How Do Appraisal Districts Set Commercial Real Estate Property Values?


Throughout Texas, Appraisal Districts have mailed out the 2016 Proposed Value Notices. For many commercial real estate property owners, they are left wondering how their values were set. Are you one of them?

To help owners understand and aid in their real estate tax planning process, we thought we’d take the time to explain how Appraisal Districts place valuations on commercial real estate. First, let us say that with few exceptions, all taxable property must be appraised at its market value as of January 1 of the current year (2016 in this case). By definition, a property’s market value is determined by what a willing seller and buyer determine is a fair price, assuming neither is under duress. To determine this fair value, the Appraisal District uses one of three methods of appraisal, as outlined below.

Because property taxes are one of the largest line item expenses for a commercial real estate property, it’s extremely important that owners analyze and ensure their properties have been fairly assessed. If an owner disagrees with a property’s valuation, he can decide to file a real estate tax appeal, which must be recorded by May 31, or 30 days following receipt of the Notice of Proposed Value, whichever is later.

Now, let’s take a look at the three methods of appraisal:

  • Income – Typically the most relevant approach in major markets, the income approach considers the income that a property could potentially generate, and then derives a value by applying a cap rate that reflects the current real estate investment environment. If the property is owner-occupied, market rates are employed instead of actual income and expenses.
  • Sales Comparison – This approach considers the sale price of comparable properties in relation to the subject property. However, in Texas, this can often be difficult since the law does not require the buyer or seller to disclose the price a property actually traded for.
  • Cost – The cost approach is typically utilized when improved real estate is either under construction or recently completed. Building permits, along with data published specifically for calculating construction costs, are used by the Appraisal District to estimate the hard and soft costs of the project and arrive at a total value. This approach is also relevant for properties difficult to value, including manufacturing sites, chemical plants, and other non-typical properties.

In addition to these three approaches, Texas commercial property owners are provided further remedy if a property is appraised at a value that exceeds the medium appraised value of a reasonable number of appropriately adjusted comparable properties (section 42.26 of the Texas Property Tax Code). However, keep in mind that the opposite can also occur – the Appraisal Districts can increase a property’s valuation that might otherwise support a value below the medium appraised value of comparable properties.

The Appraisal Districts are tasked with valuing thousands of properties each year, and as a result, mass appraisal techniques are used. So, it’s up to individual property owners – or their property tax consultants – to perform an in-depth analysis of their properties. Use our real estate tax guide to help understand how you can verify your property’s information and plan out your next steps (if needed) for the property tax appeal process.

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