VARIATION IN COMMERCIAL PROPERTY TAX APPRAISAL ACCURACY IN TEXAS by JAMES

184 Pages·2012·2.96 MB·English

VARIATION IN COMMERCIAL PROPERTY TAX
APPRAISAL ACCURACY IN TEXAS

by

JAMES HOWARD JOHNSON

Presented to the Faculty of the Graduate School of
The University of Texas at Arlington in Partial Fulfillment
of the Requirements
for the Degree of

DOCTOR OF PHILOSOPHY

THE UNIVERSITY OF TEXAS AT ARLINGTON
December 2012
Copyright © by James Howard Johnson 2012
All Rights Reserved
ACKNOWLEDGEMENTS

To all who gave of their time to help me in any way with completing this dissertation:
thank you. In particular, that includes my supervising professor, Dr. Fred Forgey, and dissertation
committee members Dr. Ivonne Audirac and Dr. Andrew Whittemore. Their patience and
helpfulness were extraordinary. Dr. Maria Martinez-Cosio and Dr. Rod Hissong offered timely
criticism, support and ideas on theoretical approaches. Dr. G. William Domhoff provided
guidance on questions of political power in tax appraisal.
I owe a debt of gratitude to tax appraisers in Texas and elsewhere who either helped with
the creation of the survey or completed it. These professionals have a difficult task, balancing the
revenue needs of government with the duty of fairness to taxpayers. I hope that shining the light
of research and analysis on their corner of the world increases understanding of the obstacles in
their path and improves in some small way their ability to perform their job.
I am deeply grateful to my academic cohort partner, Lisa London, for her assistance,
leadership and encouragement. It is likely I would not have finished, certainly not in this relatively
short period of time, without Lisa’s help.
Carole Robinson proofread the manuscript and saved me from egregious errors.
I owe a special debt to Dr. Nasser Haghighat, my coworker and mentor in research, who
patiently answered my questions, helped with development of the survey, and provided the online
survey capability. He is a role model for all who would do research.
Finally, I could not have made it through this degree program without the unwavering
support of my wife, Barbara. It surely seemed like a long road to completing the Ph.D. degree,
but she has always been patient and full of kind encouragement in all my academic endeavors.

November 12, 2012
iii
ABSTRACT

VARIATION IN COMMERCIAL PROPERTY TAX
APPRAISAL ACCURACY IN TEXAS

James Howard Johnson, PhD

The University of Texas at Arlington, 2012

Supervising Professor: Fred A. Forgey
Article 8 of the Texas Constitution requires property taxation to be “equal and uniform,”
and state law requires nearly all real property to be assessed at 100% of market value. Despite
these requirements, evidence exists that the appraisals of some high-value commercial
properties, specifically downtown class A office buildings, vary widely from market value.
According to the state Comptroller’s Property Value Studies, residential property tends to be fully
valued for tax purposes. An equity issue arises from the apparent undervaluation of high-value
commercial properties, which typically are owned by wealthy individuals and institutional
investors.
While residential property tends to be homogeneous with frequent sales to use for
comparison, commercial property is largely heterogeneous with infrequent sales. Data on
commercial sales is less available and harder to obtain than data on residential sales. Even
though Texas state law does not require the disclosure of real estate sale prices, most residential
sales are recorded in local real estate multiple listing service databases that are accessible by
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county appraisal districts. Information on commercial property sales is more difficult to obtain and
is available primarily through non-broker sources such as CoStar and other data providers.
Some of the variation in appraised value of class A office buildings in the downtowns of
the five most populous Texas cities can be traced to technical, legal, procedural and political
issues in valuation. Other potential causes of appraisal variation are revealed by the theoretical
approaches of the new institutional economics and the concept of bounded rationality.
Tax appraisers in the five most populous Texas counties were surveyed to gain insight
into obstacles to appraisal accuracy. Solutions proposed involve better use of market data and
modeling and changes to administrative procedures and policy at the state and local levels. A
valuation model is proposed that may increase the accuracy of high-value property appraisal and
could have application beyond the class A office segment of commercial real property.
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TABLE OF CONTENTS

ACKNOWLEDGEMENTS ............................................................................................................. iii

ABSTRACT ................................................................................................................................... iv
LIST OF TABLES ......................................................................................................................... xi
Chapter Page

1. INTRODUCTION .......................................................................................................... 1

1.1 Context .......................................................................................................... 1

1.2 Statement of the Problem .............................................................................. 7

1.3 Purpose ......................................................................................................... 7

1.4 Research Questions ...................................................................................... 7

1.5 Research Design Overview ........................................................................... 8

1.6 Assumptions .................................................................................................. 9

1.7 Rationale and Significance .......................................................................... 10

1.8 The Researcher ........................................................................................... 10

1.9 Definitions .................................................................................................... 11

2. LITERATURE REVIEW .............................................................................................. 13

2.1 Introduction .................................................................................................. 13

2.2 Obstacles to Accuracy in Tax Appraisal ...................................................... 14

2.2.1 Technical Issues in Valuation ...................................................... 14

2.2.2 Legal Framework of Valuation ..................................................... 17

2.2.3 Procedural Issues in Valuation .................................................... 19

2.2.4 Political Aspects of Valuation ...................................................... 21
2.3 Explanatory Theories................................................................................... 23
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2.3.1 New Institutional Economics ....................................................... 23

2.3.2 Bounded Rationality .................................................................... 28

3. RESEARCH METHODOLOGY .................................................................................. 37

3.1 Research Approach ..................................................................................... 37

3.2 Valuation Model Design............................................................................... 41

3.2.1 Introduction and Overview ........................................................... 41

3.2.2 Automated Valuation Models ...................................................... 45

3.2.3 Categorization of Properties ........................................................ 48

3.2.4 Data-Collection Methods ............................................................. 50

3.2.5 Model Specification ..................................................................... 52

3.2.6 Model Calibration......................................................................... 57

3.2.7 Data Analysis and Synthesis ....................................................... 60

3.2.8 Limitations of the Model .............................................................. 60

3.2.9 Valuation Model Summary .......................................................... 63

3.3 Survey Research Design ............................................................................. 64

3.3.1. Introduction and Overview .......................................................... 64

3.3.2 Identifying the Survey Population ................................................ 65

3.3.3 Overview of Information Needed ................................................. 67

3.3.4 Research Design Overview ......................................................... 68

3.3.5 Data-Collection Methods ............................................................. 74

3.3.6 Data Analysis and Synthesis ....................................................... 78

3.3.7 Ethical Considerations ................................................................. 79

3.3.8 Issues of Trustworthiness ............................................................ 80

3.3.9 Limitations of the Study ............................................................... 81

3.3.10 Survey Research Summary ...................................................... 82

3.4 Research Methodology Summary ............................................................... 82
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4. DATA ANALYSIS AND FINDINGS ............................................................................ 84

4.1 Introduction .................................................................................................. 84

4.2 Findings on the Valuation Model ................................................................. 85

4.2.1 Accuracy and Feasibility of the Valuation Model ......................... 85

4.2.2 Variation in Appraisal Accuracy ................................................... 87

4.3 Findings on the Effect of Sales Data Availability ......................................... 93

4.3.1 Limitations or Gaps in Available Market Data ............................. 93

4.3.2 Nondisclosure of Sale Prices ...................................................... 93

4.4 Findings on Internal Appraisal District Limitations ...................................... 94

4.4.1 Barriers to the Effective Use of Data in Appraisal ....................... 95

4.4.2 Hardware and Software Limitations ............................................ 95

4.4.3 Limited Appraiser Training, Knowledge and Skill ........................ 96

4.5 Finding on Appraisal District Budget Constraints ........................................ 96

4.5.1 Appraisal District Budget Constraints .......................................... 96

4.6 Finding on External Pressure ...................................................................... 98
4.6.1 Limitations from External Pressure or Public
Relations or Political Consequences .................................................... 98

4.7 Findings on Divergences from Fair Market Value ....................................... 99
4.7.1 The Effect of the Protest-Appeal-Resolution Process
on Final Valuation Accuracy ............................................................... 100

4.7.2 Divergences from Fair Market Value ......................................... 101

4.8 Findings on Rules and Laws ..................................................................... 101
4.8.1 Legal Constraints that Make it Difficult to Apply
the Fair Market Value Standard ......................................................... 101

4.9 Finding on Human Cognitive Limits ........................................................... 102

4.9.1 Bounded Rationality at Work ..................................................... 102

4.10 Findings on Environmental Demands ..................................................... 106
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4.10.1 The Presence of Environmental Demands in
Tax Appraisal ...................................................................................... 106

4.11 Finding on the Relationship between Appraisers and
Taxpayers ........................................................................................................ 109

4.11.1 The Rules of the Game ........................................................... 109

4.12 Conclusion ............................................................................................... 110

4.12.1 Summary of Findings .............................................................. 110

5. INTERPRETATION OF FINDINGS .......................................................................... 114

5.1 Introduction ................................................................................................ 114

5.2 Goals and Methods of the Study ............................................................... 114
5.2.1 Measuring Variation in Accuracy through a Mixed
Methods Approach ............................................................................. 114

5.2.2 The Valuation Model and Quantitative Analysis ........................ 115
5.2.3 Survey of Registered Tax Appraisers: The
Qualitative Approach .......................................................................... 117

5.3 Meaning of the Findings ............................................................................ 119

5.3.1 Appraisal Accuracy .................................................................... 119

5.3.2 The Protest-Appeal-Resolution Process ................................... 120

5.3.3 Bounded Rationality .................................................................. 121

5.3.4 Sale Price Nondisclosure .......................................................... 122

5.3.5 Causes of Variation between Counties ..................................... 122

5.3.6 Pursuit of Litigation .................................................................... 123

5.3.7 Unequal Appraisal Protests ....................................................... 123

5.3.8 Volume of Protests .................................................................... 124

5.3.9 Appraiser Accuracy versus Productivity .................................... 124

5.4 Conclusion ................................................................................................. 125

6. CONCLUSIONS AND RECOMMENDATIONS ........................................................ 127

6.1 Introduction ................................................................................................ 127
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6.2 Conclusions ............................................................................................... 127

6.2.1 Appraisal Accuracy .................................................................... 127

6.2.2 Availability of Sales Data and Price Disclosure ......................... 128

6.2.3 Budget and Resource Issues .................................................... 129
6.2.4 Inaccuracy in the Stages of the Protest-Appeal-
Resolution Process ............................................................................. 129

6.2.5 Legal Constraints....................................................................... 130

6.2.6 Bounded Rationality and Environmental Demands................... 130

6.3 Recommendations ..................................................................................... 131

6.3.1 Recommendations for CAD Officials ......................................... 131

6.3.2 Recommendations for Local Governments ............................... 132

6.3.3 Recommendations for the State Comptroller ............................ 132

6.3.4 Recommendations for Lawmakers ............................................ 133
6.3.5 Recommendations for Professional or Trade
Organizations ..................................................................................... 134

6.3.6 Recommendations for Citizen Groups ...................................... 134

6.3.7 Recommendations for Academic Researchers ......................... 134
APPENDIX

A. VALUATION TABLE ................................................................................................ 136
B. STATE LICENSE DATABASE AND CAD EMPLOYEE NAME
MATCHING ................................................................................................................... 148

C. RESEARCH QUESTIONS AND SURVEY QUESTIONS KEY ................................ 152

D. COMERCIAL REAL PROPERTY APPRAISAL SURVEY ....................................... 155
E. COMMERCIAL REAL PROPERTY APPRAISAL SURVEY
CONCEPTUAL FRAMEWORK .................................................................................... 158

F. COMMERCIAL REAL PROPERTY APPRAISAL SURVEY RESULTS ................... 161

REFERENCES .......................................................................................................................... 165
BIOGRAPHICAL INFORMATION ............................................................................................. 173
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