Developing Value Estimates and
Appraisal Ratios: Category by Category
Property categories are informally called “local properties” and “technical properties.” Local properties consist of residential properties and vacant lots; rural real property not qualified for productivity appraisal; commercial real and personal property; and other taxable property.
Property Tax Division (PTD) field appraisers gather almost all of the data used in the local properties portion of the Property Value Study. These employees, assigned to different regions throughout the state, appraise individual properties and collect sales data and other market information.
As a general rule, PTD staff will sample properties in a local property category in a school district if the category has at least 5 percent of total school district value or $250 million in value based on the preceding year’s study. However, a category may be sampled at any time, regardless of whether its value falls within the general rule. Categories not sampled are assigned reported appraisal roll value (local value).
Technical properties consist of oil, gas and other mineral properties; utility properties; and, qualified agricultural properties. With the exception of agricultural properties, these properties often do not sell, and if they do, the sales data are rarely available. As a result of the lack of sales data, staff must obtain and analyze volumes of data and develop computer models to value these properties.
The Comptroller’s Austin-based appraisers perform all of the necessary work to review and appraise these properties.
As a general rule, staff will sample properties in each technical property category in each school district if the category has a minimum percentage of district value and a minimum dollar amount. Categories not sampled are assigned reported appraisal roll value. The specific criteria for sampling categories and for assigning values to non-sampled categories are discussed in the individual category descriptions.
Residential Properties and Vacant Lots
(Categories A, B and C)
These properties consist of Categories A (single-family residential real property), B (multifamily residential real property), and C (vacant lots and tracts). Mobile homes on non-farm/ranch land owned by the occupants fall into Category A.
For each of these property categories sampled, field appraisers collect sales information and perform appraisals to develop a sample of tested parcels. Using this sample information, Austin-based staff then develops either a stratified or non-stratified weighted mean appraisal ratio for each category. (A stratified ratio was developed whenever possible. See the previous discussion of stratification.) This estimated ratio divided into the school district’s total self-reported value for the category produces the staff’s estimated value for the category.
Rural Real Property: Acreage and Farm and Ranch Improvements
These properties consist of Category D (rural acreage) and Category E (farm and ranch improvements, including mobile homes located on land owned by the occupants). Although Categories D and E remain as separate categories on the reports of property value, these categories were merged in 1989 for the purpose of calculating and reporting taxable value findings. This merger was necessary since rural improvements and land often sell together as one package. Consequently, this merger facilitates the comparison of total sales prices for land and buildings with the total appraised values on the appraisal roll without making artificial allocations between land and buildings.
Texas law requires appraisal districts to appraise property at 100 percent of its market value. Constitutional amendments, however, allow taxation of much of the state’s agricultural land based on its productive capacity rather than its market value. These provisions require appraisal districts to classify qualified land according to its agricultural productivity, determine the net income to land for each land class over a five-year period, and capitalize the average to estimate productivity value. The Property Tax Code sets the capitalization rate at the greater of 10 percent or 2 1/2 points above the Farm Credit Bank of Texas’ lending rate for December 31 of the prior year. Property taxes are based on the productivity appraisal, but appraisal districts also must estimate the market value of any land receiving productivity appraisal.
Section 23.71 of the Property Tax Code establishes the procedures for productivity appraisal of timberland. This process differs only slightly from the procedure for agricultural land. Timberland is classified according to soil type and the type of timber grown. For each class, the estimated net income to land is capitalized into a value per acre.
PTD conducts two studies of property in the rural real property category: a market value study and a productivity study. The market value study covers all acreage taxed at its market value (acreage that did not receive productivity appraisal), as well as farm and ranch improvements. The staff collects sales and performs appraisals to develop a property sample based on market values. This sample may include some property receiving productivity appraisal, but the ratios for those individual parcels are calculated on the basis of the appraisal district’s reported market values, not their productivity values.
From this market value sample, staff develops a non-stratified weighted mean appraisal ratio and divides this ratio into the school district’s reported value of rural real property that did not qualify for productivity appraisal. The result is PTD’s estimated market value for acreage not receiving productivity appraisal and the value of farm and ranch improvements.
To develop the productivity ratio, the division staff uses the appraisal district’s report of total acreage in each of the agricultural land classes for each school district. Staff uses information provided by published sources and persons in each county who are familiar with local agricultural conditions. The Austin-based staff develops an estimate of net return to land over a five-year period and capitalizes the average using the legally mandated rate to reach an estimated value per acre for each land class. Multiplying the value for each class times the reported acreage in the class yields the total taxable value per land class. The total of the values for each land class is the total taxable value for all acreage receiving productivity appraisal in a school district.
On the report of property value, school districts report the total appraised value of all land receiving productivity appraisal. The division divides this reported value by its own estimate of productivity value. The resulting ratio shows the general level of appraisal of all land receiving productivity appraisal in a school district.
An appraisal district’s ratio is calculated similarly and is based on the sum of the school district calculations. This ratio is not a median derived from a property sample. As a result, agency staff does not calculate measures of appraisal uniformity for land receiving productivity appraisal.
Finally, staff adds the estimated market value of rural real property not receiving productivity appraisal and the estimated productivity value for land receiving productivity appraisal. The total is the estimated total taxable value of Category D rural real property.
Commercial Real and Personal Property
(Categories F1 and L1)
Category F1 contains commercial real property (land and improvements), while Category L1 contains commercial personal property (furnishings, fixtures, movable machinery, equipment, and inventories). To estimate market values in these two categories, staff collects sales information and, if necessary, performs appraisals for each school district category sampled. Staff develops either a stratified or non-stratified weighted mean appraisal ratio from the sampled properties and divides each school district’s reported category value by the weighted mean ratio to generate the division’s estimate of category market value. This procedure is the same as that used to estimate value in other local property categories, with the notable exception of agricultural land qualified for productivity appraisal.
Oil, Gas and Other Minerals
The minerals category consists primarily of oil and natural gas producing properties and lignite and sulfur mines. The division samples mineral properties in school districts if the minerals category represents 5 percent or more of the total school district value. Minerals categories not meeting this criteria are assigned local value.
Staff uses computer models and specialized software to carry out discounted cash flow evaluation of mineral properties. Using computer models and information from a variety of sources including an in-house database, staff derives or calculates economic parameters such as wellhead prices, operating expenses, equipment costs, net salvage values, and discount rates. The future discounted cash flow is then generated based on forecasted production and economic parameters. The discounted equipment salvage value is then added to the future discounted cash flow to derive the market value for each oil and gas property. Discounted cash flow analysis also is used to appraise lignite and sulphur properties.
To produce the individual appraisal ratio for each minerals property in the sample, staff divides the appraisal district’s value by the staff’s estimated market value. Category G ratios are calculated similar to Category A, but Category G is divided into three subcategories.
The utilities category consists of the real property and tangible personal property of telephone, electric, gas distribution, railroad, and pipeline companies, as well as the property of other companies commonly thought of as utilities, such as water systems.
The division staff chooses utility samples by a method that ensures sampling the highest-valued properties and other properties as appropriate. Utility staff use recognized unitary valuation methods, including the cost, income, and market (sales comparison or stock and debt) approaches, as applicable. Appraisals are based on information published in annual company reports filed with federal and state regulatory agencies and furnished directly to the Comptroller by the utility companies. Staff also obtains information from business and industry publications. Staff determines the percentage of unit value attributable to each company’s Texas operations to develop an overall estimated value for the company’s Texas portion. Using information provided by the utilities and/or appraisal districts, staff allocates this Texas value to the various school districts in which the utilities own property.
The total appraisal roll value for the sampled utility properties divided by their total estimated market values produces a non-stratified weighted mean ratio for utilities. Dividing this ratio into the school district’s total reported value for utilities generates the division’s estimated total value of all utility property in the school district.