DCAD Doesn’t Know And Doesn’t Count Deed Restrictions And Other Impairments

When we “feel like just a number,” we’re really just reflecting our uniqueness being ignored. We’ve long known we’re just a number to taxing bodies like DCAD … albeit one with a dollar sign in front. But recently, I’ve found we’re a percentage, too.

In valuing property, DCAD calculates the total market value based on both land and “improvements” (structures). The combination of these numbers equals the total assessed value of a given property. All fine so far. A (land) + B (structures) = C (total market value)

But did you know that there’s a ratio used between land and improvement values? You likely think this means that land appreciates at roughly the same rate of structures. Partly. It also means that land should be equal to a certain percentage of the structure. And when the ratio gets out of whack, it’s adjusted. On the surface this too seems generally fine, provided you start with structure and land that fall within the ratio (and nothing changes).

But what happens when it’s not OK? Think about the person who overbuilt or over improved their structures compared to the land area they live in? Should that ratio hold or should it be challenged? Typically this would be easy to figure out and protest if you compare your land with neighboring land values and find a discrepancy (like here).

But what happens when you live within an area of municipal or civil deed restrictions or PD (planned development district) limitations? Does DCAD take those restrictions into account when valuing land? Apparently not.

Why would this make any difference?  Suppose you own a (dry) parcel and can’t sell liquor, but the neighboring liquor store and bar can. Should the dry parcel be taxed at the same rate as the wet parcels who take advantage of their wetness to increase the desirability and profitability of their parcels? I would say “no” as the dry restriction impairs the parcel’s potential when compared to neighboring parcels. However, if all parcels were wet and an owner decided not to open a liquor-related business, that’s an owner’s choice and not based on an uncontrollable impairment to the property.

Wet, or specifically dry, areas are called Liquor Control Overlay Districts, but civilly imposed dryness can be placed by a teetotaler on their land. DCAD doesn’t appear to track this type of information and so it doesn’t take the value impairment into consideration.

Within the residential world, the same shallowness of calculation also exists.

I live within PD-15 (shocking, right?). The PD documents limit precisely what can be built on each parcel to what is currently there. Preston Place’s 60 units burned down 16 months ago. The membership of the PD, and now the city, are still hacking away at whether to allow them to exceed their prior envelope of height, lot coverage, number of units and even to change the exterior façade of the 1979 building. Preston Place could only have moved forward without PD approval by securing building permits to precisely replicate what had burned.

The only value the Preston Place parcel has is connected to that exact structure. In this case, should the value of the land ever change? Sure, the building should gain or lose value as the market dictates, but without that exact structure the land is valueless without legally binding intervention (and you can’t value anything using “coulda, woulda, shoulda” math).

However, factoring that in is difficult when DCAD doesn’t track the city’s nearly 1,000 PDs and how their restrictions impair the land they sit on (or not). For example, Oak Lawn’s PD-193 didn’t change or augment underlying zoning.

In Preston Place’s case, the fuller story is crazier. This year’s 2018 valuations reflect the fire’s destruction. Unit values diminished to $10 per unit (likely a system placeholder). However, the land value jumped. One unit’s land portion valued at $44.730 in 2017 jumped $30,000 to $74,550. In a year when the only structure that would give the land value (because of the PD restrictions) was burned, the land’s value rose 66 percent. Huh?

If you’ve been following the PD-15 soap opera, you may be thinking the value of their sales contract revalues the land. Nope. First, DCAD doesn’t know the specifics of the contract. Second, the contract is contingent on the PD being satisfactorily changed (of which there is no guarantee). So the land hasn’t changed hands. Again, DCAD can’t tax on potential results from a future legal action to increase the land’s potential (the same way I can’t be taxed today for winning the lottery in the future).

This isn’t the first time for Preston Place. Reacting (two years late) to the Recession in 2011, DCAD reduced the valuation of one condominium unit by $50,000 in the same year they doubled the land value. In 2015, DCAD again devalued the unit by $20,870 but raised the land value by $20,870 to keep the overall valuation the same. The following year, the unit’s value shot up $58,100 while the land stayed the same.

Why the teeter-totter on land and building values? I think that at least in multi-family complexes, the land is used as a floor valuation and so rarely goes down. During recessions or other market events it’s the structure that changes value. In upping the land value, DCAD makes part of the A+B=C equation largely unreducible. And this year was a big year for high-rise land value increases.

Aside from being a little smarmy, within PD-15’s burdensome limitations, it’s wrong.

Looking at an unburned building within PD-15 we see the same thing. This year, the land valuation under my development-locked condo tripled. It was the first valuation increase in many years. I figured the stagnant land valuation was because DCAD understood the PD’s limitations. Nope.

I attended a lunch featuring Ken Nolan, DCAD’s chief appraiser. After some mostly good-natured verbal sparring (they really read this stuff – Hi Ken!), I explained my conundrum of land valuation increases within PD-15’s restrictions. He offered to have the appraiser call me.

That call wasn’t so much a conversation about why my belief didn’t hold water, but rather ‘splaining why they did it. The reason all came down to the fact that the ratio of assessed land value was out of whack with the assessed value of the structure (all hail ratio over rational). Their increase in land value was to make the math work out right, and anyway, DCAD really only cares about the total assessed value of both the land and structures (and therefore so should I).

But it does make a huge difference when, in my case, the land can only be used for a single purpose without variation. It’s like a garbage dump. You can built million-dollar homes next door, but the dump can only be a dump. Close the dump and the land has no value.

It makes another huge difference when you understand that reductions in land value are rare in comparison to building depreciation. This significantly reduces a landowner’s ability to influence half the A+B=C equation used in reporting assessed real estate valuations.

If you think I’m nuts (on this), tell me why in the comments.

 

Remember:  High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement. In 2016, 2017 and 2018, the National Association of Real Estate Editors recognized my writing with three Bronze (2016, 2017, 2018) 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.