Property taxes are one of apartment owners’ most significant line item costs. 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 that can’t effectively be appealed. It tends to boil down to the adage, “You can’t fight city hall.”
While the property tax appeals process varies from jurisdiction to jurisdiction, they follow a familiar cadence.
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 extensive line item expense significantly reduces the owner’s overall operating expenses. While it is impossible to entirely escape the burden of paying property taxes, reducing taxes sharply, often by 25% to 50%, is possible.
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, it is impossible to appeal and reduce the property taxes. Although appeals on 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 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, in which 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 assessed 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
Property owners can request a notice of assessed value for their property annually. Owners benefit from requesting and receiving written notice of assessed value for each property, ensuring they can review the assessed value. This notice should be sent on an annual basis. However, if an owner is not satisfied with a prior year’s value and the value remains the same, the appraisal district probably will not send a notice of 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
However, while many owners are comfortable with an assessed value, there is a basis for appealing in many cases. Two options for appealing include:
- unequal appraisal, and
- market value based on data the appraisal district provides to the owner before the hearing.
You can appeal by completing the protest form provided by the appraisal district and indicating 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.
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. If the subject property is income, review the appraisal district’s income analysis versus your actual income and expense statements. 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 information from the actual income and expenses to prepare their income analysis and estimate the 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 property tax hearings except for new or relatively new properties. If your property is new, the appraisal district will probably want to review the cost information, and you 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 true, you will likely want to appeal on 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 information on 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 requests for adjustments based on deferred maintenance 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 adjust based on those costs. Most appraisers and ARB members are more inclined to adjust 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 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
Most jurisdictions provide for appraising or appealing on unequal appraisal, including ratio studies and “a reasonable number of comparable properties appropriately adjusted.” Virtually all unequal appraisal appeals involve a reasonable number of appropriately adjusted comparables. Comparables have 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 a free appraisal for each comparable property and compared 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 simple. The first step is to choose a reasonable number of comparables. Usually, four to five comparables is the typical number used at a property tax hearing, but in some cases, property owners choose ten to thirty.
In some cases, only one to four comparable properties may merit consideration. 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, fewer five-year-old bowling alleys would be in a typical city 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 information on an unequal appraisal. In many cases, the appraisal districts’ unequal appraisal analysis will document a reduction in your assessed value! If the appraisal district’s unequal appraisal analysis documents a reduction, the informal appraiser or the ARB should adjust the assessed value for you. The opportunity to get an assessed value reduced automatically based on the appraisal district’s unequal appraisal analysis is one of the reasons to appeal to every property every year.
Completing Hearing Preparation
After reviewing the appraisal district’s information on your property, the assessor’s information, 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. It would be prudent to visit someone knowledgeable in local property tax appeals to determine whether the county appraisal district and ARB in your area are considering appeals on unequal appraisal.
Set Negotiating Perimeters
After reviewing the information, it is essential to set the highest level of assessed value you will accept at the informal hearing because after you accept an assessed value, the appeal process will be complete for 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 procedures and rules are typical at the informal hearing:
- Meet with an appraiser representing the appraisal district. It would be best 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 the available information.
- 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 comprises 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.
Like the appraisal district appraiser, the ARB does not set tax rates or policies. 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 the high level of property taxes or the poor quality of some aspects of local government.
The ARB will expect you to present 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 will often present other available information the appraisal district has. If you requested the appraiser’s information for your property, it substantially limits the evidence the appraisal district appraiser can offer at the hearing. The ARB members may have questions after the appraiser’s 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.
After hearing the evidence, the ARB members will confer and make a decision. This decision is not subject to negotiation, and they will not revise it 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 and notifying the owner of any appeal rights.
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 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 is a meaningful option to minimize property taxes since it reduces the base value. This is important because the appraisal district and ARB consider the base value in the subsequent year when setting the administrative hearing value.
Property owners can generate substantial reductions in property taxes by appealing annually. Consider appeals on both market value and unequal appraisal and obtain appraiser information information when preparing for the appeal hearing. 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 intimidating, each is straightforward once you understand the mechanics.