Houston Property Tax
Houston Property Tax
Commercial Property Tax in Harris County: Who Bears the Heaviest Burden?
It’s Not Just Where You Build — It’s Also What You Build
In Harris County, there’s one thing that virtually every commercial property owner, developer, and asset manager can agree on: The local real estate market is booming and values of most Houston-area properties are enjoying double-digit growth. As a result of this record growth, however, Harris County is also one of the nation’s most aggressive appraisal districts, and local owners are faced with some of the highest property taxes anywhere.
The Harris County Appraisal District is the largest in the state of Texas and one of the largest assessors in the country. In 2018, almost 107,000 parcels made up over $164 billion in taxable values in the Houston/Harris County region. All properties are assessed annually with the deadline to protest each May.
Property owners and developers understand why their taxes are going up, but they have a hard time stomaching the aggressive pace. To provide some answers, Altus Group’s real property division, reviewed CRE taxes in the Houston area and analyzed the averages by market and asset type. Identifying which sectors have had the biggest tax increases throughout Harris County can help owners find remedies that may relieve their tax burdens and better prepare for the future. But first, let’s find out more about the factors that cause these high burdens.
Harris County Commercial Property Tax Rate
Visit the Harris County Tax Assessor Office’s website for a complete table of tax rates.
Why Are Your Taxes So High When Your Performance is Lagging?
If you manage, own, develop, or buy CRE in Harris County, your property tax can be as much as 20% to 40% of your operational cost. These taxes, and the 10-40% increases year-over-year (YOY), adversely affect your portfolio and property earnings and impact operations, as well as make it very difficult to forecast or underwrite with confidence
Under Texas law, the assessment ratio or taxable value of properties is 100% of its market value; Harris County has an average tax rate of 2.67%. This leads to Houston’s commercial real estate owners experiencing some of the highest property taxes in the nation, even on properties under performing the market. Why is that?
The Answer: Harris County Property Tax Appraisals
The answer has to do with way the appraisal district values properties, which does not always align with actual real estate market performance. In other words, it’s not you — it’s the mass appraisal valuation method they use. Harris County Appraisal District creates an income proforma model and applies it across the board for the same asset type. While there are some variations based on location and class, it’s effectively using the same vacancy rate, expense ratio and cap rate across the entire county. This creates disparities and it’s no wonder values are not aligned with your property’s actual performance. The appraisal district assesses property according to the market data they receive from prior year tax appeals, publications and industry related databases and in some cases sales transaction records, even though Texas is a non-disclosure state. However, the mass appraisal method could disproportionately affect specific property types in specific neighborhoods.
To realistically budget for taxes and manage your portfolio, it’s essential to know not only which locations can expect increases, but also which asset types. Altus Group works closely with their clients to advise and help forecast these unforeseen increases. For example:
- Apartments: Apartments lead the way for some of the largest tax assessment increases in the county. With over 6,500 units delivered in 2019, double that coming in 2020 and an increase in rental rates of 3-4%, value assessments have been bullish. From 2016 to 2018, the average tax assessment increase for apartments was 7% across all classes. From 2018 to 2019, however, the average YOY assessment spiked to 15%.
- Healthcare/Hospitals: Houston boasts one of the largest collections of hospital systems in the world, and more outpatient, medical office and medical facilities are being built. County assessors recognize the healthcare industry as a leading sector for increased tax assessments. In fact, the average four-year tax assessment increase had been 2.5% across the healthcare sector, but in 2019, it increased to close to 9%.
- Self-storage: In 2018, this asset type was building in record numbers, saturating the Houston market. Construction has slowed, but for some, it’s still a preferred investment. Rental rates are finally increasing after a period of declining revenue, and the appraisal district has taken notice.
- Industrial/Warehouse: Although the decline of the oil and gas industry has taken a toll, the industrial sector is recovering rapidly, due to an influx of e-commerce and manufacturing companies and record job growth. With new construction on the rise and portfolios of properties trading hands, tax assessors have been diligently watching the market in this sector.
- Office/Retail/Hospitality: These sectors have remained relatively flat, with some areas experiencing small increases and others decreasing YOY.
Overvalued? Appealing your property tax assessment and other management tactics
Harris County assessors have become more aggressive with their valuations and less willing to settle values at the informal or formal Appraisal Review Board level. This is now forcing owners to file a Judicial Appeal to dispute their tax burden — a practice that has become commonplace and, in many cases, necessary. The Harris County Appraisal District 2018 Annual Report reports that over the past 10 years, lawsuits soared from 2,711 cases in 2009 to a record high 7,026 in 2018. This does not include the 17,000 additional Binding Arbitration cases filed between 2016 and 2018.
Although a new law passed in 2019, Senate Bill 2, will help slow the growth of property taxes, it won’t reduce them. But there are steps you can take if your property has been overvalued:
- Vote: Starting in 2020, most taxing units, including cities and counties, will need voter approval to increase their property tax levies above a 3.5% tax rate, with some provisions. So, be sure you take this opportunity to vote.
- Binding Arbitration (BA): With the passage of Senate Bill 2, the deadline to file BA to appeal your value beyond the Appraisal Review Board decision has been extended from 45 days to 60. You can also file BA for commercial properties up to $5 million. Another addition to the law allows you a 45-day window after your application for BA has been accepted to work with the county assessor to settle the case informally, before an arbitrator is assigned. This method has produced great results and is more cost effective then filing litigation.
- Appeals Process: The average reduction of tax values through the appeals process over the past 5 years was slightly better than 10% for Harris County commercial properties. This was true whether the process was handled personally by the owner or by a third-party tax consultant, or whether an informal, formal, litigation, or BA approach was used. Results vary based on property type, class, location, and age
What To Expect in 2020, and Beyond
This holistic view of the Houston CRE market and where the spikes are occurring illustrates why hiring a highly experienced tax consultant is something owners should consider for appeals. But whatever approach you take to manage your taxes, current market trends and those over the past three years indicate that taxes will almost certainly continue to increase and some properties will be overvalued.
These increases are not a one-year anomaly; there are clear factors driving this growth. Although slight changes by asset and area type are expected, the market appears to be heading in just one direction: Up.
In our next article, we’ll explore trends in specific Harris County neighborhoods and asset types and analyze what they indicate for the remainder of 2020 and beyond.
Until then, our real property tax team can help you manage your tax liabilities to improve your portfolio’s performance.