Never Wait for Another Property Tax Refund… If Your Lender Will Let You
Abstract In Texas, property taxes on commercial real estate often come due while a lawsuit appealing the appraisal district’s assessment remains open. Historically, owners had little choice but to pay these taxes in full, then wait for a refund after the appeal’s resolution. Recently, the Texas Legislature amended the property tax code by eliminating the mandatory penalties associated with partial payment of taxes. Several hurdles remain, but if partial payments are deemed a viable option, there are best practices to consider.
The Texas Property Tax System provides owners of large commercial property two venues to obtain a reduction in their assessed value. These are best described as phases, as the first must be fully exhausted before an owner may proceed to the second.
The first phase, commonly referred to as the “ARB”, allows for discussion and negotiation with the appraisal district, followed by a formal hearing in front of the district’s Appraisal Review Board. The vast majority of ARB hearings, especially those limited to challenges of assessed value, occur between June and August each year. Tax bills, typically distributed in October, are based upon certified tax rolls that nearly always reflect the ARB’s changes to assessed values.
The second phase for owners of large commercial property is an appeal of the ARB’s determination of value in district court, commonly referred to as “Litigation”. Litigation allows for further discussion and negotiation with the appraisal district and often encompass discovery, mediation, depositions of expert witnesses, and sometimes a trial. Resolutions from litigation may come as quickly as a matter of months or may take a year or more; recently, defendant appraisal districts have taken actions that seek to draw these appeals out longer and longer. As a result, litigation is often not resolved until after taxes have become due for the tax year in dispute.
The Partial Payment Predicament
The Texas Property Tax Code allows a lawsuit appealing the assessed value of a property to be dismissed if the property taxes become delinquent. This has left owners with little choice but to pay their property tax liability in full, wait for litigation to settle or go to trial, then receive a refund on their overpayment.
The frustration and challenges this caused were immense. Gross reassessments by appraisal districts, on which there is no ceiling to how high they can raise a value, resulted in tremendous increases in tax bills. Cash flows became decimated, straining relationships with partners, lenders, and investors. Capital improvements were delayed as funds sat in the hands of the government, only to be returned interest-free at some indeterminate time in the future.
This predicament was caused by two statutes in the TX Property Tax Code and their joint impact on taxpayers.
Sec. 42.08 Forfeiture of Remedy for Nonpayment of Taxes lays out three important rules:
The existence of an appeal does not affect the delinquency date of taxes on the property.
The non-payment of taxes in the required amount results in the forfeiture of the right to continue an appeal in litigation.
The amount of taxes required to be paid by the delinquency date may be less than the full amount of taxes due.
Sec. 42.08 not only details the consequences of not timely paying the required taxes while a lawsuit is ongoing, it also says the required amount of payment may be something less than the full amount of the tax bill. This means a property owner could pay some lesser amount than the full bill and still keep their appeal in good standing.
Sec. 42.42(c) Corrected and Supplemental Tax Bills specifies what becomes due, once an appeal is resolved by either settlement or trial verdict, when a property owner has made a partial payment:
“…the property owner is liable for penalties and interest on the [additional tax due] as if the tax became delinquent on the original delinquency date…” (emphasis added)
Applying both code sections meant a property owner (a) had to make at least some minimum property tax payment to preserve their right to continue their appeal, and (b) any additional future property tax payments required to “settle up” after litigation would come with sizeable penalties and interest. As a result, while owners technically had the option to pay some lesser amount than the full tax bill, to do so was punitive enough to render it not practical.
When a partial property tax payment has been made, and that property’s litigation is resolved by either settlement or trial verdict, a supplemental tax bill is issued. Previously, any supplemental tax bill came with penalties and interest calculated from the original due date of taxes, regardless of whether that supplemental bill was paid on time.
In the last Legislative session, the state updated Sec. 42.42(c) Corrected and Supplemental Tax Bills to read:
“If the additional tax is not paid by the delinquency date for the additional tax, the property owner is liable for penalties and interest… as if the tax included in the supplemental bill became delinquent on the original delinquency date…”
This alteration to the tax code means penalties and interest are no longer due if the supplemental tax bill is paid by the due date of that bill. If the supplemental tax bill is not paid by its due date, only then are penalties and interest imposed, and they are calculated from the original due date. As a result, property owners can now take advantage of the partial payment options offered in sec. 42.08 without automatically incurring the penalties and interest they would in previous tax years.
Partial Payment Options
Sec. 42.08 offers two options for partial payment of taxes independent the ARB’s determination of value:
The amount of taxes due on the portion of the property’s taxable value that is not in dispute.
The amount of taxes imposed on the property in the preceding tax year.
The first option, to pay the amount not in dispute, carries additional requirements that make it more complicated than it first appears. Most importantly, it requires the appeal filed by the property owner to “be accompanied by a statement in writing of the amount of taxes the property owner proposes to pay.” This implies an owner must be certain of their opinion of value the day they file a lawsuit, a duty that is essentially impossible for a property owner or their representation.
The day a property owner’s attorney files their appeal of the ARB’s determination of value, both variables in the tax liability equation are still unknown:
(Assessed Value x Tax Rate = Tax Liability)
Expert designations are not required to file lawsuits. A property owner may not yet know whom they intend to retain as a testifying expert. Even if they do, it’s virtually certain the property owner doesn’t know how that expert will conduct their analysis; specifically, which comparable properties will be selected, the ARB value of those comps, the cap rate to be employed, adjustments to be applied, on and on. The other variable, tax rates, are typically adopted by taxing units (cities, school districts, etc.) in late September, often after the 60-day deadline has passed for a property owner to file their appeal.
As a result, it is near ubiquitous that property owners file appeals without yet knowing exactly how overstated they believe their tax bill to be.
The remaining option, to pay the amount of taxes imposed on the property in the preceding tax year, is far more absolute of an amount and therefore carries much less risk.
Issues That Persist
The statutory laws defining when property taxes must be paid do not embody all the challenges owners face when choosing how to pay those taxes; therefore, the recent legislative change to the property tax code does not fully clear the path to start paying taxes in a different manner.
The single greatest issue that remains for most property owners are the requirements of their lending partner. When electing to make a partial payment, the full tax liability as-of the due date is not being completely satisfied. Although an owner could maintain the tax bill is not yet technically due in full, any remaining balance would still exist as an unfunded liability.
Any unpaid tax liability would almost certainly result in a line item on a lender’s Exception Report. Presidents and leadership of several regional banks across Texas all yielded a similar response when discussing how to address exception reports – “Talk with your lender.” All those interviewed stressed the importance of a strong working relationship between borrower and lender, so that together both can determine how to satisfy an exception report entry. Possible solutions included the leveraging of collateral or creating new, self-held escrow accounts that retained cash or other assets to offset the liability until the appeal was resolved. But unfailingly, every discussion was dotted with disclaimers of needing to fully know the borrower, the property, and the amount of the liability.
Another persistent issue can be the strain on cash flow. Even if the entire tax bill is no longer paid by the original due date, the short fuse on supplemental tax bills demands some level of liquidity. Unlike the initial tax bill, which is often received in October and not due until the following January 31st, any supplemental tax bill is due the first day of the month the bill’s mailing, provided that allows at least 21 days. This means any supplemental bill may be required to be fully paid in as little as three weeks or the owner gets hit with penalties and interest calculated from the original due date!
Build and maintain strong relationships with lenders and equity partners. Many of the constraints that discourage partial property tax payments now reside outside the four corners of the Texas property tax code.
Escrow to the full amount due on the original tax bill. Not only does the full amount represent the worst-case scenario, but having funds available to pay the entire amount it will likely be a requirement of most lenders. Do not rely on tax consultants or legal representation to advise on how much to escrow. These advocates are regulated by ethical and industry guidelines that limit their ability to provide financial advice or guarantees.
Partial payments allow for flexibility, but they do not alter or reduce any present-day total financial obligation. Circumstances around appeals can change dramatically for many reasons, including a sale of the property, a natural disaster such as a hurricane or global pandemic, or even court-guided changes to discovery or scheduling orders. Always be able to meet the current financial obligation.
Choose consulting and legal representation that work on contingent fees. By choosing advocates that work on contingency and do not pass through expenses, property owners safeguard against total effective tax liability (tax costs + appeal expense) exceeding those funds set aside to pay taxes.