Texas Property Valuation Process
Business property owners in Texas pay high property taxes, but you may be paying more than you rightfully owe. Texas law specifies that taxes must be "equal and uniform" and requires each County Appraisal District (CAD) to determine taxable values for each business property.
Taxable value must be 100 percent of market value as of January 1 each year. When the market value of your property decreases, CAD will not automatically reduce your property tax obligation, so you must file a protest. During the protest and appeals process, you use data to show that the market value of your property has decreased, and CAD argues that its assessment is correct. To determine the market value of your property, both parties use either the Cost, Sales, or Income Approach.
What is Market Value?
Market value is the amount of cash or its equivalent that a business property would transfer for in an open market as of January 1 each year. Texas law specifies that the party determining market value assumes that the buyer and seller both seek to maximize their gains without taking advantage of the other party. It also assumes that both parties know all the potential uses for the property and are aware of any applicable restrictions.
CAD must reappraise every property in its jurisdiction at least once every three years. Unless the property owner files a protest, CAD uses mass appraisals to determine market values. They group similar properties together, based on size and use. Then, using recent sales, CAD appraises market value for properties in each classification, making adjustments for land size and age of buildings.
Especially in densely-populated Texas counties -- like Harris, Dallas, Tarrant, Bexar, and Travis Counties -- CAD's database may contain data about more than one million real properties. This extensive database is subject to human error. One property may have its value overstated, while another may be understated, even if, upon inspection, the properties are quite similar. Filing a protest and appeal forces CAD to determine the market value of your individual property so that you are taxed in an "equal and uniform" manner as required by Texas law.
To determine the market value using the Cost Approach, calculate the replacement cost for each improvement on your business property, add the land value, and then deduct the amount of depreciation determined by age/life tables. When CAD uses the Cost Approach to determine the market value of your business property, it may use cost information obtained during the appeals process or construction cost documentation.
The Cost Approach is the preferred method of determining the estimated market value of a business property during the Appraisal Review Board process when the property is newly constructed or does not have comparable properties in the area.
To determine the market value using the Sales Approach, analyze sales of comparable properties by collecting sales information, e.g., closing statements. When CAD uses the Sales Approach, the sales information is entered in a database and the appraiser can select the most comparable properties to the subject property based on market area and physical characteristics. The appraiser then adjusts the estimated market value based on land size, location, improvements, age of the buildings, and condition.
The Income Approach uses the business property's income to estimate market value through capitalization. The idea behind the Income Approach is to determine what an investor would pay as of January 1 for the anticipated income stream from the property.
To find the market value of a business property using the Income approach, divide the business property's single-year net operating income by the market capitalization rate to determine the estimated market value. CAD estimates market capitalization rates based on net operating incomes and sales prices of business properties.
The business property's net operating income comes from income statements, expense statements, and rent rolls. Business property owners usually provide this information during the appeals process. CAD enters this information in a database and then compares actual income to market indicators to determine the market value.
The Income Approach is the preferred method for determining market value for income-producing business properties during the Appraisal Review Board Process.
Protesting Your Property Taxes
If you own business property in Texas, property taxes are a significant expense. Texas law allows you to protest your business property taxes each year, and reduced taxes means a stronger return on your investment.
Whether you own a Fortune 100 company or a small business, the dedicated attorneys at Brusniak Turner Fine LLP can handle your property tax protest from filing the first form with CAD to fighting for "equal and uniform" taxes in District Court. Contact our office today.