Property Taxes And Protests Driving Investment Decisions In Houston

No one likes paying property taxes, especially in Harris County, where they are almost double the national average. In the delicate and detailed world of financing, where spreads are quickly narrowing, getting a good number on your tax assessment has become an important factor in real estate opportunities and has fueled an entire legal industry.

“We’ve been really trying to find those plays where we’re not going to get crushed by the taxman,” Berkadia Director Jennifer Ray said at Bisnow's Houston Capital Markets event Dec. 4.

With no state income tax, Texas and its municipalities must rely on property taxes to fund local law enforcement, schools, roads and all manner of local services, leading to higher property taxes than most other states. As the largest uncontrollable cost of owning a building, property tax assessments and reassessments have become a critical part of financing asset ownership. 

Disputing your property taxes has become a legal arms race. The Harris County Appraisal Review Board, an independent entity that resolves disputes about property tax assessments, reduced Harris County property tax assessments by $22.2B in 2019, according to January Advisors. Roughly $19B of that value reduction came from commercial property, saving owners an estimated $444M total in taxes. 

In total, 73% of commercial and residential property tax protests involved hired help, according to January Advisors. With most firms that protest property taxes paid a portion of the savings, a conservative 20% fee estimates the yearly market size of property tax protests at $88M. 

County appraisal districts are fighting back.

“Municipalities have become more and more aggressive every year. The numbers are coming out earlier and earlier. That’s where I’ve seen groups who do acquisitions get blown apart,” Ray said. “What they put as their reassessment value is not what the taxes came out to. Most people have had to go into litigation.” 

What you pay depends on where you build. Property taxes in the Houston metro are a complicated business, with dozens, sometimes hundreds, of “taxing units” each levying their own taxes. That makes Houston-area property owners, regardless of which county or city they reside in, pay more in property taxes than other major metros. 

The high tax bills and potential for reassessments is driving real estate investment strategy in the metro.  

“To me, when I’m looking for opportunity, it’s about where can you go and feel like you’re going to get a better tax reassessment,” Ray said. “There’s certain counties that will be more aggressive than others in the Houston market.”

Ray works mostly on the multifamily side of commercial real estate, but the property tax issue is a prominent concern for every asset class. 

“If there’s a site that has low taxes with a demand need, that’s where we feel there’s an opportunity,” Vigavi Realty Managing Principal Luis René Garza Villarreal said. Vigavi focuses on industrial development.

Houston-based Weingarten Realty, specializing in retail, is a prolific property tax protester in its hometown. Property tax protests and litigation were a key part in the REIT’s recent effort to strengthen its balance sheet.

“It’s a battle, there’s nothing strategic about it, you just grind it out,” Weingarten CEO Drew Alexander said. “A buddy of mine on the review board said, ‘You need to stop suing all the time,’ I said look, ‘we’ll stop suing when we start losing.’ We’re a public company with shareholders, we have a fiduciary responsibility. We have a team dedicated to it.”

Alexander feels lucky to be in Texas though because the issue is worse in other parts of the country. 

“It’s absolutely a concern nationwide,” Alexander said. “It’s worse in a lot of areas.”