The Unfair Burden

How Austin Homeowners Subsidize Speculative Land Holdings and Commercial Property Owners

July 1, 2009

Report prepared by Brian Rodgers

512 366-5000

Austonian January 9, 2009


Summary:  Commercial property owners and land speculators in Texas donŐt pay their fair share of property taxes, in most cases.  This report contains 30 examples of the systemic gross undervaluation of commercial properties and speculative land in Travis County.[1]  Travis Central Appraisal District appraised values were compared with verified commercial property sales prices obtained through open records from the City of Austin, Travis County or public media.  The comparison revealed persistent undervaluations for tax purposes from 25% to higher than 90%.

Example #1

Lot at 2nd & Congress

2005 - Sold for $7.4 million

2005 - TCAD Value $1.8 million

2006 - TCAD Value $2.9 million

2007 - TCAD Value $2.9 million

2008 - TCAD Value $2.9 million

2009 - TCAD Value $2.9 million

Austonian developers escaped paying property taxes on $18 million of lot valuation from 2006 through 2009, putting additional burden on homeowners.

With $42 billion in non-single family property on the tax rolls in Travis County, homeowners are shouldering  annually an additional $390 million in property taxes, if an estimated undervaluation of 30% is used. Since the residential tax burden has climbed from 53% to 62% of the total since 2000, while the commercial burden dropped to 38%, there is reason to suspect this trend is based on depressed commercial TCAD appraisals.[2]

Background: Property taxes help pay for public schools, city streets, county roads, police, fire protection and many other services.  An appraisal district in each county, administered by a chief appraiser, sets the value of the property each year. Accurate appraisals insure that all property owners pay their fair share.  The Texas Constitution sets basic rules for the property tax:

However, in Travis County, and contrary to state law, owners of commercial property and speculative land generally pay appreciably less than market value.  The Texas Association of Appraisal Districts released a study in 2005 estimating that commercial property in Texas is undervalued by 40%, resulting in over $4 billion uncollected for schools annually.[3]  While the problem is widespread, Travis County should take corrective action.

Methodology:  The City of Austin and Travis County purchase real property for roads, parks, preserve lands, buildings, rights of way and other similar uses.  Prospective government purchases must be appraised by third-party appraisal companies to determine fair market value.  Since 2006, the City of Austin has ordered over 600 appraisals, of which the majority are commercial property appraisals.[4] Travis County has ordered far fewer but the total likely exceeds 100.  Within each appraisal, there is a section where the appraiser gathers recent sales in the area for comparison purposes, usually 5 or 6 per appraisal.  These Ňsales compsÓ are verified market value property sales stating the property description, sales price and date, zoning, ownership and legal description.  

Photo copies of approximately 120 sales comps were requested for this report, with no prior knowledge of their TCAD valuations.  The comps were culled for duplicates (right of way purchases tended to use the same comps), too-recent sales (2008 had limited history), non-profit or government purchases (no motivation to withhold sales price), tracts that had been re-platted or subdivided (the history lost), those with improvements constructed (a subject matter for a separate report) and those simply untraceable without major effort.  Seventeen of the sale comps that  fell within 75% of the TCAD valuation for two or more years and were not included.  The remaining 40 comps were reduced to 30 to provide a variety of geography, size and type.[5]

Analysis:  TCAD valuations ranged from 6% to 75% of the verified sales price in various commercial property categories in all areas, from AustinŐs Central Business District to the outlying areas of the county.  All major State Property Tax Board categories of commercial property types, A-F, were represented but large, commercial-income properties were absent due to the fact that both Travis County- and the City of Austin-supplied appraisal comps dealt primarily with land.  However, the study by the Texas Association of Appraisal Districts in 2006 has provided in Appendix C shows large office and apartment valuations at 63% of the verified sales price, with tax collection losses continuing for years.

Large speculative tracts tended to show the greatest undervaluations.  The TCAD market values for properties with agricultural appraisals (commonly known as ag exemptions) were seldom anywhere close to the purchase prices paid and were specifically purchased for speculation, as evidenced in the sales comp notes.  While agricultural appraisals greatly reduce the tax liability during the speculation period, the law provides for rollback taxes amounting to 5 years when the physical use changes, which makes the need for 100% market value appraisals extremely valuable to the taxing authorities.

Conclusion/Remedy: AustinŐs homeowners are subsidizing speculative land holdings and commercial property owners through a flawed appraisal system administered by the Travis Central Appraisal District.  The City of Austin and Travis County should immediately challenge the low level of commercial appraisals before the Travis Central Appraisal Review Board, as allowed by Texas Property Tax Code Section 41.03.  Further, a majority of taxing units in Travis County should request the Texas State Comptroller to audit the performance of the Travis Central Appraisal District under Section 5.12.

[1] See Appendix A: TCAD Valuation vs. Sales Price for 30 Properties

[2] See Appendix B: City of Austin 10 Year History – Property Tax Collections – Graph of % Residential vs. % Commercial and 2 graphs showing total TCAD values by category over 10 years for county and city.

[3] See Appendix C:  TAAD Study, news articles

[4] See Appendix DSample copy of appraisal lists provided by the City of Austin Real Estate Services Division

[5] See Appendix E:  30 Sales comp summaries plus the TCAD equivalent online