Appealing Property Taxes For Apartment Investors

Property taxes are one of the most significant line item costs incurred by apartment owners. However, many owners do not appeal effectively. Even though owners realize that property taxes can be managed and reduced through an appeal, some view taxes as an arbitrary estimate provided by the government which can’t effectively be appealed. It tends to boil down to the adage, “You can’t fight city hall.” While the process varies from state to state, and you should understand your local jurisdiction rules, the following general guidelines usually apply.

Fortunately, the property tax appeal process provides owners multiple opportunities to appeal. Handled either directly by the owner or by a property tax consultant, this process should involve an intense effort to appeal and minimize property taxes annually. Reducing the most considerable line-item expense has a significant effect in reducing the owner’s overall operating expenses. While it is impossible to escape the burden of paying property taxes entirely, it is possible to reduce taxes sharply, often by 25% to 50%.

Why some owners don’t appeal

Some property owners don’t appeal because they either don’t understand the process or don’t understand that there is a reasonable probability of achieving meaningful reductions in property taxes. Some owners believe that since the market value of their property exceeds the assessed value, then it is not possible to appeal and reduce the property taxes. Although appeals on the unequal appraisal are relatively new, there is a clear-cut way to appeal property taxes at the administrative hearing level based on unequal appraisal. Unequal appraisal occurs when the property is assessed inconsistently with neighboring or comparable properties. Also, some owners are reluctant to hire a property tax consultant, even though many consultants will work on a contingent fee basis. There is no cost to the owner unless property taxes for the current year are reduced.

Overview of the appeal process

The following are the primary steps in the annual process for appealing property taxes:

• Request notice of accessed value
• File an appeal
• Prepare for hearing

.               Review records

.               Review market value appeal

.               Review unequal appraisal appeal

• Set negotiating perimeters
• Administrative hearings
• Decide whether binding arbitration or judicial appeals are warranted
• Pay taxes timely

Requesting a notice of assessed value

Owners benefit from requesting and receiving written notice of assessed value for each property because it ensures they have an opportunity to review the assessed value. This notice should be sent on an annual basis. The appraisal district does not have to send a notice of assessed value if the value increases by less than $1,000. However, if an owner was not satisfied with a prior year’s value and remained the same, the appraisal district probably will not notice the assessed value for the current year. In this situation, the owner might forget to protest since a notice of assessed value for the property was not received.

How to file an appeal

While many owners are comfortable with an assessed value, there is a basis for appealing in many cases. Two options for appealing include:

1. unequal appraisal, and
2. market value based on the appraisal district’s data to the owner before the hearing.

You can appeal by completing the protest form provided by the appraisal district and indicating both excessive value (market value) and unequal appraisal as the basis for appeal. In addition, the property owner can send a notice that identifies the property and indicates dissatisfaction with some determination of the appraisal office. The notice does not need to be on an official form, although the comptroller does provide a form for the convenience of property owners.

Preparing for the Hearing

Start by reviewing the appraisal district’s information for your property for accuracy. If the appraisal district overstates the quality or quantity of improvements, this will justify a deduction. The next step is to review the information on market value and unequal appraisal provided by the appraisal district. Review the appraisal district’s income analysis versus your actual income and expense statements if the subject is an income property. Consider the following areas as opportunities to dispute the appraisal district’s analysis:

• Gross potential income
• Vacancy rate
• Total adequate gross income, including other income
• Operating expenses
• Amount of replacement reserves
• Net operating income
• Capitalization rate
• Final market value

Many property owners and consultants start with the actual income and expense data and use one or two of the assumptions provided by the appraisal district. However, they primarily utilize the actual income and expenses information to prepare their income analysis and estimate market value for the subject property.

When comparable sales are the primary issue in determining market value, start by reviewing the comparable sales data provided by the appraisal district versus the assessed value for your property. Convert the sales prices from the appraisal district to either a per square foot or per unit basis. Then compare the sales to your property’s per square foot or unit assessment. Sales can be helpful during the hearing.

The cost approach is not typically used in the property tax hearings except for brand new or relatively new properties. If your property is new, the appraisal district will probably want to review the cost information, and you probably won’t want to show it to them. In many cases, the actual cost of a property is higher than the estimate provided by the appraisal district. If this is the case, you will likely want to appeal to unequal appraisal instead of market value. No matter how good your argument or how passionately it is expressed, the appraisal district staff and Appraisal Review Board (ARB) members tend to believe, that cost equals value for new properties.

Deferred Maintenance and Functional Obsolescence

Another critical issue for the market value appeal, and to some extent for an unequal appraisal appeal, is deferred maintenance and functional obsolescence. Deferred maintenance could include items such as:

• rotten wood
• peeling paint
• roof replacement
• substantial repair
• landscaping updating and other similar items

Most appraisal districts give minimal consideration to adjustments based on deferred maintenance requests unless the property owner provides repair costs from independent contractors. There are some exceptions where a cooperative informal appraiser or sympathetic ARB will take an owner’s estimate of deferred maintenance and make adjustments based on those costs. Most appraisers and ARB members are more inclined to make adjustments if third-party cost estimates are provided. In addition, the appraisers and many ARB members are inclined only to deduct a portion of the total cost using the argument, “we’ve been giving a replacement reserve allowance for this item for the past years, and it’d be double-dipping to deduct the whole value off it in the current year.” While this is an incorrect appraisal argument, it does tend to be the practice at many appraisal districts. The reality is the cost of curing deferred maintenance is deducted from the offer by a prospective buyer.

Examples of functional obsolescence would be a three-bedroom apartment with only one bathroom or a two-bedroom apartment that does not have washer/dryer connections in an area where those connections are standard. Another example would be an apartment with a window air conditioner in an area where central HVAC is typical and expected.

Unequal appraisal analysis

Virtually all unequal appraisal appeals involve a reasonable number of appropriately adjusted comparables. Comparables are similar properties.

This is primarily because of the difficulty and cost of performing a ratio study. Historically, the position of many appraisal districts was that the property owner needed to get a free appraisal for each comparable property and compare the market value estimated by the appraiser to the assessed value. The cost of getting multiple appraisals made this process financially impractical. Compiling a reasonable number of comparables appropriately adjusted is straightforward. The first step is to choose a reasonable number of comparables. Usually, four to five comparables are the typical number used at a property tax hearing, but property owners choose ten to thirty in some cases.

There may only be one to four comparable properties that merit consideration in some cases. Most unequal appraisal presentations include three to ten comparables. The number of reasonable comparables depends on the property’s location, type, size, and age. For example, there would be fewer five-year-old bowling alleys in the northern part of Harris County compared to recently built apartment complexes.

After choosing a reasonable number of comparables, array them in a table format, including data fields such as account number, net rentable area, year built, street address, assessed value, and assessed value per square foot.

You should also review the information in the appraisal district’s House Bill 201 packet on an unequal appraisal. In many cases, the appraisal district’s unequal appraisal analysis will document a reduction in your assessed value! If the appraisal district’s unequal appraisal analysis documents a reduction, either the informal appraiser or the ARB should adjust an assessed value for you. Having the opportunity to get an assessed value reduced automatically based on the appraisal district’s unequal appraisal analysis is one reason to appeal to every property every year.

Completing Hearing Preparation

After reviewing the appraisal district’s information on your property, and your market value and unequal appraisal analyses, determine the strengths and weaknesses of each approach and decide which basis of appeal provides the best opportunity for a meaningful reduction.

Set Negotiating Perimeters

After reviewing the information, it is crucial to set the highest assessed value you will accept at the informal hearing. After you accept an assessed value, the appeal process will complete the year. You will not be able to appeal further.

Administrative Hearing Process

The two steps to the administrative hearing process are the informal and appraisal review board hearings.

The Informal Hearing

The following procedure and rules are typical at the informal hearing:

• Meet with an appraiser representing the appraisal district. It would help if you were polite and prepared at this meeting. While many property owners are frustrated and angry at the high level of real estate taxes, the appraisal district appraiser does not control the tax rate set by various entities nor the policy regarding property taxes in the area or the state. The appraisal district appraiser is trying to execute his job professionally and appreciates it when property owners work with him.
• Provide the appraiser information on your property, and he will review that information and information he has available.
• The appraiser will likely make an offer to settle the assessed value of your property fairly quickly. You can either accept the value or negotiate further. Either way, you should know whether the appraiser will offer an acceptable value within ten to twenty minutes. If the value is acceptable, conclude the negotiation by agreeing to the value for the current year. If the value offered is not acceptable, ask to go forward with an ARB hearing.

Appraisal Review Board Hearing (ARB)

The ARB hearing panel consists of three impartial citizens selected and paid by the appraisal district. The age of most ARB members ranges from fifty to eighty. The system has an unfortunate bias since the ARB members are selected and paid by the appraisal district. Still, most ARB members are reasonable people who want to make appropriate decisions.

The ARB does not set tax rates or tax policy like the appraisal district appraiser. The members are also not responsible for the effectiveness of local government. It is unlikely to help your case if you complain to the ARB members about either the high level of property taxes or the poor quality of some aspect of local government.

The ARB will expect you to make your presentation in about three to ten minutes. They will typically wait patiently while you make your presentation and may have questions after you conclude. An appraiser from the appraisal district, who may or may not be the same person who attended the informal hearing, will represent the appraisal district at the ARB hearing. The appraiser will comment on the evidence you presented and often present other information the appraisal district has available. The ARB members may have questions after the appraisers’ presentation. Then the property owner will be given a final opportunity to rebut evidence presented by the appraisal district appraiser and quickly summarize the evidence. The ARB members strongly prefer you not to repeat your entire presentation at this point.

After hearing the evidence, the ARB members will confer and decide. This decision is not subject to negotiation, and they will not revise the decision if further evidence is presented. When this decision is announced, the hearing is effectively over. The ARB will send a letter two to four weeks later summarizing their decision.

Binding Arbitration or Judicial Appeal

Many owners pursue judicial appeals to reduce property taxes further. Judicial appeals can be expensive if the property owner and attorney don’t understand the process and have a plan in place to minimize the cost of legal and expert witness fees. Judicial appeals are typically successful. However, success requires cooperation from the property owner, such as responding to questions, documents, and a deposition if requested. The judicial appeal minimizes property taxes since it reduces the base value. This is important because the appraisal district and ARB consider the base value when setting the administrative hearing value in the subsequent year.

Conclusion

Property owners can generate substantial reductions in property taxes by appealing annually. Consider appeals on both market value and unequal appraisal. Property owners should consider all three levels of appeal: informal hearing, ARB hearing, and judicial appeal/binding arbitration. While the ARB hearing and judicial appeal/binding arbitration can be an intimidating process, each is straightforward once you understand the mechanics.