By: Mihir Zaveri
Big businesses and commercial building owners in Harris County have unleashed a growing number of lawsuits in recent years to knock millions of dollars off their property tax bills.
It's a good bet: filing a lawsuit to challenge the appraised property value results in a reduction, on average, of more than 10 percent, according to the Harris County Appraisal District. For property valued in the millions, that decrease in value could mean hundreds of thousands of dollars less in property taxes per year.
The trend toward litigation - a departure from cheaper informal or administrative negotiations of the past - has raised alarm bells among public officials whose governing entities rely on property taxes to serve Harris County's rapidly growing populace.
They are seeing larger and larger sums of tax revenue carved out of budgets as well-resourced property owners take their challenges to court. The practice means budget officers increasingly are uncertain about how much money they will have to spend on services.
For Harris County, which typically keeps a robust fund balance, that uncertainty usually can be absorbed. For an entity like the city of Houston, already looking at a budget deficit of more than $100 million next year, the consequences can be more dire.
Such was the case in February 2016 when the city, already looking at a $126 million budget gap in the following fiscal year, learned it would have $16 million less to work with following a spate of successful lawsuits from business owners protesting their property values.
"The reality is, that $16 million is a real hit to the city's budget," Mayor Sylvester Turner said then.
One agency definitely put in a pinch by the growing litigation is HCAD itself, which has had to shell out more money to defend against the lawsuits.
The number of lawsuits against appraisers grew from an average of 2,600 filed annually from 2010 to 2012, to more than 4,100 a year from 2014 to 2016.
Successful lawsuits cut property tax collections for Harris County, Houston, and Houston ISD by an estimated $60 million in 2016.
Refunds to property owners this year could be the highest ever seen, officials said, potentially reaching $70 million. Meanwhile, the appraisal district, funded by local governments, must use public dollars to defend its valuations in court.
"You're having to spend money on legal fees and refunds," said Jim Robinson, director of special projects in Harris County's budget office who previously headed HCAD for more than two decades. "Resources are finite. That's services that the public needs that go undone."
Explanations for the trend vary.
HCAD officials say the increasing litigation has been spurred by a rise in property values brought on by the recovering economy. The lawsuits, they said, are buoyed by a niche industry of lawyers and tax consultants.
Robinson and other county officials say the district is not trying hard enough to resolve appraisal challenges out of court.
Meanwhile, downtown business representatives say HCAD is too aggressive when valuing properties. And tax consultants blame a cultural unwillingness to settle cases out of court.
The finger-pointing reflects the complex, high-stakes game of property tax collection in Texas, where public and private entities perennially jockey over tens of billions of dollars that are collected to pay for schools, roads and public safety.
Bolstered by a unique provision in Texas law, some say the trend also reflects a system that benefits the wealthy while homeowners carry some of the highest property tax burdens in the country.
"When they game the system, hard-working homeowners get stuck with the bill and it becomes more difficult to pay for our schools, first responders, hospitals, roads, parks, flood control and other county services," Harris County Precinct 1 Commissioner Rodney Ellis said.
The basic premise of property tax collection: HCAD appraises each of the 1.7 million parcels of land in Harris County every year, aiming to get as close to the market value as possible under certain restraints, including limits on how much an appraisal can increase in a year.
The property owner can challenge that appraisal. The majority of these challenges are resolved informally with HCAD appraisers or through a three-member Appraisal Review Board.
Property owners who have exhausted those processes can take their challenges to court, a method rarely utilized by residential property owners.
In the commercial property world, however, the tactic is on the rise.
Robinson said the trend has hampered the county's ability to budget. The county must set its budget, according to state law, well before it knows how much it could lose in the lawsuits. Without a hike in the tax rate, that has led to more conservative budgeting - a particular pinch for county officials trying to provide for a region that has grown by nearly 1.3 million people since 2000.
The city, mayoral spokesman Alan Bernstein said, has other streams of revenue, such as sales tax, to help compensate for money that may not materialize because of lawsuits over property tax appraisals. He said the city projects out how much it expects to lose based on averaging the prior three years' losses and direction from the appraisal district.
HCAD Chief Appraiser Roland Altinger, who took the helm of the agency last year, said he understands the concern but calls the rise in lawsuits a problem without a fix.
There are a number of reasons behind the rise in litigation, Altinger said. First, he said, is that in the aftermath of the recession, HCAD began raising property values amid news reports of commercial buildings and properties - one of the main drivers of litigation - being sold for millions of dollars.
In 2013, for example, HCAD raised property values downtown roughly 50 percent. The next year, they were raised almost 18 percent, according to HCAD.
"When you do that, clearly there is going to be some pushback by the property owners on that," HCAD spokesman Jack Barnett said.
Compounding this, Altinger said, is that attorneys and tax consultants, both of whom benefit financially from taking cases to court and getting property values lowered, have figured out how to wield state law in property owners' favor, particularly a provision that allows properties to be valued similar to comparable properties.
That creates an incentive for the property owners to sue and drag out the challenge process as long as possible. Meanwhile, those comparable property values are being knocked down through challenges of their own.
"They know what they are doing," Altinger said. "This is better than going to Vegas."
Tammy Betancourt, CEO and executive vice president of the Downtown Building Owners and Managers Association, disputed Altinger's characterization. She said the rise in lawsuits is due to "unreasonable increases in values over a number of years, as well as the inability to find any middle ground through the (Appraisal Review Board) process."
Robinson said he also believed that HCAD was not prioritizing more informal measures to resolve property tax disputes.
Altinger said, however, that tax consultants and commercial property owners increasingly are breezing through those informal or administrative processes in order to get to court.
He pointed to the growing number of informal meetings for which the property owners or their agents did not show up, from 48 percent in 2012 to almost 52 percent in 2016. He said agents, many whom are former employees of HCAD, are savvy to the process and that lawsuits save their clients much more money.
"They make a bunch more in the litigation process," Altinger said. "It's like a little game that's being played."
Patrick O'Connor, president of O'Connor and Associates, a tax consulting firm that represents roughly 120,000 property owners across the state every year in tax appeals, disputed Altinger's claims, noting that the vast majority of cases are settled and do not go to trial.
"So, when they say people can get more in district court, what they're saying is, 'We won't negotiate in good faith until you file a lawsuit,' " O'Connor said.
He said he preferred resolving cases informally.
The increase in the number of lawsuits also has another, more direct, cost: defending the appraisal district. HCAD is funded by Houston, Harris County, Houston ISD and other jurisdictions in the Houston area.
When the cost of litigation goes up, that cost is passed onto all the taxpayers. HCAD's litigation load has grown from roughly $9.4 million in 2012 to $15.6 million in 2016 - from 15 percent of the district's budget to more than 20 percent. Much of that money goes to outside counsel to help defend the suits.
Altinger said he does not expect to have to raise the budget on outside counsel, further. Barring a fix, he said, lawsuits will be a perennial concern.
"This is not going away," he said.