Commercial Real Estate Exposed: DCAD’s Other Black Hole of Assessed Value Accuracy

Whenever property taxes are spoken about, residential usually gets the most ink. The reason is simple. The commercial market offers a fraction of the data available to a residential assessor. In the residential world, similar homes are typically clustered together, placing them in the same valuation realm. There aren’t a lot of crackerboxes on Strait Lane.  However in the commercial world, a four-story building can be next to a skyscraper.

Also, unlike residential, there is no centralized multiple listing service to get a view of commercial properties for sale. If residential is iPads and apps, commercial real estate is the equivalent of a quiet conversation in the back of a darkened, smoke-filled restaurant. It’s just more difficult.

I’ve made the suggestion that DCAD needs to hire appraisers to zoom around town and physically inspect commercial real estate to accurately assess its value. That’s because …

Commercial real estate is wildly undervalued and a few large buildings can escape millions in annual taxes.  Dallas is losing a boatload of tax revenue in the obscured world of commercial real estate and that places a higher burden on residential property owners.

How much are we losing? Here’s one example …

This week it was announced that a 13-story, 140,000-square-foot office building at 3131 Turtle Creek had been sold to the State Teachers Retirement System of Ohio. It’s far from the largest office buildings, but it’s a decent size.  Both The Dallas Morning News and website Chief Investment Officer reported that the sale price was over $350 per square foot.  At $350 per foot, that’s $49 million. Let’s call it $50 million.

DCAD’s 2018 valuation?  $26,545,430.

That’s just 53 percent of its lowest (“more than” $350 per foot) selling price. The amount of tax missed from this one building?  $635,209 just this year. Neither article reported on the gaping discrepancy between the sales price and its DCAD assessed valuation.

But it gets juicier.

The prior owner, Cardinal Capital, purchased the building in 2014 and renovated the building, spending nearly $10 million. At that point, DCAD upped the valuation from $10.4 million to $14.375 million. It’s only in this fourth tax year since acquisition has the building’s assessed value accounted for the $10 million in renovations.

… and juicier …

We all know Dallas real estate, whether commercial or residential, has been on a tear since for several years. So one wonders if DCAD’s 2014-2018 increases factored in the $10 million in renovations at all.

… and juicier still …

Think about “Improvement” on the tables above as the building and the “land” being … well … land.  In the few years Cardinal owned the building, the assessed value increased by $12,170,430, of that, $2.767,430 was land appreciation. The remaining $9,403,000 million was building appreciation.

So for four years, during some of the hottest real estate growth, 3131 Turtle Creek spent $10 million in renovations and in DCAD’s mind the building hasn’t even appreciated the amount of the renovations? How’s that?

By that reckoning, Cardinal Capital is either running a charitable operation or DCAD’s valuation is laughable. I’m going with the latter.

Looking at the land values, recent Turtle Creek residential development deals peg the dirt at $9 million an acre (although since it’s commercial, it’s likely higher). The building’s plot is 1.4 acres, equating to a value of at least $12.6 million. DCAD says $7,606,630.

DCAD-wide, the total assessed value for commercial and industrial property was $92.7 billion in 2016 (latest DCAD data). If commercial real estate in Dallas is as undervalued as this office building, Dallas is only collecting about half the commercial taxes it’s owed.

DCAD needs to do a better job assessing commercial properties to ensure they’re paying their fair share of our ever-increasing tax burden.

Reminder: Protests must be filed by May 15.

 

Remember:  High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement. In 2016 and 2017, the National Association of Real Estate Editors recognized my writing with two Bronze (2016, 2017) and two Silver (2016, 2017) awards.  Have a story to tell or a marriage proposal to make?  Shoot me an email [email protected]. Be sure to look for me on Facebook and Twitter. You won’t find me, but you’re welcome to look.