Property taxes in downtown neighborhoods are on a steep incline. We have conversations about them on Next Door and FaceBook and in neighborhood meetings and wonder what is causing the rise and how we can fight it. We talk with our next door neighbors across the fence to see if they are fighting the increase this year. If you are upset about your property taxes and want to fight them, it may feel as though you are fighting a losing battle. You are right. You may be able to lower them this year, but the fix is temporary and will not address the systemic issues of rocketing property values.
This issues around our rising property taxes seems complicated, but it comes down to one simple idea: Everyone must pay their fair share. The first part of this series explains the heavy burden that commercial property tax laws put on the average homeowner. The solutions are not complicated, but they will take political will which can come only from a concerted effort on the part of citizens for meaningful change. Corporate and large commercial property owners are able to shift their share of the tax burden on to others by the use of unequal comparables, lowered median values, and deep pocket lawsuits.
Unequal Comparables
One of the biggest reasons that large commercial property owners are able to avoid paying for their fair share of taxes is that they are able to compare, for assessment purposes, their properties with those of lesser value creating a tax loss for which residential property owners are responsible.
In 1997 a third paragraph was added to Section 42.26 P a1 and a 2 of the Texas Tax Code which deals with appraisal ratios. The uniform and equal (sometimes called “equity”) provision passed without notice but it provides a lucrative opportunity or loophole for commercial property owners to exploit to pay less in property taxes. It states:
“The district court shall grant relief on the ground that a property is appraised unequally if the appraised value of the property exceeds the median appraised value of a reasonable number of comparable properties appropriately adjusted.”
Bexar County Chief Appraiser Michael Amezquita states in one of my favorite quotes, “Paragraph 3 is where the money is. Any blind monkey can win that deal.” (County)
This “equity” provision as well as a series of court decisions have rendered the constitutional requirement that property be taxed in proportion to its market value moot.
Corporate and commercial property owners continue to sue and win large reductions in their appraisals regardless of the market value of their property because of the ambiguity and lack of definition of terms like “reasonable number” and “comparable.”
Since enacted, this provision has undergone some revisions but none more significant and more beneficial to commercial property owners than when the words, “appropriately adjusted” was tacked on to the end of paragraph three in 2003 causing a flurry of litigation. Through interpretation, an overwhelming majority of judges have sided with the property owners, again, because there isn’t a definition of “comparability” in the tax codes.
These reductions in commercial appraisals has meant hundreds of millions of lost dollars for Texas’s school districts, roadways, emergency medical services and fire protection, a loss homeowners shoulder. “Homeowners pay taxes based on something reflecting market value, but corporate taxpayers just don’t,” said Amezquita. “That’s not equal, and what they’re doing puts upward pressure on tax rates.” (County)
Lowered Median Value on Commercial Properties
The effects of the unequal comparisons allowed by the tax codes to commercial properties is that it lowers the tax base down longer term. When high value commercial properties are compared to those of lower value the median is lowered. This new lower median level creates a level by which all properties can be reduced. Jim Robinson, who retired from HCAD in May 2013 after serving 28 years at the agency states in the Houston Press, “What we see happening time and time again is tax consultants get everything that’s out there and they’ll pick a set of alleged comparables at the very bottom of the list and argue that they should be adjusted to that.”
The result of the drop in median value is a constant and growing erosion of the tax base” on which Texas’s public-school finance channels are dependent.
Deep Pocket Lawsuits
In 2013, State Rep Mike Villarreal (D) and Austin property tax agent Jim Popp authored HB585 to make administrative changes to the tax code. It was an attempt to address issues of bias, lack of responsiveness and transparency in Appraisal Review Boards and local appraisal districts. Rep. John Otto (R) added an amendment that states if a property owner wins an appeal of the property’s value (whether through litigation, arbitration, or through a board hearing) the appraisal district would have a higher burden of proof if it wanted to raise the value the next year.
It did not take long for attorneys to act on behalf of their clients: In San Antonio in 2014, JW Marriott Hill Country Resort & Spa, with a construction price tag that nearly eclipsed $600 million, had been able to lower its value by $125 million by winning multiple lawsuits against the Bexar County Appraisal District.
Bexar County Chief Appraiser Michael Amezquita told the Houston Press: “I’ve been sued every year by [JW Marriott],” Bexar County at the time was facing $10.3 billion in appraisal-reduction litigation compared to the annual $4 billion to $5 billion average. In the 2011 tax year, BCAD’s ten most expensive courtroom losses to class A commercial and industrial property owners resulted in an absence of $1.8 million in tax revenue for San Antonio-area school districts.
“Valero sues every year,” Amezquita added. “H-E-B is suing every year now. They never used to sue me before.” (http://www.houstonpress.com/news/texas-is-losing-out-on-millions-of- dollars-thanks-to-its-defective-property-tax-system-6601492)
In 2016 local news aired a piece on deep pocket lawsuits by commercial and corporate property owners to lower their appraisal values: “These are the cases set for trial, hundreds of them,” declared Deputy Chief Appraiser for Bexar County Mary Kiekie. But she noted, none of these will ever make it to trial, lawyers will settle it in litigation.” Litigation is the ugly thing that nobody knows about,” she explained.
Of their $15 million budget, in 2016, at least $1 million had been spent on lawyers litigating.” It’s shifting the burden from the corporate and commercial properties onto the backs of the homeowners,” Kiekie said. “The tax rates would go down and still generate the same amount if indeed commercial properties were paying at the same rate that residential properties were paying at.”
Corporate lawsuits had more than doubled in 2016 . From 2009 to 2014, they accounted for an average of 474 lawsuits per year. In 2015, that number jumped to 965.
“It’s a game that the tax lawyers and tax agents are playing, and it’s so easily played,” said Kieke. Last year alone, corporations were able to litigate off almost a billion dollars in taxable value.
Kieke says a loss at trial, even if it’s just by a dollar, could mean a death sentence for her office. So they have to litigate.”If the appraisal district loses at trial, we can be responsible for the other side’s attorney fees up to $100,000 per property, per year,” said Kiekie. “So if Valero sues us on all their convenience stores and puts 130 stores into a lawsuit, they can bankrupt us.” (New4SA)
The problem has been exacerbated by Texas’s absence of sales-price disclosure, which gives property owners a running start in property-tax disputes because appraisal districts must rely on private databases to procure sales numbers. Even then, it’s impossible to seize reliable data for every property.
“Whoever heard of doing an appraisal without sales information?” says Amezquita. Idaho, Utah and Alaska are the only other states that lock away all sales figures on taxable properties.
“It’s like boxing with one hand tied behind your back,” says former Houston County Appraisal District (HCAD) Chief Appraiser Jim Robinson, who retired from HCAD in May 2013 after serving 28 years at the agency. “What we see happening time and time again is tax consultants get everything that’s out there and they’ll pick a set of alleged comparables at the very bottom of the list and argue that they should be adjusted to that.” (Houston Press).
And Now: Dark Store Legal Battle
This from the Texas Comptroller:
Dark store theory primarily concerns the property taxation of big-box stores, behemoth department stores, hardware sellers and other outlets often running to 50,000 square feet or more.
The dark store theory of property valuation, championed aggressively by many big-box retailers, suggests that commercial properties should be appraised and valued the same whether they’re operating or shuttered. They favor appraising all big-box properties as if they were vacant or “dark” to calculate property value, arguing these locations will be difficult to sell because they have little appeal to subsequent buyers. In essence, they’re asking that these properties be appraised according to how the next occupant may use it.
Appraisal districts, by contrast, appraise such buildings according to their “highest and best use,” which in practice means appraising them as operating locations.
The difference between these perspectives, as you might imagine, can be significant. Dark store proponents often ask that the value of their property be reduced by more than half, in one instance from $82 to $20 per square foot. Big-box retailers have pushed dark store theory most vigorously, but the practice has spread to other commercial property types as a way to seek tax reductions.
In Texas, the main proponent of the theory has been Lowe’s Home Improvement, which has 141 stores in the state.
Property tax appraisal methods for commercial properties usually rely on “comparables” — the sale value of similarly situated properties — to determine a property’s market value to a hypothetical buyer. Texas Property Tax Code Section 23.01(a) requires taxable property in Texas to be appraised at its market value as of Jan. 1 of each year.
The Property Tax Code requires determinations of appropriate comparable sales to include the property’s condition, occupancy and any legal burdens. Considering vacant properties as comparables for a property that isn’t vacant is akin to using a ghost town as a “comp” for a vibrant city block.
Bexar County Chief Appraiser Michael Amezquita also believes dark store theory is inappropriate precisely due to the use of comparables, because it begins with the assumption that stores should all be appraised as if they were closed.
“It turns all appraisal theory on its head,” he says. “The first step in any appraisal assignment is to determine the highest and best use of a property. The highest and best use of these properties is usually continued use as a big-box retailer. It’s never appropriate to pretend one could only look to sales of failed, vacant stores for comparables.”
The state comptroller’s office estimates Texas cities, counties and school districts will lose $2.9 billion if Lowe’s wins its Bexar County lawsuit and other commercial properties take up the “dark store” legal argument, potentially leaving homeowners to pick up the property tax burden. (Houston Chronicle)
Solutions
The solutions are simple, finding the political will is much more challenging. While we can fault corporate and commercial property owners for shifting the burden of their fair share to the rest of us, they could make the case that anyone would take advantage of what the law allows. However, if loopholes were closed, If commercial property owners paid their fair share, billions of dollars of revenue would be pumped into our tax base possibly lowering the tax rate of residential property owners. There are other factors such as tax abatements and school financing, but the failure of commercial property owners to pay their fair share contributes greatly to the problem.
This is a legislative issue.
In this last legislative session, HB 27, authored by Rep. Drew Springer -Muenster (R) and backed by Comptroller Glenn Hegar, aimed to limit businesses’ ability to use the unusual legal strategy when contesting their property values. The bill passed out of two committees but never made it to the House floor for a final vote.
In 2013, State Senator Wendy Davis (D) and Rep Sylvester Turn (D) co-authored a bill that would have addressed the ambiguous language of the equal and uniform provision.
In 2009, Rep. Michael Villarreal (D), Sen. Leticia Van de Putte (D), and Sen. Jeff Wentworth (R) authored a series of bills that would require sale-price disclosure in the state.
All of these attempts at property tax reform have failed.
It is up to homeowners to demand that all property owners pay their fair share, no more, no less.
