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Chapter 2
Findings of the Appraisal Standards Review

This chapter addresses findings, commendations and recommendations from the appraisal standards review of the McCulloch CAD in two sections:

2.1
Generally Accepted Appraisal Practices

The CAD must consider three general appraisal methods or approaches–cost, income and market–in determining the market value of property. The appraiser must use the method most appropriate to each particular property.

The CAD can find additional information about the approaches to determining or appraising value in appraisal textbooks and IAAO Standards. Appraisers usually determine the value of producing mineral deposits, such as oil, gas and coal and the value of many utility and commercial properties by using the income approach to value. Most appraisal districts contract with consultants to appraise mineral and utility properties. The chief appraiser can provide information that helps the contractor decide the proper method to use to appraise mineral and utility properties.

FINDING
McCulloch CAD lacks written appraisal procedures manuals for the appraisal staff.

The CAD employs one real property appraiser, hired in February 2007 after serving as an appraiser at Harris CAD. This appraiser position was vacant for the 2006 tax year, and the chief appraiser performed all real property appraisals.

The field appraiser is responsible for appraising all real property accounts except those appraised by the firm under contract to appraise minerals and other complex properties. The CAD has another employee who appraises business personal property in addition to handling other administrative duties.

McCulloch CAD field appraisers accomplish most appraisals by entering the accumulated property characteristics into the computerized valuation model. The model, when directed, produces a market value for each property based on the property's characteristics that the appraiser then reviews for reasonableness and accuracy.

Residential properties are appraised using cost-based schedules primarily developed from the Marshall & Swift Valuation Service guidebook (M&S) and local sales. The residential cost schedules consist of eight classes, and the CAD last updated cost data in 2006. The CAD, however, has no residential appraisal manual. The chief appraiser explained that staff does not rely on local written appraisal procedures; instead the CAD trains appraisers in the field on identifying property classes and other appraisal procedures.

The CAD appraises commercial properties using the M&S guide and locally developed cost schedules. The chief appraiser explained that appraising commercial properties is difficult due to the lack of uniformity in commercial properties and the existence of many older buildings in the county. As a result, the CAD uses more of a fee appraisal approach, especially on the older properties. Older buildings, being harder to classify and value, are appraised using locally developed schedules. Newer commercial buildings can often be appraised using M&S schedules and values adjusted using local modifiers. The CAD last updated the commercial cost schedules in 2006. The CAD has not developed local procedures, but instead relies on the M&S manual for general appraisal guidance.

The M&S guidebook is a helpful tool in appraising residential and commercial property, but M&S did not design it specifically for McCulloch County. In addition, the valuation guidebook does not contain local procedures and directives for completing appraisals.

A comprehensive residential or commercial appraisal manual would include a description of classifications, representative pictures for each classification, detailed instruction on using the manual and the steps to conducting an appraisal. Procedures detailed in the manual might focus on measuring procedures, classification, identifying property attributes, applying depreciation, developing modifiers and site valuation.

McCulloch CAD bases personal property values on taxpayer renditions. The personal property appraiser reviews renditions for reasonableness by comparing rendered values to renditions of similar businesses. The vast majority of business personal property accounts are located in Brady. The CAD uses drive-by inspections to discover new accounts or changes in accounts through the course of the year. The CAD inspects new businesses each year, along with businesses it observes to have had personal property changes.

The chief appraiser explained that the valuation of business personal property is largely a non-automated approach, as it appraises account items on a case-by-case basis. According to the chief appraiser, the majority of furniture, fixtures and equipment are used and quite old and difficult to appraise using standardized price per square foot schedules. The CAD uses M&S depreciation schedules that it maintains on its computer system. McCulloch CAD does not have a manual to guide its appraiser in the valuation of personal property, review of renditions or in the reasonableness determination.

The appraisal district contracts with an appraisal firm for the appraisal of industrial, utility and mineral accounts. The firm appraises utilities using the unit value technique. The unit value technique requires the appraiser to determine the market value of the entire utility company. The appraisal firm then apportions utility company value to each taxing unit based on an agreed measure of the company's presence in the taxing unit such as miles of track, historical cost or number of meters. The unit valuation is widely accepted as the preferred income technique for appraising utility properties.

Lack of detailed appraisal procedures manuals could cause inconsistent appraisals and result in property values that deviate from market value. If the level of appraisal (percentage of market value) varies from school district to school district, or from taxpayer to taxpayer, some taxpayers could be bearing more than their fair share of the local tax burden.

According to Chapter One, The Ad Valorem Tax System, in IAAO's textbook, Property Appraisal and Assessment Administration, standards of practice may incorporate or be contained in laws, regulations, policy memoranda, procedurals and guidelines, appraisal manuals and schedules. Guidance manuals describe repeated tasks, particularly those done by more than one person. The publication further states that there needs to be a procedure for establishing standards that includes updating manuals on a regular basis. Performance and progress contribute to effective and efficient operations of appraisal districts. Procedures are required for monitoring the quality of appraisals, editing data and reviewing appraisals.

Standards of practice include:

• manuals – establish work procedures;
• procedures – promote uniformity of approach to tasks;
• policy memoranda – set performance goals; and
• forms.

According to Property Tax Code Section 23.01, CADs are required to appraise all taxable property at its market value as of January 1. The CAD must determine market value of property by the application of generally accepted appraisal methods and techniques. If the appraisal district determines the appraised value of a property using mass appraisal standards, the mass appraisal standards must comply with the USPAP. The CAD must use the same or similar appraisal methods and techniques, based upon the individual characteristics that affect the property's market value.

Comprehensive appraisal procedures manuals would help ensure that the CAD meets these standards and requirements. In addition, developing complete and detailed appraisal manuals complements the field training of new employees and helps ensure consistent appraisal practices among all the staff.

Johnson CAD, for example, provides a systematic approach to property appraisal with well-written policy and procedures manuals and other written guides. Tom Green CAD has well-written and comprehensive residential, commercial, personal property and land appraisal manuals.

RECOMMENDATION 1
Develop appraisal manuals that provide local procedures and practices for each type of property the staff appraises.

FINDING
McCulloch CAD lacks written local guidelines for appraising agricultural land.

The CAD relies on the Property Tax Code and the Manual for the Appraisal of Agricultural Land published by the Comptroller's office for guidelines on qualifying and appraising land for productivity appraisal. Comprehensive guidelines establishing intensity standards for all major agricultural uses in McCulloch County do not exist.

The chief appraiser develops the five-year net-to-land calculations on a spreadsheet. However, the chief appraiser was unable to locate the document and consequently, the net-to-land spreadsheets were not available for review. The Comptroller's office obtained details of productivity calculation procedures through conversations with the chief appraiser during the review process.

The chief appraiser reviews each agricultural use application and conducts on-site inspections when necessary.

Some of the steps listed in the Comptroller's Manual for the Appraisal of Agricultural Land to calculate productivity value based on a typical cash lease include:

• gather as many leases as possible for each year of the five-year period. In most cases, you will need to gather four to six leases per year to develop a reliable net to land value for a specific land class;
• determine a lease rate for each year based on the most common lease rate, not an average lease rate;
• establish a lease rate for each year of the five-year period. Section 23.51 (4), Tax Code, defines the net to land base period as the five-year period preceding the year before the appraisal;
• determine typical landowner expenses;
• for each of the five base years, subtract the expenses from the typical lease rate. The remainder is the net to land value;
• average the five net to land values for each of the five years to obtain the overall net to land value for the land class for the five-year period; and
• divide this net to land value by the capitalization rate to obtain the agricultural use value for the class.

Appendix E of the manual contains an example of this process.

McCulloch CAD maintains agricultural appraisal schedules on its computer system, which are updated each year. The CAD has established the following agricultural classes:

• wildlife management;
• native pasture;
• improved pasture;
• cropland; and
• irrigated cropland.

The chief appraiser indicated that he consults area ranchers and farmers for income and expense data for each land class. Hunting is a major recreational activity in McCulloch County and the potential for hunting can significantly affect the lease rates of rural property in the area. As a result, the chief appraiser includes income from hunting leases on native pasture properties in the county.

The CAD has determined that the following expenses are typical for the area:

• depreciated fencing expense;
• property taxes;
• management expenses;
• water pumping equipment on irrigated land; and
• brush control.

According to the chief appraiser, the CAD deducts these expenses from the lease rates.

In completing the appraisal calculations, the chief appraiser confirmed that the CAD calculates an average of the five net-to-land values for each of the five base years to obtain the overall net-to-land value for each land class. Finally, the CAD divides the net-to-land values by the capitalization rate to obtain the agricultural use value for each class. For 2006, the CAD applied the 10 percent capitalization rate required by law.

The McCulloch CAD Productivity Values Report from the 2005 PVS shows that the ratio for the productivity value for qualifying acres was 102 percent of state value. Ratios for the component land classes of rural property value were 103 percent for native pasture, 97 percent for improved pasture, 107 percent for irrigated cropland and 98 percent of productivity value for dry cropland. Native pasture comprises 81 percent of all qualified acres in McCulloch County.

The chief appraiser noted that the degree-of-intensity standard for the CAD is one animal unit per 20 acres. The Comptroller's Manual for the Appraisal of Agricultural Land states intensity the CAD should establish standards for each type of commodity production in the area and points out that "one animal unit per 20 acres" is not sufficient because it would not apply to all types of livestock (cattle, goats, exotics) or all agricultural classes.

Establishing degree of intensity standards is a critical step in the process of qualifying land as agricultural use. Degree of intensity standards are tests intended to exclude land on which token agricultural use occurs as a way to obtain tax relief. Because the law does not state what degree of intensity qualifies a particular type of land-in a state as large as Texas, no single statutory definition could cover all possible uses–the chief appraiser must set the standards according to local agricultural practices. The CAD should apply standards in a reasonable, flexible manner and should not deny a landowner an agricultural appraisal based on a rigid application of local standards.

In setting degree-of-intensity standards for an appraisal district, a chief appraiser should follow a process similar to the steps outlined in the Comptroller's Manual for the Appraisal of Agricultural Land:

• analyze each type of commodity production in the area;
• analyze the break down in typical steps in producing the commodity;
• specify how much time, labor, equipment, (i.e., inputs) are typical for each level;
• determine the typical minimum levels involved for each step;
• the degree-of-intensity specifications address these levels of input in detail for each step of the enterprise;
• it is the chief appraiser's decision on what constitutes an "area" for defining "typical" agricultural intensity;
• for a common crop, the chief appraiser looks to farming (ranching) practices within the county; and
• for crops that are rare, the chief appraiser may need to consider a multi-county region.

The absence of local agricultural guidelines can contribute to lack of uniformity in calculating productivity values and help in the decision-making process. By clearly defining prudent management factors for the area and the minimum standards that meet the degree-of-intensity requirements, both CAD staff and taxpayers benefit from written, local guidelines for understanding agricultural valuations. The CAD should apply these standards in a reasonable and flexible manner.

Erath CAD, for example, has developed a process in which the chief appraiser works with the agricultural advisory committee to obtain income and expense data, establish local guidelines for granting agricultural use and obtaining data for degree of intensity standards, stocking ratios, acreage requirements, and minimum management factors necessary to qualify for agricultural use.

RECOMMENDATION 2
Develop a manual and local procedure for the appraisal of agricultural land that includes intensity standards and other elements for qualified land for productivity appraisal and apply standards reasonably and flexibly.

FINDING
The CAD's agricultural appraisal advisory board is inactive.

The CAD's agricultural appraisal advisory board has not met since the 1990s, according to the chief appraiser. The chief appraiser obtains income and expense information primarily through conversations with local ranchers. In 2003, the CAD mailed out 300 survey letters to local ranchers and farmers, but the CAD only received two survey forms back.

An active agricultural advisory board might provide additional information using sources that are unavailable to the chief appraiser. Property Tax Code Section 6.12(a) states the chief appraiser of each appraisal district shall appoint, with the advice and consent of the board of directors, an agricultural advisory board composed of three or more members as determined by the board. One of the agricultural advisory board members must be a representative of the county agricultural stabilization and conservation service. The remainder of the members must have resided in the appraisal district for at least five years and must own land in the CAD that qualifies for agricultural or timberland appraisal under Subchapter C, D, E or H, Chapter 23.

The agricultural advisory board advises the chief appraiser on the appraisal and use of land within the district that qualifies for agricultural use or that is open space agricultural land. The agricultural advisory board can be one of the most important sources of information for the chief appraiser. Lack of expert advice from an agricultural advisory board or other sources could lead to inaccurate income and expense data from unreliable secondary sources and compromise the appraisal of land in agricultural use.

The Comptroller's office publishes a technical information publication, The Agricultural Appraisal Advisory Board, which be the CAD appoint and make use of an effective agricultural advisory board. The publication is available at http://www.window.state.tx.us/taxinfo/proptax/agadvboard/agappraisal.pdf.

RECOMMENDATION 3
Appoint an agricultural appraisal advisory board, with advice and consent of the CAD board of directors, as required by Property Tax Code Sections 6.12(a) and 6.12(b).

FINDING
McCulloch CAD does not have written procedures for gathering and analyzing sales.

The majority of sales data comes primarily from local realtors and appraisers, as no local multiple listing service (MLS) exists. The CAD maintains a sales file in a database management system that allows the staff to retrieve sales by various fields including school district, date range, property class, etc.

The CAD obtains deed information from the county clerk's office. A CAD staff member takes scanner equipment to the clerk's office and scans deed documents. The appraisal district is normally able to process this deed information and update its computer system within one to three months from the filing date of the deed. The CAD scans sales documents (deeds, notes and settlement statements) into its computer system. Another part of this process is coding sales in the system as arms-length or valid sales.

The CAD uses ratio studies, which it conducts in May, to analyze this data. Categories of property included in the ratio studies include sales of land, residential and commercial properties. The CAD runs ratio studies by school district and property class. It uses ratio study results to update schedules when warranted. Conducting ratio studies in May might be too late to make meaningful adjustments, since by that time the CAD would have already mailed notices of appraised value.

Since the CAD's processes for gathering and evaluating sales are not in writing, inaccurate or non-arms-length sales could compromise the sales database, resulting in misguided market evaluations and appraisals.

At the time of the review, an appraiser vacancy existed and the chief appraiser was performing all appraisals. If the chief appraiser retires, the CAD will face the prospect of having to hire new appraisers not familiar with the CAD or its processes. Written processes and procedures ensure that the CAD performs market analyses consistently, regardless of changes in personnel.

Knowing what analysis needs to be done, when to perform the analysis, and how to perform it is key to maintaining continuity and a high level of appraisal performance. These procedures include information on what constitutes an arms-length transaction. They include content on when to adjust sales for financing. Lastly, the procedures include information on ratio studies and the development of statistical measures the CAD may employ. The procedures provide employees with a list of the progressive steps the CAD uses to process sales.

A good appraisal procedures manual includes a sales analysis procedure. Compiling these procedures in a written manual can increase overall effectiveness of the appraisal program and ensure continuity in the appraisal district's performance. In addition, it is a good practice for the CAD to maintain copies of sales documents and ratio studies results in its files to provide documentation of the analysis performed and to support adjustments in value.

Accurate sales data are needed for specifying and calibrating valuation models and for sales ratio studies. The reliability of any valuation model or sales ratio study depends on the quantity and quality of data. According to IAAO's textbook, Property Appraisal and Assessment Administration, Chapter 5, Data Collection and Management, the reliability of any appraisal model or sales ratio study depends upon the quantity and quality of its data. According to IAAO, to obtain valid indicators of market value, appraisers must collect, edit and adjust sales data. The text recommends collecting the following sales data whenever necessary:

• sales price – single most important information about any sale;
• names and addresses of buyers and sellers – allows appraiser to contact for additional information on the sale;
• relationship of buyer and seller – helps distinguish an arms–length transaction
• property address, parcel identifier and legal description – links sale to CAD records;
• type of transfer and deed – also helps identify an arms-length transfer;
• interest transferred – what property rights are included in the sale;
• instrument number – unique identifier helps identify subject property;
• personal property – the price needs to be deducted from the sales price;
• financing – the terms can affect the price and must be accounted for; and
• date of transfer – needed for determining time of sale adjustments.

The three basic sources of sales data are deeds, contracts or agreements of sale and affidavits of property value. When this information is unavailable, is incomplete or requires verification, appraisers may obtain sales information from buyers and sellers by mail questionnaire, by telephone inquiry or face-to-face interviews. As a final resource, realtors, multiple listing services, title companies, private appraisers, leasing agents and certified property managers can be good informational sources.

Quality control is key to insuring that data is accurate. The CAD's field supervisors provide frontline quality control and should be personally accountable for the quantity and quality of work produced by those in their charge, according to IAAO.

According to Chapter One, The Ad Valorem Tax System, in IAAO's textbook, Property Appraisal and Assessment Administration, repeated tasks, particularly those done by more than one person, should be described in guidelines or manuals. The publication further states that there needs to be a procedure for establishing standards of practice that include updating manuals on a regular basis. Performance and progress reviews contribute to effective and efficient operations of appraisal districts.

Nueces CAD, for example, has developed detailed market analysis procedures. These procedures include data entry processes, neighborhood adjustment analysis and ratio study procedures.

RECOMMENDATION 4
Establish written procedures for gathering and analyzing sales.

FINDING
McCulloch CAD does not use statistical measures and does not evaluate value ranges as a stratification component in its ratio studies.

As mentioned earlier, the CAD:

• conducts annual ratio studies in May;
• does not have a MLS. Sales data used in the ratio studies come primarily from local realtors and appraisers;
• maintains a sales file in a database management system that allows the staff to retrieve sales by various fields, including school district, data range, property class, etc.;
• conducts ratio studies by school district and property class; and
• uses ratio study results to update schedules when warranted.

The chief appraiser noted the CAD does not run ratio studies by value ranges. Categories of property included in the ratio studies include sales of land, residential and commercial properties.

Although a copy of a ratio study report was not available at the time of the review, the chief appraiser explained that the CAD does not use statistical measures in the ratio studies, such as measures of variability (coefficient of dispersion, ranges, etc.) or measures of central tendency (median, mean, weighted mean).

While USPAP does not require or suggest value stratification, IAAO's Standard on Ratio Studies suggests that it is an appropriate method to help determine the relationship of the level of appraisal between high– and low-valued properties. With value stratification, it is easier to see if bias, either toward high– or low-valued properties, exists.

The Comptroller uses value stratification in the annual PVS by value, where possible. Stratified ratios provide the best indication of how well an appraisal district is appraising property. In the 2005 PVS, for example, results indicated that single-family residences in Brady ISD were mis-appraised in strata three ($32,661-$55,370), strata four ($55,371-$87,930) and strata five ($87,931-$999,999), but strata two ($12,561-$32,660) was appraised at 95 percent of market value or better.

Commercial real property in Brady ISD presented another example of the lack of appraisal uniformity. The 2005 PVS results indicated that strata two ($20,281-$74,570) and strata four ($146,471-$397,510) were mis-appraised, while strata three ($74,571-$146,470) was slightly mis-appraised. Strata five ($397,511-$999,999) was reported to be appraised at 95 percent of market value or better.

In ratio studies, stratification is the sorting of parcels into relatively uniform groups. Stratification permits analysis of mass appraisal performance within and between property groups.

Failure to use statistical measures and stratification in ratio studies deprives the CAD of valuable tools that can help it adjust appraisal values to ensure that they are appraising equally and at market value.

A properly designed ratio study is an effective tool for analyzing appraisal performance and developing strategies for improvement. For example, a ratio study designed to look at value ranges can direct appraisal resources to property groups in greatest need. The CAD could then target these areas for reappraisal or other corrective action.

The Comptroller's office explains in The Property Value Study and How to Protest that the value of stratifying properties so similar kinds of property are in each strata, before calculating PVS statistics, makes the results more meaningful and accurate. PTD obtains the information needed to value-stratify the appraisal roll values from prior-year stratification surveys or the appraisal roll, depending upon availability.

IAAO's Standard on Ratio Studies discusses the importance of statistical analysis in the ratio study process. Section 4.5 states that an appraisal district should compute a ratio for each parcel included in the ratio study, and should calculate the measures of appraisal level, uniformity and reliability for the entire jurisdiction and each stratum. When an appraisal district conducts ratio studies for equalization purposes, it may use confidence intervals and statistical tests to determine whether, at a given confidence level, that appraisal performance meets or falls outside mandated standards. Without such measures of reliability, the appraisal district should not conclusively consider the sample statistics concerning level of appraisal.

The IAAO's Standard on Ratio Studies Section 7 discusses ratio study statistics and analysis. Sections 7.3 through 7.3.6 describe the measures of appraisal level. The basis for these measurements are measures of central tendency, and appraisers should calculate them for each stratum and for such collections of strata as may be appropriate. Ratio studies should calculate several common measures of central tendency (appraisal level) and should include the:

• median ratio – the middle ratio when the ratios are arrayed from low to high or high to low, if there is an even number of ratios, the median is the average of the two middle ratios. The median is the generally preferred measure of central tendency for the evaluation of overall appraisal performance, determining reappraisal priorities or evaluating the need for a reappraisal;
• mean ratio – the arithmetic average of the ratios and is calculated by summing the ratios and dividing by the number of ratios. In a normal distribution, the mean will equal the median and is affected more by extreme ratios than the median. The sample mean has a slight upward bias in respect to the true level of assessment as it tends to slightly overestimate the true level of assessment; and
• weighted mean ratio – the value weighted average of the ratios where the weights are proportionate to the sales prices and is the ratio of the average assessed value and average sales price. It gives equal weight to each dollar of value in the sample, whereas the median and mean give equal weight to each parcel.

According to IAAO Standard on Ratio Studies Section 7.4, the ratio study should calculate measures of variability (dispersion), which relate to the uniformity of the ratios, for each stratum in the study. Generally, the smaller the measure, the better the uniformity, but extremely low measures can signal a flawed study.

The IAAO Standard on Ratio Studies Section 7.4.1 states that the most generally useful measure of variability or uniformity is the coefficient of dispersion (COD). The COD measures the average percentage deviation of the ratios from the median ratio. The formula for calculating COD is:

• subtract the median from each ratio;
• take the absolute value of the calculated differences;
• sum the absolute differences;
• divide by the number of ratios to obtain the average absolute deviation;
• divide by the median; and
• multiply by 100.

The IAAO's Standard on Ratio Studies, Section 4, identifies stratification and statistical analysis as two of the six basic steps of a ratio study. Those steps stated in this IAAO standard are:

• definition of purpose and objectives;
• collection and preparation of market data;
• matching appraisal and market data;
• stratification;
• statistical analysis; and
• evaluation and use of results.

A properly designed ratio study provides valuable information about the quality of mass appraisal work. Ratio studies provide not only a measure of performance, but also a means of improving performance.

For an example of what needs to be done to improve performance, the CAD may consult the Nueces CAD, which has a comprehensive ratio study system that allows proper reappraisal and maintenance planning. The computerized appraisal system allows the appraisal district to analyze its appraisals through ratio studies within and among property classifications.

RECOMMENDATION 5
Evaluate value ranges as a stratification component in the ratio study process and measure the level, uniformity and reliability of ratio data through statistical analysis.

FINDING
McCulloch CAD fails to apply ratio study results on an annual basis, so its values during non-reappraisal years may fail to reflect market values.

The chief appraiser explained that the CAD is on a three-year reappraisal cycle in which all property is appraised every third year. Even though the CAD conducts ratio studies annually, the CAD only uses the results of the ratio studies to change values during the reappraisal year causing its valuations to be out of date by as much as three years.

During the non-reappraisal years, the appraisal staff conducts ratio studies and adjusts land and cost schedules in preparation for the reappraisal year. Once the reappraisal year arrives, the CAD then reviews appraised values based on the market-adjusted schedules.

The CAD completed the last reappraisal in 2006, at which time the chief appraiser conducted the reappraisal of real property, since the CAD lacked a field appraiser. The chief appraiser noted that, due to the staffing shortage, appraised values were adjusted based on results from ratio studies; however, on-site inspections were limited. In 2007, the CAD filled the previously vacant field appraiser position. The CAD conducted the last reappraisal consisting of on-site inspections of all property in 2003.

The chief appraiser understands the CAD may need a more frequent reappraisal cycle to maintain appraised values at market value. If the CAD continues on a three-year reappraisal cycle, it will not update property values until 2009 and could continue to be at risk of not reflecting market value. While the law requires a reappraisal every three years, it also requires a CAD to maintain appraisals at market, which may require more frequent reappraisals.

McCulloch County is experiencing an appreciating real estate market. According to Trends in Texas Rural Land Values, Real Estate Center at Texas A&M University, 2005 research indicates that:

• values show positive increases;
• recreation uses of land, related primarily to hunting, continue to be a primary influence;
• buyers from the metropolitan areas of Texas are common and typically come from Dallas, Fort Worth, San Antonio and Austin;
• out-of-state buyers have been entering the market;
• the aesthetic characteristics of the land, i.e. views, and live water, are primary factors in the formation of land values, particularly in the Hill Country; and
• diversification of investments and a continued confidence that the land is a safe investment with a long-term appreciation potential seems to reinforce a buyer's motivation to purchase and retain rural land.

The policy of updating values every three years challenges the CAD's ability to maintain current market valuations each year. This is especially true in an appreciating and transitional market.

According to Property Tax Code Section 23.01, CADs are required to appraise all taxable property at its market value as of Jan. 1. Ratio studies, which measure the percentage of appraised values to market values, show whether appraised values are consistent with the statutory requirement that a CAD appraise property at market value. The coefficient of dispersion (COD) shows whether appraisals between properties and among property types are uniform. Strong appraisal uniformity guarantees each property owner pays a fair share of taxes and no more or less than others.

Section 4.2.2 of IAAO's Standard on Property Tax Policy, suggests that current market value implies annual assessment of all property. Annual assessment does not necessarily mean, however, that the CAD must review or recompute each valuation individually. Instead, the CAD needs to develop trending factors based on criteria such as property type, location, size and age and apply them to groups of properties. The CAD needs to derive these factors from ratio studies or other market analysis and apply them to its appraisals.

On the frequency of ratio studies, IAAO's Standard 12, Section 4.5, points out that the purpose of a ratio study dictates how often it should be conducted. Regardless of the reappraisal cycle, appraisers should conduct ratio studies, made as an internal control procedure, at least annually. This enables appraisers to recognize and correct potential problems before they become serious, as might happen if the CAD conducted ratio studies only in tandem with multi-year appraisal cycles. As mentioned earlier, McCulloch CAD conducts ratio studies annually, but it does not apply the findings until it reappraises every three years. This denies the CAD the opportunity to make timely adjustments to appraisals.

Failing to apply ratio study results in a timely manner to adjust cost schedules can result in misappraisal of properties. If the CAD incorrectly appraises enough properties, it can result in a loss of state funding to schools and inequities for local taxpayers, as well as increased protests due to the appraisal inequalities.

Frequent ratio studies and appraisal maintenance enable an appraisal district to keep its values at or near market levels.

Appraisal districts use ratio studies to plan appraisal maintenance programs. The study results indicate those market areas in the appraisal district where values no longer reflect the market. If the ratio study in a market area shows that the appraised values do not reflect the market, the CAD appraises the available sales to determine the market adjustment factor. This factor is the percentage the CAD uses to adjust the appraisal schedules to determine market value.

Nueces CAD, for example, performs ratio studies within property classes, by school district and county at least quarterly to determine appraisal performance. For some types of properties or locations, the CAD staff makes reappraisal and value maintenance decisions based on ratio study results.

RECOMMENDATION 6
Apply ratio study results annually to ensure property valuations remain at current market levels.

If values are not at market, think about reappraising more frequently than once every three years.

FINDING
The appraisal district has developed a reappraisal plan that does not fully comply with Property Tax Code Sections 6.05 and 25.18.

Property Tax Code Section 6.05(i) requires the CAD's board to develop a written plan biennially for the periodic reappraisal of all property within its boundaries, "according to the requirements of Section 25.18." Sections 25.18(a) and (b) require that:

(a) Each appraisal office shall implement a plan for periodic reappraisal of property approved by the board of directors under Sec 6.05(i).

(b) The plan shall provide for the following reappraisal activities for all real and personal property in the district at least once every three years:

The IAAO textbook, Property Appraisal and Assessment Administration, Chapter 13, Mass Appraisal, states that the required activities for all reappraisals must include the following steps in the order given:

• Performance Analysis – Determines whether the values are consistent with the market and equitable and that ratio studies are the primary tool for the analysis.
• Reappraisal Decision – Use statutes or administrative rules. This may include a cyclical schedule in which the appraisal district physically reviews and revalues jurisdictions. The reappraisal requires careful planning along with a major commitment of resources;
• Analysis of Available Resources – The appraisal district performs this step before defining goals and objectives. This includes evaluating the staff, budget, existing systems and practices, data processing support and existing data and maps. The publication also stresses that an adequate budget is crucial in that it can overcome deficits in other areas;
• Planning and Organization – IAAO emphasizes that this is the most important aspect of reappraisal, as it identifies the target completion date and performance objective, specific plan of action and timeline. The plan should also include definitions of critical activities with completion dates, assignment of responsibilities, and establishment of data collection and fieldwork standards;
• System Development – This produces the procedures, methods, manuals and software for the mass appraisal system;
• Pilot Study – This tests procedures in several portions of the jurisdiction. It should include a ratio study to verify if the system produces reliable and accurate values and point out needed modifications;
• Data Collection – After developing procedures and forms that are tested and approved, the data collection can start. IAAO stresses that quality control is essential;
• Production of Values – This begins with a market analysis, model development, model calibration and calculation of preliminary values. The ratio study then assesses the consistency and validity of the values between each property type and area. After the models provide acceptable results, the appraisal district can use them to produce values;
• Preparation of Appraisal Roll;
• Final Performance Analysis;
• Data Maintenance; and
• Value Updates.

On Sept. 20, 2006, the board of directors discussed and approved the reappraisal plan for tax years 2007-08 as required by Property Tax Code Section 6.05(i). Major sections of the appraisal district's reappraisal plan include:

• available resources;
• appraisal frequency and methods;
• data collection and maintenance;
• value review procedures;
• residential valuation process;
• commercial and industrial valuation process;
• business personal property valuation process;
• performance tests;
• limiting conditions;
• tax calendar; and
• USPAP reappraisal report.

The CAD is on a three-year reappraisal cycle. It conducted the last reappraisal in 2006, which resulted in increased valuations in approximately 80 percent of the CAD accounts. The CAD will next reappraise in 2009. Due to an increase in market activity, however, the chief appraiser is considering a more frequent reappraisal cycle. The CAD will perform ratio studies and make a decision to conduct reappraisals more frequently based on those results.

Each year, the CAD inspects, measures and adds new properties to the appraisal roll. In addition, the CAD obtains building permits from throughout the county and makes changes to accounts as indicated. The CAD reappraises individual properties due to changes in the condition of the property in instances such as fire, remodeling or demolition of a portion of the improvement.

While the CAD's reappraisal plan fulfills the fundamental requirements of Property Tax Code Section 25.18, and by reference Property Tax Code Section 6.05(i) an effective reappraisal plan requires a work plan that presents tasks for executing the essential requirements of the statute. IAAO provides vital elements for an effective work plan, such as inclusion of a timeline or calendar for performing reappraisal tasks. The work plan needs definitions of critical activities, with completion dates, assignment of responsibilities and established data collection and fieldwork standards.

The CAD has developed a tax calendar that lists statutory deadlines as well as reappraisal tasks. The plan, however, is too general. For example, it only generally describes reappraisal tasks such as "continue field work on reappraisal." The lack of a comprehensive reappraisal work plan could lead to the CAD not reappraising some properties or could compromise the timely completion of the project.

Data maintenance, conducted during non-reappraisal years, involves such tasks as: valuing new construction based on information from building permits and subdivision plats; reappraising individual properties due to changes in the condition of the property (fire, remodeling, demolition); valuing updates using ratio studies; and conducting market analysis to determine trending factors based on property type, location, size and age, etc.

Cass CAD has developed a weekly report to document the field appraiser's work during the reappraisal process. The report requires the appraiser to provide information such as the number of parcels inspected, number of improvements measured and approximate percentage of appraisal district completed.

RECOMMENDATION 7
Amend the 2007-08 reappraisal plan to include a more thorough planning and organization section, which defines critical reappraisal activities with completion dates and assigns responsibilities.

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