TAPTP EQUAL AND UNIFORM APPRAISAL MacKenzie S. Bottum, MAI, CRE If - - PowerPoint PPT Presentation

TAPTP EQUAL AND UNIFORM APPRAISAL

MacKenzie S. Bottum, MAI, CRE

If prepared by a state certified appraiser, an equal and uniform appraisal under Section 42.26(a)(3) of the Texas Property Tax Code must comply with the Uniform Standards of Professional Appraisal Practice (USPAP) and is subject to enforcement by the Texas Appraiser Licensing and Certification Board based on Opinion No. GA-0911 issued February 7, 2012 by Attorney General Greg Abbott. People who are not certified or licensed as appraisers are not regulated by TALCB for these analyses. Section 42.26(a) of the Texas Property Tax Code states “The district court shall grant relief on the ground that a property is appraised unequally if: ...(3) the appraised value of the property exceeds the median appraised value of a reasonable number of comparable properties appropriately adjusted.” This was affirmed by the Court of Appeals of Texas (14th District) in Harris County Appraisal District v. United Investors Realty Trust (No. 14-00-00374-CV). All appraisals are a valuation problem to be solved. For equal and uniform appraisals, there are five key problems to be solved: the property to be appraised; a reasonable number; comparable properties; appropriate adjustments; and the median. A) The property to be appraised:

• 1. Highest and Best Use

a) Influence on the selection of comparables

• 2. Appraisal District Records versus Economic Unit
• 3. Appraisal District Records versus what actually exists

B) Reasonable Number of Comparables:

• 1. The Merrian-Webster Dictionary defines reasonable as being a) in accordance with reason; b) not extreme or excessive; c)

moderate, fair; d) possessing sound judgement.

• 2. Reasonable number of comparable properties for market value appraisal versus equal and uniform appraisal.

• 3. In United Investors Realty Trust, seven comparables were selected and deemed by the court to be sufficient. In HCAD v.

Kempwood Plaza, Ltd. nine comparables were selected based on similar land use, building class and size. HCAD argued that nine was not a reasonable number but the appellate court disagreed. Hence, it appears court rulings support an appropriate, systematic selection process without regard for the number of properties selected.

• 4. Comparable properties are usually selected from the same county to ensure consistency. What about properties with an

insufficient number of comparables in same county? C) Comparable Properties1

• 1. Comparability is based on the principle of substitution, which states that a rationale buyer will not pay more for an item than

the cost of an acceptable substitute. To be an acceptable substitute, the property must have the same (or very similar) highest and best use.

• 2. The Texas Property Code in Section 23.01(f) states: “The selection of comparable properties and the application of appropriate

adjustments for the determination of appraised value for property under Section 41.43(b)(3) or 42.26(a)(3) must be based on recognized methods and techniques that are necessary to produce a credible opinion.” In addition, Section 23.01(f) states “Whether a property is comparable to the subject property shall be determined based on similarities with regard to location, square footage of the lot and improvement, property age, property condition, property access, amenities, views, income,

• perating expenses, occupancy, and the existence of easements, deed restrictions, or other legal burdens affecting marketability.”

Hence, the citations in the Texas Property Tax Code essentially reflect generally accepted appraisal methods and techniques for the selection of comparable properties.

• 3. According to the Dictionary of Real Estate Appraisal, “comparables” are defined as “a shortened term for similar property

sales, rentals or operational expenses used for comparison in the valuation process.” In discussing the Sales Comparison Approach Procedure on page 381 of The Appraisal of Real Estate, the text states: “The characteristics of the properties such as property type, date of sale, size, physical condition, location, and land use constraints should be considered. The goal is to find a set of comparable sales or other evidence such as property listings or contracts as similar as possible to the subject property to ensure they reflect the actions of similar buyers. Market analysis and highest and best use analysis set the stage for the selection

• f appropriate comparable sales.”

• 4. Identification of Potential Comparable Properties

a) Systematic, documented approach b) Inspection and knowledge of the area c) Market Surveys d) Discussions with market participants e) Third-party data sources f) Appraisal district records

• 5. Selection of a Reasonable Number of Comparable Properties

a) Ranking by elements of comparison (location, age, size, physical condition, etc.) b) Selecting the most comparable properties and number

• 6. The Texas Property Tax Code and interpretive case law makes clear that settled values (not preliminary values) must be used

for analysis. Of course, this means that during the settlement and litigation process the values may change, and this may alter a median value derived.i D) Appropriate Adjustments:

• 1. Section 42.26(a) of the Texas Property Tax Code states “Appropriately adjust the selected comparable market values for

location, physical and economic elements to provide a range of appropriately adjusted values.”

• 2. Section 23.01(f) states: “Adjustments must be based on recognized methods and techniques that are necessary to produce

credible results.”

• 3. Types of Analysis:

a) Economic Analysis versus Typical Adjustment Grid Analysis b) Strengths and Weaknesses of Economic Analysis i) Ease of economic analysis ii) Economic element used for comparison iii) Tax rates iv) Appraisal district economic modeling versus actual/proforma analysis

c) Strengths and Weaknesses of Traditional Adjustment Grid Analysis i) Reflects generally acceptable appraisal methods and techniques ii) Analysis of individual elements of comparison iii) Location and physical elements explain economic differences iv) Subjectivity of adjustments derived

• 4. Deferred maintenance and lease-up adjustments applied by appraisal districts
• 5. Adjustment examples based on generally accepted appraisal methods and techniques

a) Tax rate location adjustment example b) Parking adjustment example E) Median

• 1. Depending on the number of comparable properties, this is either the middle number for an odd number of comparables or the

average of the two middle numbers for an even number of comparables.

• 2. For apartments and other properties for which more than one unit of comparison is relied upon by the market, we average the

indicators (for instance for apartments we use the average of the median from the price per square foot analysis and the median from the price per dwelling unit analysis). APPROPRIATE ADJUSTMENTS EXAMPLES Location Adjustment-Differing Tax Rates The following proforma analysis was used to support location adjustments for a property in Flood Control District (FCD) #1 in Irving,

• Texas. This special tax district causes the aggregate tax rate for properties in the district to be substantially higher than for nearby

properties outside the district. Two proformas were developed and compared to estimate the adjustment. As shown, the same net

• perating income per square foot and base overall rate were used for both analyses and were derived from an income analysis prepared

by the appraisal district. The overall rates are “loaded” for the tax rates, and indicated values are derived. A comparison of the values indicates an approximate 24.8% adjustment for properties outside the district compared to those within FCD #1. This also reflects the actions of buyers and sellers since a property with lower net operating income per square foot is worth less on a per square foot basis. This is an example of an adjustment based on generally recognized appraisal methods and techniques.

In an assignment for a Houston CBD office property, parking differences were noted among the comparables, requiring an analysis to derive parking adjustments. Operating statements for the subject property and seven comparable central business district properties (including four of the comparables used for the equal and uniform analysis), were obtained and analyzed. Parking income (as a percentage of total income) and parking ratio were compared, as shown in the following graph. This data indicated that properties with a higher parking ratio generated a higher percent of total income from parking with nearly a linear relationship. Using this data, parking adjustments were estimated based on estimated differences in parking income as a percent of total income. If a property has 2% more parking income, it is worth 2% more since income differences equate to value differences (assuming the same overall rate). A graph showing the properties used to derive the adjustment is shown below, followed by a graph that estimates parking income for the comparables based on the parking ratio, thereby providing a basis for adjustment.

References

• 1. Court Cases-Comparables

“...that ‘similar’ does not mean ‘identical’, but means having a resemblance, and that property may be similar in the sense in which the word is used here though each possesses various points of difference.” City of Chicago v. Vaccaro, 97 N.E.2d 766 (Ill. 1951). “Has similar use, function and utility; is influenced by the same set of economic trends and physical, governmental, and social factors; and has the potential of a similar highest and best use.” Montana Code Annotated 2011, 15-1-101, retrieved from http://data.opi.mt..gov/bills/mca/15/1/15-1-101.htm

• 2. Under Section 42.26(a)(3) of the Texas Property Tax Code, a property owner is entitled to 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.” Tex. Prop. Tax Code 42.26(a)(3) (emphasis added); see also Weingarten, 93 S.W.3d at 286. The Texas Property Tax Code defines “[a]ppraised value” to mean “the value determined as provided by Chapter 23 of this code.” Tex. Tax Code 1.04(8). While Chapter 23 of the Texas Property Tax Code, entitled AAppraisal Methods and Procedures,@ generally provides appraisal methodologies for taxable property, it also contains a specific instruction regarding the appraised values of settled properties, stating, “[n]otwithstanding any provision of this subchapter to the contrary, if the appraised value of property in a tax year is lowered under Subtitle F, the appraised value of the property as finally determined under that subtitle is considered to be the appraised value of the property for that tax year.” Tex. Tax Code 23.01(e) (emphasis added). Among other things, Subtitle F of the Texas Property Tax Code includes Chapter 41 (involving administrative protests to and reviews of values by the appraisal review board) and Chapter 42 (involving judicial appeals of appraisal review board determinations).1 Read together, the Code is clear: for purposes of determining the “median appraised value of a reasonable number of comparable properties appropriately adjusted,” the appraised value of the comparable properties shall be the values as lowered through appeal to the appraisal review board or through judicial appeal.

The Houston Court of Appeals approved the use of values settled in litigation in Harris Cnty. Appraisal Dist. v. Houston Laureate Assocs. Ltd., 329 S.W.3d 52 (Tex. App.BHouston [14th Dist.] 2010, pet. denied).2 There, on appeal of a judgment in favor of the property owner, HCAD challenged the use by the property owner=s expert of values for comparable properties that had been reduced during the pendency

• f the lawsuit. Harris Cnty. Appraisal Dist. v. Houston Laureate Assocs. Ltd., 329 S.W.3d 52, 57 (Tex. App.BHouston [14th Dist.] 2010,
• pet. denied). The Court of Appeals cited the expert’s testimony regarding the use of reduced values that “[t]he values, especially of

properties at this value level, are constantly changing due to litigation process, correction motions.” Id. at 57 (quoting expert testimony). The Court of Appeals approved the expert’s use of the reduced values and stated: “The fact that some of the appraised values of comparable properties [the appraiser] identified may have changed during the pendency of the suit does not make his data unreliable, and [the appraiser] changed his conclusions to reflect the more current data.” Id. at 58. FN1: Subtitle F also includes Chapter 41A concerning appeal through binding arbitration and Chapter 43 concerning taxing unit suits against the appraisal district. Neither chapter is relevant to this case. FN2: While Laureate is instructive and supports the use of settled values, it should also be noted that it was decided before Section 23.01

• f the Texas Property Tax Code was amended to include the clear instruction that appraised values should be the values as reduced through

administrative or judicial appeal. Since the Laureate decision, the legislature codified the requirement to use settled values. Similarly, Harris Cnty. Appraisal Dist. v. Duncan, 944 S.W.2d 706 (Tex. App.-Houston [14th Dist.] 1997, pet. denied) was also decided prior to the amendment of Section 23.01. Additionally, the Duncan Court did not address the use of values lowered through litigation, but rather the use of values determines by the appraisal review board. However, the Duncan decision acknowledged the fluidity of appraised values and supported the use of lowered values.