Last year, Advanced Micro Devices successfully protested the tax appraisal of its 59-acre office park on Southwest Parkway, knocking about $13 million off the $111 million valuation of the property with commanding views of the hills west of Austin.
This year, when the Travis Central Appraisal District raised the assessment by nearly 50 percent, the computer chip company appealed again. The appraised “market value” of AMD’s Lone Star campus, which it spent more than $200 million to develop, now stands at $127.5 million. AMD has filed a lawsuit to drop it even lower — as it also did in 2010, when the district tried to peg the appraisal of the property to its cost.
Meanwhile, the real market has spoken. In April, the company sold its office park for $164 million to Spear Street Capital, a San Francisco group. The price was $37.5 million more than the taxable value that AMD is disputing as too high.
For two years running, AMD has topped the list of 25 property owners who won the largest markdowns from the appraisal district, but it is hardly an aberration. All but one parcel on the list are classified as commercial — businesses, industries, offices, apartment complexes — and all received reductions that lowered their tax bills by tens of thousands, if not hundreds of thousands of dollars a year.
The Texas Constitution and state law require that real property be assessed at fair market value. But state lawmakers — by both their actions and inaction — have made it increasingly difficult. That has consequences for homeowners already squeezed by high property taxes in a state with no income tax, business taxes that are some of the lowest in the country and a heavy reliance on local property levies to educate its children, fix streets and hire police and firefighters.
Gaping discrepancies between the value of property on the tax rolls and what it actually sells for are widespread, especially in the commercial and multifamily sectors attractive to investors. Two buildings at Research Park Plaza, another Spear Street investment, are currently valued on the tax rolls at $65.8 million; they sold for $103 million in August. The 20-story office building at 816 Congress, valued at $82.5 million, sold for $102 million in April. The owners of a luxury 502-apartment complex in the Steiner Ranch development recently sold it for $80 million, shortly after they got its tax value reduced to $59 million.
As 2013 property tax bills go in the mail in October, Travis County’s appraisal district — which has barely cleared the decks from another heavy season of tax protests — is gathering data for the 2014 assessments that will go out next spring, producing a flood of protests disputing property valuations that kicks off the months-long appeal process again.
But tax appraisers around the state say a sea change has taken place in that process, unnoticed by the general public. Thousands of appeals — historically, arguments over what a property is worth to somebody who might buy it — are uncoupling tax appraisals from that very question.
What’s driving the change, say appraisers, is the growth of so-called equity appeals, which are unique to Texas. While the state constitution mandates uniformity and equality in taxation, a 10-year old provision in the tax code defined that standard in a new way, allowing property owners to protest their valuations — and get them lowered — to the median appraised value of “comparable” properties.
As properties above the median are reduced to the target valuation, the median drops. The result: “a constant and growing erosion of the tax base,” said Travis chief appraiser Marya Crigler.
Texas has been fertile ground for this development. It’s one of the few remaining states that don’t require some form of disclosure of property sales prices — transparency that greatly eases the appraiser’s job in aligning appraised values with market values. With equity appeals, that becomes irrelevant.
“Sales are the most accurate indicator of market value,” said Williamson Central Appraisal District chief appraiser Alvin Lankford. “‘Equal and uniform’ appeals stray from the most important equalizer of all — the market itself.”
Asked how many of the 8,000-plus formal appeals to Bexar County’s Appraisal Review Board are based on the equal and uniform provision, that county’s deputy chief appraiser Mary Kieke said, “All of them.”
In the words of Houston tax consultant Patrick O’Connor, the equity provision was “an incredible gift” from the Legislature in 2003. In the words of Michael Amezquita, chief appraiser for the Bexar Appraisal District, it’s a “scam” that lightens the tax burden of those with the resources to exploit it and transfers that burden to lower- and middle-class homeowners.
The gradual shifting of that burden is seen in the annual property value study produced by the state comptroller’s office. In 2000, single-family homeowners paid the biggest share of real property taxes that support the public schools — 45 percent — while commercial and industrial property owners paid 21 per cent. (Other sectors, from oil and gas to personal property, make up the rest.) By 2012, commercial and industrial owners were paying less than 20 percent, but homeowners were paying 54 percent.
State Sen. Wendy Davis, D-Fort Worth, introduced a bill in the Legislature this year that would have curtailed equity appeals for properties valued at more than $1 million. Appraisal districts, including Travis County’s, supported it. The bill never got a hearing beyond a subcommittee.
“I have said for 20 years that the meek had better inherit the earth since they were paying all the property taxes in the meantime,” Kieke said. “This has become a soul-sucking business for anyone who believes in fairness.”
Millions in lost revenue
As Austin’s real estate market scaled giddy heights this year, property owners filed 79,000 protests of their valuations, affecting 1 out of 5 tax parcels in Travis County. That ratio has held steady since 2009, when an economic downturn produced even more appeals, 93,000.
Unlike in the past, most protesters now rely on the growing industry of professional tax agents to file the paperwork and represent them in appraisal district proceedings. Today, 70 percent of appeals are brought by hired tax agents, many of whom use mass-marketing techniques to encourage owners to fight their appraisals. One of the biggest is Texas ProTax, located next door to the appraisal district’s Northeast Austin office.
This year, appeals shaved $4.3 billion from $107.6 billion worth of taxable property of all kinds. Crigler said the process plays “an important role in the fairness and integrity of the property tax system. … Corrections are valid and expected.”
More value will be lost after equity lawsuits like AMD’s run their course. For four of the past five years, the growth in value on the tax rolls has been offset by value taken away in the appeals process, even as land and building prices marched steadily upward.
But the beneficiaries aren’t distributed equally across the tax rolls. The average value of properties protested was $744,084; the average value of those under equity lawsuits was $11.5 million. “These are not your typical homeowners,” Crigler said.
The Statesman’s rough estimate of the potential tax dollars that the adjusted valuations cost public schools, city, county, health district and Austin Community College last year: about $113 million. Of that, the Austin school district would have been due as much as $58 million — enough to offset what the Legislature cut from the school district’s funding in the state’s 2013 budget and to build the new boys’ school, put on hold for lack of money.
The vast majority of protests were resolved in informal meetings with the Travis appraisal district’s staff; only a tiny portion — less than 5 percent — made a formal appeal before the Appraisal Review Board. Fewer still, about 400, have sued the district for relief. Both in value and frequency, the litigation these days is overwhelmingly commercial.
While Crigler said her $500,000 litigation budget is “pretty generous,” it goes fast. The extraordinary cost of litigation — hiring outside experts, paying the protester’s attorneys’ fees if a judge reduces the valuation by even a dollar — puts enormous pressure on the district to settle before getting to the courthouse, a fact not lost on tax agents.
“Lawsuits are expensive for everybody,” said Mark Dzeda, president of Industrial Tax Consulting.
Expensive properties benefit most
Equal taxation is a difficult goal in any tax system, but few states make it harder than Texas to assess property taxes fairly, while claiming to do just that. The surge in equity appeals had its beginnings in laws that were touted to help homeowners fight unfair appraisals.
“The state’s constitution sets a standard that its statutory provisions cannot satisfy,” wrote Bexar County assistant district attorney Nathan Morey in the St. Mary’s Law Journal in 2010. “On the one hand, the Texas constitution requires equality in taxation, while on the other, the tax code does not give appraisal districts the necessary tools to achieve that result.”
Chief among those tools is a law mandating sales prices of real estate to be reported. The International Association of Assessing Officers declares that such laws are necessary to assure that appraisers have access to reliable sales data, critical to formulas for calculating market value.
“It could be argued that price disclosure would be the single most leveling force in resolving what appears to be significant inequality between residential and commercial property appraisals,” wrote James Johnson, a Ph.D. candidate at the University of Texas at Arlington, in his dissertation last year that looked at the accuracy of commercial property tax appraisal in Texas.
Yet the Texas Legislature has repeatedly declined to pass such a law.
All but four states — Texas, Alaska, Idaho and Utah — now have some kind of disclosure, said Idaho tax policy expert Alan Dornfest. Some states have transfer fees from which the sales price can be deduced. Others, like New Mexico, require only disclosure of residential sales. Missouri doesn’t require disclosure, but some of its counties do. Louisiana lets tax assessors have access to a property owner’s books and records.
In 2004, the Legislative Budget Board recommended Texas lawmakers enact sales disclosure, saying it would result in “significant savings” to the state because school districts would get more money from property taxes. In 2006, believing the board had understated the case, the state’s largest appraisal districts released their own study asserting the lack of sales disclosure in Texas was costing them more than $4 billion a year due to inaccurate appraisals.
Most of that lost value was in underappraisals of the most expensive property. In the zero-sum game of property taxation, that means lower-value properties — the category where the most sales information is available — paid more than their fair share. The study included a sample of real estate sales in Travis County indicating that offices and apartments were being assessed at 63 percent of market value and high-end residential at 77 percent of market value, but low to mid-range homes at 98 percent.
“Mandatory sales disclosure is an idea whose time has come in Texas,” the study’s authors proclaimed. A task force named by Gov. Rick Perry and headed by former Texas Workforce Commission Chairman Tom Pauken endorsed a limited form of disclosure.
But it never found favor with either the Legislature or the real estate industry — particularly the Texas Association of Realtors. The association’s political action committees dole out contributions from two of the five biggest “campaign war chests” in the state, totaling $14 million, according to the latest reports published by the Texas Tribune.
“There was a deep fear the Legislature would add a transfer tax” — basically, a kind of sales tax — if sales prices were reported, said former Harris County chief appraiser Jim Robinson. (Most disclosure states have done so.) There were privacy concerns. There were arguments that prices were only one of many equally important factors in reaching accurate valuations.
Not so, say tax appraisers. “There’s nothing that beats sales. (Otherwise) how can you know what the market value is?” said Michelle Hagen, director of the commercial business division for the King County Department of Assessments in Seattle.
Former state Sen. Jeff Wentworth, R-San Antonio, unsuccessfully pushed sales disclosure legislation for years. If it had passed, he said, the Legislature probably wouldn’t have needed to cut $4 billion from public education in 2011. But that year his bill didn’t even get out of committee. By 2013, Wentworth had lost his seat in the Senate, and no one else picked up the cause.
“In my opinion it will never pass,” said Art Cory, former Travis chief appraiser.
“If you want to use the word beaten-down, we accept that,” Lankford said.
Paul Welcome, who worked under Cory in Austin, is now the chief appraiser in Johnson County, Kansas, a state where sales prices have been a matter of public record for 20 years. Welcome said the real estate lobby in Kansas had also objected to sales disclosure.
But Kansas lawmakers believed it would make property assessments more accurate “so everyone is paying their fair share,” said Welcome. “The Legislature knew it was the right thing to do.”
Game of cat and mouse
Though resistant to sales disclosure, Texas lawmakers have easily passed bills more to the industry’s liking. Foreclosures were not the problem in Texas that they were in some other states during the housing bust, yet a 2009 law directs appraisal districts to factor in recent foreclosures when valuing property; another prevents a district from raising a valuation without clear and convincing evidence for a year after the owner has won a reduction.
The measures were among the “dramatic reforms” that were needed to correct a “broken system,” said Mark Lehman, vice president of governmental affairs for the Texas Association of Realtors. “All we want is a good, fair, balanced appraisal process.”
Lehman, like many in the real estate industry, contends that sales figures are readily available to appraisal districts through the Multiple Listing Service run by local boards of Realtors. There’s some truth to that, if only because every real estate agent has access to the MLS book, which details residential properties for sale. The information leaks out, often in their promotional materials.
However, the Austin Board of Realtors has chosen not to share its proprietary MLS data with the Travis appraisal district. Senior litigation appraiser Patrick McCluskey, a licensed broker who is a dues-paying Realtor, said the organization forbid him to use MLS data at his job. Local boards don’t let appraisal districts in Harris, El Paso, Bexar and Williamson counties have access to their listings.
And MLS data doesn’t help fill in the blanks that appraisal districts struggle with the most. Sales of high-end homes often don’t show up in the listings; commercial properties never do. Larger districts — and their taxpayers — pay providers such as CoStar for commercial sales information that comes free in most other states. A subscription to CoStar costs the Travis appraisal district $26,000 a year. The state comptroller’s property tax division pays $43,150. Harris County pays $89,472 for its CoStar subscription and $357,000 to PropertyInfo, which tracks residential sales. While the privately held information is extensive, it is not all-inclusive, and there are no guarantees of accuracy.
The Travis appraisal district also sends letters asking purchasers of properties what they paid, but fewer than one-third respond, said Crigler. Her appraisers scour the Statesman and other media outlets for news of sales. Appeals hearings, in which protesters present evidence of comparable sales, provide more information.
Wentworth, who is now a Bexar County justice of the peace, knows that appraisal districts have ways of scrounging for information, and paying for it, too. “But why should they have to do that?” he asked.
This story reflects the American-Statesman’s consistent focus on how government decisions affect Central Texans through such factors as tax burdens, housing affordability and quality of education. Find more at mystatesman.com/s/investigations.