and the data,” to press the Legislature to comprehend the problem and restore equity to the system. He said that the Republican Party in Texas has become the spokesman and representative of big business, and “small businesses need at least one comptroller.” Rather than think first about the needs of big business, he added, state officials need to consider, in order, the needs of “homeowners, consumers, small business, and then big business.”

We’ve talked about this before, and you know how I feel about it. I’m glad to see Collier out and about talking about this – he’s on a two-week statewide tour, including a stop in Atascocita today, to discuss the issue. If he can get his message out, he can put himself in a position to win.

Harris County threatens to sue Harris County Appraisal District

That headline may sound dry, but this is a big deal.

HCAD

Worried about the erosion of the tax base, county officials said Wednesday that they may consider suing the Harris County Appraisal District over concerns it is undervaluing certain business properties at the expense of homeowners.

Officials said HCAD’s Appraisal Review Board in recent years has agreed to set values for commercial and industrial properties that are far below what those properties later sell for, suggesting the independently governed agency did not adequately fight property owners who challenged their appraisals in court.

Commissioners Court on Wednesday took the unprecedented step of agreeing to hire independent appraisers to double-check HCAD’s valuations of business properties. Court members said they would take the appraisal district to court, if necessary, but suggested their action was meant more as a warning to the agency or the Texas Legislature.

“They haven’t been pushing to get these appraisals done the way they should have on some of these major buildings,” said Precinct 3 Commissioner Steve Radack, who placed the item to hire independent appraisers on Wednesday’s agenda. “I think they need to be shook up and understand that they have a very important job to do and not bow down to pressure from people that, you know, hire big guns to get their taxes lowered on buildings, some of which are clearly more valuable than their appraisals.”

[…]

Commissioners Court wants independent appraisers to closely monitor the appraisal process this year, and for the county attorney to be prepared to challenge the results, if the court deems it necessary. Any challenge must be filed within 15 days of HCAD submitting preliminary property values to the Appraisal Review Board, which typically occurs in mid-May.

The Houston Press had a cover story last year about large commercial properties getting lowball appraisals that were costing the county millions in revenue, and before that former Chron business columnist Loren Steffy covered the topic with the specific example of the Williams Tower, which anyone over 35 still thinks of as a the Transco Tower. The issue has been known for a long time, but this is the first time that the county has taken direct action about it. It’s interesting that it comes at a time when real estate is hot and revenues are rising – we sure could have used some of that lost revenue a few years ago when the bottom fell out of the market and everyone that depended on property tax revenues had to cut the hell out of their budgets – but the concern for the longer term is valid and pressing. The response from HCAD is less than convincing to me.

HCAD Chief Appraiser Sands Stiefer defended the settlement process, and predicted the county’s venture would not result in a lawsuit. He said HCAD has implemented changes since he started last June to ensure “that nobody gets away with something unfair” during litigation.

For example, if a proposed settlement exceeds a certain percentage in value, Stiefer said it must be “discussed with me before it is finalized.” Appraisers also must submit formal reports on the settlements before a final agreement is made, he said.

“It’s absolutely untrue that we are giving away the store in that settlement process,” he said, noting that Houston’s hot real estate market means that market values often change rapidly, especially for certain commercial properties.

Sales prices also do not have to be disclosed, which Stiefer described as a “roadblock.”

I agree that sales price disclosure is an issue, but if this is the process to ensure accurate appraisals, it seems lacking to me. Not to be insulting, but what assurance do we have that the head guy isn’t in the same tank as everyone else? Given the track record to date, having a fresh set of eyes on the process sounds like a good idea to me.

Appraisal district critics such as George Scott, who worked for HCAD as a spokesman until 2012, applauded the county’s action Wednesday, saying it would enable it to make a strong case to the Legislature in 2015 for changes to improve the appraisal process for business properties and potentially encourage HCAD to better defend market values.

“It is a powerful, powerful step to tell the Harris County Appraisal District that everything that transpires is now going to be high, high, high on the radar,” Scott said.

Scott’s blog is here, and while he covers a variety of topics these days, HCAD is still his main hobbyhorse. See here and here for a couple of examples. I don’t think anyone believes this matter will actually wind up in court. Radack et al are seeking leverage to get HCAD to change how it does things. I think they’ll win in the end, but it may get messy along the way. I suspect other large urban counties will be keeping a close eye on this as well, and of course other entities within Harris County – Houston and all the other cities, HISD and all the other school districts, HCC and Lone Star College, etc – are affected by this and may want a piece of the legal action if it comes to that. I’m sure we’ll be hearing quite a bit more about this in the next few months.

On HCAD and rigging the system

This Houston Press cover story on the Harris County Appraisal District is provocative, to say the least.

HCAD

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 thesis of the story, which is worth your time to read, is that HCAD rigs the appraisal process to over-value low-end houses, while big dollar office towers routinely knock millions off their assessments via the appeals process; they also win a greater percentage of their appeals than homeowners. All of this shifts a lot of the tax burden for Houston, Harris County, HISD, and other taxing entities from the high end to the low. HCAD blames the Legislature for tying their hands on commercial appraisals; having discussed this issue before, I have some sympathy for that argument. I don’t have enough information to evaluate the claim about screwing homeowners – I wish that the Press had published the data they collected during their months-long investigation so we could play with the numbers ourselves. Whatever the case, I don’t expect to see a sales price disclosure bill to get passed out of the Lege, so nothing will change anytime soon. Anyway, read the story and see what you think, then go visit George Scott’s blog for more.

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.

Property values declining

I have three things to say about this.

The housing slump that has battered much of the country for two years finally has trickled down to Harris County, where residential property values have declined or stagnated for the first time since the oil bust of the 1980s, the county’s top appraiser said Friday.

Nearly half of homeowners saw their property values decline this year, while a third saw no movement, Harris County Appraisal District chief appraiser Jim Robinson said. Just under 20 percent of properties increased in value, mostly in neighborhoods featuring homes worth more than $500,000.

HCAD has finished appraising 860,000 of the county’s approximately 1 million homes, and homeowners’ value notices should begin arriving in mailboxes in the next few days, Robinson said. The district will spend the next two weeks appraising the remaining homes, mostly new construction and properties damaged by Hurricane Ike.

The total value of the 860,000 homes that have been assessed has declined by about 2.5 percent from last year, Robinson said.

It will be difficult to determine how the sputtering real estate market will affect local governments, which rely heavily on property taxes to fund operations, until all residential and commercial appraisals are completed. Robinson said his office is reporting declining values for many commercial properties after years of soaring appraisals.

“I think there will be some jurisdictions, perhaps a significant number, that will see their tax base less than it was in 2008,” Robinson said.

A decline could force budget cuts or tax rate hikes by some local government entities that have watched their tax revenue grow steadily in recent years.

But local leaders said they have assumed a slowdown was imminent and budgeted accordingly.

1. In a sane world, this would move the biennial crusade for appraisal caps to the back burner. In the world we live in, where there are Republican primaries to be won, I’m not so sure. I must admit, between voter ID and the stimulus, most other agenda items have gotten drowned out to some extent. I haven’t heard much at all about appraisal caps lately. I just think that’s temporary, and not indicative of anything.

2. By the same token, this will probably make it even more difficult to pass sales price disclosure legislation, which is intended to ensure that commercial and high-end residential properties are appraised fairly and accurately. Not that such legislation was likely to pass anyway,

3. This is another reason why federal stimulus money is so important. It can and will help local governments bridge their budget deficits in ways that will let them avoid making the kinds of cuts that would greatly exacerbate the effects of the downturn; specifically, it will help them not have to lay people off. The fewer people that lose their jobs, and the more that feel confident they won’t lose their jobs, the better for the economy.