Can Austin Save Dallas Homeowners from Getting Screwed on Property Taxes?

In 2007, Downtown Dallas' JP Morgan Chase tower sold for nearly $290 million, according to Real Values for Texas. It's currently valued by the Dallas Central Appraisal District at $192 million.
In 2007, Downtown Dallas' JP Morgan Chase tower sold for nearly $290 million, according to Real Values for Texas. It's currently valued by the Dallas Central Appraisal District at $192 million.

Last week the city of Austin took the unusual step of suing the Travis Central Appraisal District, the body that sets property values on which local governments and school districts assess taxes. According to Austin officials, commercial properties were widely and consistently undervalued, handicapping the city's ability to provide services and putting a disproportionate share of the tax burden on homeowners. They were hoping a court would look at the Texas Constitution, which stipulates that taxes be "equal and uniform" and that real estate be "taxed in proportion to its value," and declare the system illegal. In another unusual step, TCAD chief appraiser Marya Crigler — the head of the agency that was being sued — stood side-by-side with Austin Mayor Steve Adler at the press conference announcing the litigation.

The suit is the product of a populist effort by Austin policymakers to tap into long-simmering frustration among Texas homeowners that commercial interests have a finger on the scale during the appraisal process. "The biggest problem is that commercial taxpayers are not paying their fair share so homeowners have to pay more than their share," says Leigh Murrin with Real Values Texas, a property-tax reform group that sprung up a couple of years ago. Last December, the Austin City Council responded to those concerns by hiring a local real estate consulting firm to conduct an analysis of TCAD's commercial valuation. The study, which was released in May, confirmed homeowners' worst suspicions. Between 2012 and 2014, the report concluded, commercial properties in Austin were undervalued by an average 47 percent compared with what they were worth on the market. By extension, this meant that the owners of those properties were paying Austin half of what they rightfully should have.

As Crigler's appearance at the press conference indicates, this is not the appraisal district's fault. Texas is one of 14 "non-disclosure states" where real estate sales don't have to be publicly reported. This means that officials like Crigler are left to comb through news reports, cold-call property sellers, mine public records and otherwise gather enough second-hand information to make a passable guess of a property's actual value. Commercial properties are particularly hard to gauge because they don't sell as often as homes, making it more difficult to establish a benchmark value, and there's no database like the Multiple Listing Service, which real estate agents use to record home sales prices.

Further tipping the scales in favor of commercial property is the appeals process. Any property owner who thinks a valuation is too high can file a protest with the appraisal district and, if they don't get satisfaction from an appointed review board, sue the agency in district court. Unsurprisingly, given their greater access to tax consultants and lawyers and their larger potential savings from a successful challenge, commercial interests are far more likely to take advantage of the process. According to the Dallas Central Appraisal District's 2014 annual report, more than a third of commercial property owners lodged protests compared with just under 9 percent of homeowners. Commercial owners have also made disproportionate use of a 1997 law, written by a property tax attorney, that shifted the burden of proof in appeals cases to the appraisal district and let businesses knock down their valuations by producing evidence that ostensibly comparable buildings are valued at a lower rate. Murrin, the reform advocate, describes this as a "big loophole." "It basically makes it so that someone can file a protest because someone down the street" has a lower value, whether or not it's an apples-to-apples comparison. For instance, an "HEB could be comparing itself to laundromat" and win its protest. In addition, appraisal districts can't be awarded attorney's fees if they prevail in a court challenge even though the protesters can. Small wonder that DCAD settles the cases about 95 percent of the time.

All of which suggests that homeowners are indeed getting hosed. Assume, for example, that the 47-percent undervaluation in Austin also applies to Dallas County, where, in 2014, there were just under 75,000 pieces of commercial property valued at $91 billion dollars, three-quarters of which is taxable value. Some very rough arithmetic ($91 billion/0.53 = $172 billion market value; $172 billion x 0.75 = $129 billion taxable value; $129 billion x .0274 average(ish) tax rate for properties in Dallas County) would suggest that local governments and school districts are being shorted $3.5 billion per year. Which is an insane amount of money.

The thing is, says Dallas CAD chief appraiser W. Kenneth Nolan, the notion that an appraisal district has been undervaluing commercial properties by 47 percent is absurd. If that were the case, Nolan says he'd be out of a job. He points to annual reviews conducted by the Texas Comptroller, which certify that DCAD values for both residential and commercial properties are upward of 90 percent of their actual value. The lack of sales disclosure does make the district's job more difficult, but Nolan says that it can cobble together enough information to make a solid estimate, even if it sometimes takes the appraisal cycle a year after a commercial property changes hands to get it right. "Would I love to see this be a disclosure state?" Nolan says. "Absolutely. Will this ever be a disclosure state? No it won't." Because "the realtors will spend their last dime and their last breath" killing any attempt to force disclosure.

Nolan says he sympathizes with Austin's complaints but doesn't know what the city will be able to accomplish with its lawsuits. Taxing jurisdictions have the same procedural rights as property owners. That is, if they think a particular property or class of property is undervalued, they can lodge a protest, go before an appraisal review board, and then file a lawsuit. But the scope of the lawsuit must be limited to reviewing the decision of the appraisal review board, Nolan says. It doesn't provide a forum for challenging the fairness or constitutionality of the taxing system.

Dick Lavine, who studies property-tax issues as an analyst with the progressive Center for Public Policy Priorities and also serves on Travis CAD's board of directors, says TCAD also disagrees with some of the findings in the study commissioned by the city of Austin. It looked at commercial property sales between 2012 and 2014, too recent for all of the district's valuations to have caught up with a changing market. Given a couple more years, the gap would almost vanish. But that doesn't mean that the system is constitutional or that Austin must be limited to merely disagreeing with the decision of the appraisal review board.

"Where we're at now is not talking about one appraisal district and one class of property in one year; we're talking about the entire system of [property appraisal]," Lavine says. "I think what [Nolan]'s missing is this is no longer about the city's challenge to commercial property to 2015 and this is quite intentionally much broader." He likens the suit to school districts' ongoing legal challenge to Texas' method of allocating education funding. Since lawmakers have failed time and again to fix a system that's clearly broken, it's up to cities like Austin to ask the courts to intervene and force disclosure of real estate sales and fix the appeals process. So far, no one in Dallas County seems eager to join Austin's fight. Last year, DCAD heard 94,000 protests. All of them came from property owners.

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