FEATURE ARTICLE, JULY 2008

CUTTING THROUGH THE RED TAPE OF APPRAISALS
With a little information on the appraisal process, you can save lots on your property taxes.
Mark O’Briant and Rowan Sbaiti

O’Briant

With the list of current economic woes: the credit crunch, increased foreclosures, stable to decreasing home prices, increasing inventories, and soaring oil and gas prices, cash is tight, and property taxes, the largest expense for real estate owners in Texas, becomes all the more important. Understanding real estate taxes is key in maintaining your investment and ensuring long-term stability. Your tax expense is calculated by dividing the assessed value (determined by the county in which your property resides) by 100 and then multiplying it by the appropriate tax rates. Being educated about the activities of your taxing entities is important to understanding your property taxes and determining if you are being taxed unfairly.

Real estate in Texas typically gets taxed by three main entities: the county, which generally includes a hospital and community college system; the city; and an independent school district (ISD). Sometimes there may be a fourth, special district, such as a design or flood zone. In Houston, overall property tax rates have decreased 11.75 percent from 2004 to 2007, while in Dallas, overall tax rates fell 14.26 percent in the same period. The most substantial decline in tax rates for that period was in Austin and San Antonio, the tax rates falling 15.87 percent and 17.32 percent, respectively.

Sbaiti

This may lead one to ask, if tax rates are going down, why is my bill going up? The reason for this is that the property’s assessed value has increased, quite substantially in some cases. Consider that in Dallas County the average taxable value for commercial properties increased 32.7 percent from 2003 to 2007. From 1999 to 2007 average residential taxable value increased 75.3 percent, compared with 24 percent inflation for the same period.

New construction notwithstanding, 10 zip codes in Harris County saw commercial taxable values jump over 50 percent, and the average increase was 34 percent across the county from 2007 to 2008. The resulting tax bill may force some property owners to borrow against their equity in order to pay their bill, while others may have to go into foreclosure because they cannot afford the increase.

If you or your company owns commercial property, chances are that budgeting for next year’s property tax expense may be difficult. In Texas, commercial property may be re-appraised every year, and increases to the assessed value are not limited. The county appraisal districts are responsible for estimating the assessed values, typically through a mass appraisal system. Texas is a non-disclosure state (sale prices in a real estate transaction are not required to be reported), which requires the county appraisal districts to be more diligent in their research efforts to support the estimated assessments.

Texas state law requires that residential properties be reassessed at least every 3 years; the homestead cap on increases in assessed value is 10 percent per year or 30 percent over 3 years. This can quickly add up to a significant sum. Imagine that a couple buys a home in the city of Dallas in 1999 for $150,000. That year they would have paid $3,863 in taxes. Now imagine their house is reassessed at the maximum increase, 110 percent of value, every year through 2007. Their home’s assessed value would be $321,538, yielding a tax bill of $8,086 in 2007, marking a 109 percent increase in just 8 years. Compare this with the 24 percent inflation rate previously stated for that same period.

So where are your real estate taxes going? Budgetary spending for the taxing entities grows every year due to new programs, increased spending, better benefit packages and the like. Property taxes make up a substantial portion of the revenues generated for the county, city and ISDs. In fiscal year 2008, property taxes are estimated to make up 46.63 percent of the required revenue to operate the city of Houston. Property taxes make up about 66 percent of revenues for the Dallas ISD, and property taxes for fiscal year 2008 in Harris County are estimated to account for 67 percent of revenues. At the city and county levels, these revenues are put into a general fund where they are then divided between maintenance and operations (M&O) and debt service funds, M&O taking the bulk of the funds. The M&O money goes to departments such as law enforcement and the justice system, public safety, administration, development and maintenance services, human services and the taxation department. The revenue allocated to the debt service side is used to retire debt and also is joined with bond revenues to help securitize them. At the ISD level, the money goes to instructor salaries, school administration and staff salaries, textbooks, support staff wages, employee benefits and facility maintenance.

Texas state law provides that you may protest your assessed value to the Appraisal Review Board (ARB) for any of the reasons found in section 41.41 of the Texas Property Tax Code or on your local appraisal district’s website. Paying attention to your tax assessments, taxing entity’s planned spending, and protesting unfair estimations can save you a great deal of time and money, helping to ensure your investment’s stability through the current economic times and into the future.

Mark O’Briant is president, MAI, of Henry S. Miller (HSM) Multi-Management and HSM Consulting. Rowan Sbaiti is a real estate analyst with HSM Multi-Management.

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