Karl J. Amelang, Ameland Partners and EGN Investments II LP v. Harris County Appraisal District

Opinion issued September 22, 2022
In The
Court of Appeals
For The
First District of Texas
————————————
NO. 01-20-00623-CV
———————————
KARL J. AMELANG, AMELANG PARTNERS, AND EGN INVESTMENTS
II, LP, Appellants
V.
HARRIS COUNTY APPRAISAL DISTRICT, Appellee
On Appeal from the 190th District Court
Harris County, Texas
Trial Court Case No. 2017-58211
OPINION
Appellants Karl J. Amelang, Amelang Partners, and EGN Investments II, LP
(collectively, Amelang) filed this tax-valuation protest against appellee Harris
County Appraisal District (HCAD) pursuant to Texas Tax Code chapter 42.
Amelang challenged HCAD’s valuation of two properties—large buildings used as
warehouses and builder showrooms under a long-term master lease—for the 2017
and 2018 tax years. Following a bench trial, the trial court found Amelang’s
appraisal expert uncredible and rendered a take-nothing judgment on Amelang’s
claim of excessive valuation.
In five issues Amelang argues that the trial court (1) abused its discretion
“when it failed to apply the controlling law and appraisal methodology that require
an appraiser to consider the existence of a lease in a market value analysis”;
(2) erred in concluding that Amelang bore the burden of proof at trial; (3) erred in
finding that Amelang failed to meet its burden to establish the market value of the
warehouses; (4) abused its discretion in making its credibility findings; and
(5) erred in makings its findings of fact and conclusions of law on the issue of
attorney’s fees.
Because we conclude that Amelang failed to meet its burden of proof on its
claim for excessive valuation, we affirm.
Background
The properties at issue in this case are in Houston, Texas at 4235 Richmond
and 4245 Richmond Avenue, near the intersection of Richmond and Drexel, just
north of Highway 59. They are comprised of approximately four acres of land with
two buildings totaling 210,000 square feet. The buildings, built in the 1970s, are
currently used as warehouses or builder showrooms. They have been leased
2
consistently since 1985 and, at the time of trial, were subject to a long-term master
lease. HCAD valued 4235 Richmond at $4,787,000 and 4245 Richmond at
$11,125,000 on January 1, 2017, for the 2017 tax year. HCAD valued the
properties at $4,780,945 and $11,192,685, respectively, on January 1, 2018, for the
2018 tax year.
Amelang protested the appraised values of the two properties for both the
2017 and 2018 tax years. See TEX. TAX CODE § 41.41(a) (authorizing property
owner to protest property’s appraised value before appraisal review board). The
Appraisal Review Board (ARB) determined the protest by written order in favor of
HCAD. See id. § 41.47(a) (requiring ARB to determine protest and make decision
by written order). Amelang then filed for de novo judicial review of the ARB’s
determination. See id. § 42.01 (authorizing property owner to appeal order by ARB
determining owner’s protest under Chapter 41). Amelang filed an excessive
appraisal claim as to both properties pursuant to Texas Tax Code chapter 42,
asserting that the “assessed value assigned by [HCAD] on the Plaintiffs’ property
is grossly in excess of its actual fair market value.”1
1
Amelang also filed a claim that the valuations were not equal and uniform. See
Odyssey 2020 Acad., Inc. v. Galveston Cent. Appraisal Dist., 624 S.W.3d 535, 540
(Tex. 2021) (recognizing Texas Constitution’s requirements that “[t]axation shall
be equal and uniform” and stating that real and tangible personal property “shall
be taxed in proportion to its value”); EXLP Leasing, LLC v. Galveston Cent.
Appraisal Dist., 554 S.W.3d 572, 576 (Tex. 2018) (“[A] property tax is equal and
uniform only if it is in proportion to property value.”) (internal quotations
3
At trial, Wellington “Rocky” Stevens, III, Amelang’s asset manager for the
properties in question, testified that both properties were leased to a single master
tenant—Richmond RR, LLC—that in turn subleased portions of the properties to
other tenants. Stevens generally explained the terms of the master lease, which was
admitted into evidence, and he stated that the lease expires in 2023 but also had
options to extend the term through 2038. Stevens testified that, because the long-
term lease prevented Amelang or any subsequent purchaser of the properties from
removing the buildings and redeveloping the lots for some other purpose, they
constituted an “encumbrance” on the properties.
Stevens further testified that the properties are located adjacent to a railroad
track and some high-voltage power lines that are a “negative” in terms of usability
of the property. He also testified that there is inadequate parking to support using
the properties for something other than warehouses or storage and that neighboring
properties were “industrial” buildings. Stevens stated that, because the properties
could continue to produce income under the master lease for 14-32 more years, the
proper valuation method for establishing the market value of the properties was the
income approach.
omitted); see also TEX. TAX CODE § 42.26 (providing that taxpayer is entitled to
relief on ground that property is appraised unequally to its value). Amelang
eventually dropped the equal-and-uniform claim and the trial court rendered
judgment solely on the excessive-appraisal claim.
4
Amelang’s expert Stevan Bach provided appraisal reports for both
properties, noting that they were income-producing properties. Bach testified that
he first considered the best approach to appraise the properties, discussing the three
general approaches to determining the value of property: (1) the cost method;
(2) the market data comparison, or comparable sales, method; and (3) the income
method. Bach rejected using the cost approach—which relies on the cost of
replacing the property—because the age of the buildings made it “difficult
estimating all types of depreciation.” He likewise rejected the comparable sales
approach because “the sales that are out there in the marketplace” were too
dissimilar to Amelang’s properties. Bach determined it was best to value the
properties using the income approach, which he felt was appropriate because the
properties in question were subject to a lease that does not expire until 2023.
However, Bach did not consider the master lease’s rent terms, because they were
below market rate. Bach considered instead the market rent, terms, and restrictions
in appraising the properties.
Bach testified that, in reaching his valuation of the properties, he “did a
highest and best use analysis.” He determined that, “if it was land only, I said the
highest and best use would be for mixed use, mid- to high-rise office or
residential.” But “because of the way it’s improved [with the warehouses] and
what market rent says with rent and term and all the others, it has an interim use
5
for highest and best use for the remaining life for 5 to 10 years of this structure.”
So, he concluded, because the warehouses still had approximately 5 to 10 years of
useful life, his valuation was based on the income approach for the improved
buildings.
Bach valued 4245 Richmond at $6,650,000 for January 1, 2017, and
$5,100,000 for January 1, 2018. He valued 4235 Richmond at $3,850,000 for both
tax years.
HCAD’s expert, Gerald Teel, testified that he followed and applied the
Uniform Standards of Professional Appraisal Practice (USPAP)—the same
professional valuation standards outlined by Bach. Teel testified that HCAD
retained him to determine the fair market value of the properties. To do so, he
began by determining the highest and best use of the properties. He disagreed with
Bach that the income approach was the correct method for determining the value of
the properties:
[I]f we’re [appraising a] downtown high-rise office building, the
income approach is the most applicable. There is no doubt about that.
Now, when I get into a property that’s 50 years old with
inadequate parking, I’ve got a different activity analysis at that point
because I don’t know—then I’ve got to really test the market to see
what can I lease it for. And I develop an income approach to see if it’s
worth X. But then when I look at the market value of the land, it’s
worth twice that. Well, the market value of the land is what I’m going
to conclude is the highest and best use of that[.]
Teel further explained:
6
As far as the highest and best use in a fee simple analysis, I look at the
land as if vacant. I look at that value. And then I do look at the
income. But if that income does not produce the same net return
capitalized, as we’ve talked about. If that’s less of a value than what
the vacant land is, then the ultimate decision is, that’s a vacant land
analysis. You use the sales comparison approach, and you go find
comparables in that regard.
Regarding the Amelang properties at issue here, Teel testified:
[W]e looked at the income approach. And—and after you capitalize—
the market rent, and Mr. Bach has done that too, it’s just, I’m not sure
where he came up with his vacant land sales because the analysis of
the income at—Mr. Bach very well proves that the income approach
is not applicable, or at least that is not the highest and best use of the
land[.]
Teel testified that the improvements—warehouse-type buildings that were
between 45 and 50 years old—were essentially at the end of their useful life:
[I]n this case, because of the low density of development and the
escalation of land values within that Greenway Plaza area, the land
value has certainly overtaken the ability to lease those improvements
and get a fair rate of return. That’s a business decision if you want to
lease it. I don’t have any argument with that. But from an appraisal
standpoint and a fee simple market value, the land value is certainly
much greater than potential income.
He looked at eight sales and “did a lot of research with brokers” to find
comparable sales on which to base his valuation of Amelang’s properties. He
further testified that HCAD assessed the fee simple market value of the properties,
and he stated that “a market lease at market occupancy on this property does not
come close to the value of the land as if vacant.” He considered the rent values as
part of his highest and best use analysis in making this determination.
7
Teel opined that 4245 Richmond was valued at $10,820,000 for the 2017 tax
year and at $11,400,000 for the 2018 tax year. He valued 4235 Richmond at
$5,750,000 for the 2017 tax year and $6,060,000 for the 2018 tax year.
The trial court rendered a take-nothing judgment on Amelang’s claim. The
trial court found that Amelang bore the burden of proof and that it failed to meet
this burden to establish the market value of either property for both the 2017 and
2018 tax years. The trial court determined that Amelang was not entitled to relief
under Tax Code section 42.25. The trial court found that Stevens and Bach were
not “credible” and that Amelang was not entitled to recover its attorney’s fees.
Appraisal Methodology
In its first issue, Amelang complains that “[t]he trial court abused its
discretion when it failed to apply the controlling law and appraisal methodology
that require an appraiser to consider the existence of a lease in a market value
analysis.” In making this argument, Amelang fails to identify any specific ruling
by the trial court that constituted an abuse of discretion; rather, Amelang asserts
that the methodology that Teel used to appraise the property was not sound.
Amelang also challenges the trial court’s findings of fact and conclusions of law
that Amelang had the burden of proof and did not meet its burden to establish the
market value of the properties. Amelang argues that “the trial court rejected
8
controlling law on the valuation of a property with the existence of a lease” and
thus abused its discretion.
Amelang’s phrasing of this complaint—as being about the methodology
used by an expert witness that can be reviewed for an abuse of discretion—
implicates a challenge to the admissibility of HCAD’s expert witness, Teel. HCAD
observes, however, that Amelang did not raise a complaint regarding the
admissibility of Teel’s expert testimony, and we agree.
A witness who is qualified as an expert by knowledge, skill, experience,
training, or education may testify in the form of an expert opinion if the expert’s
opinion testimony will help the factfinder to understand the evidence or to
determine a fact in issue. TEX. R. EVID. 702; see Reid Rd. Mun. Util. Dist. No. 2 v.
Speedy Stop Food Stores, Ltd., 337 S.W.3d 846, 850–51 (Tex. 2011). Appraisal
expertise is a form of “specialized knowledge [used to] assist the trier of fact to
determine a fact in issue.” Guadalupe-Blanco River Auth. v. Kraft, 77 S.W.3d 805,
807 (Tex. 2002) (quoting TEX. R. EVID. 702); Harris Cnty. Appraisal Dist. v.
Kempwood Plaza Ltd., 186 S.W.3d 155, 157 (Tex. App.—Houston [1st Dist.]
2006, no pet.). Expert appraisals are therefore subject to relevance and reliability
requirements. Kempwood Plaza, 186 S.W.3d at 158 (citing Gammill v. Jack
Williams Chevrolet, Inc., 972 S.W.2d 713, 718–19 (Tex. 1998)).
9
When a party wishes to complain that expert testimony is unreliable because
of the underlying methodology, technique, or foundational data used by the expert,
it should challenge the admission of the testimony before trial or object when it is
offered. See Pike v. Tex. EMC Mgmt., LLC, 610 S.W.3d 763, 786 (Tex. 2020)
(citing City of San Antonio v. Pollock, 284 S.W.3d 809, 816–17 (Tex. 2009) and
Coastal Transp. Co. v. Crown Cent. Petroleum Corp., 136 S.W.3d 227, 233 (Tex.
2004)). Requiring an objection to preserve a complaint regarding the reliability of
expert testimony allows the trial court the opportunity to conduct a reliability
analysis, and it prevents trial by ambush and allows the proponent of the testimony
an opportunity to cure any defect. See Sw. Energy Prod. Co. v. Berry-Helfand, 491
S.W.3d 699, 716 (Tex. 2016); Pollock, 284 S.W.3d at 816–17.
Even though “[e]xamination of an expert’s underlying methodology is ‘a
task for the trial court in its role as gatekeeper, and [is] not an analysis that should
be undertaken for the first time on appeal,’” incompetent evidence from an expert
is legally insufficient to support a judgment, even if admitted without objection.
Gunn v. McCoy, 554 S.W.3d 645, 661–62 (Tex. 2018) (quoting Coastal Transp.
Co., 136 S.W.3d at 233); City of Keller v. Wilson, 168 S.W.3d 802, 812 (Tex.
2005). Thus, a party may challenge conclusory or facially speculative opinions as
legally insufficient to support a judgment even if the party did not object to
admission of the testimony. Pike, 610 S.W.3d at 786; Pollock, 284 S.W.3d at 816.
10
The supreme court has held:
When an expert opinion is admitted into evidence without objection, it
may be considered probative evidence even if the basis for the opinion
is unreliable. But if no basis for the opinion is offered, or the basis
offered provides no support, the opinion is merely a conclusory
statement and cannot be considered probative evidence, regardless of
whether there is no objection. This is because the evidentiary value of
expert testimony is derived from its basis, not from the mere fact that
the expert has said it.
Hous. Unlimited, Inc. Metal Processing v. Mel Acres Ranch, 443 S.W.3d 820, 829
(Tex. 2014) (internal quotation marks and citations omitted).
Although Amelang complains on appeal about Teel’s methodology for
appraising the properties and asserts that the trial court abused its discretion,
Amelang did not object to the underlying methodology used by Teel at trial. Thus,
to the extent that Amelang argues that the trial court abused its discretion by
allowing Teel’s testimony due to problems with his underlying methodology for
appraising the properties, it failed to preserve this complaint for appeal. See Pike,
610 S.W.3d at 786; Pollock, 284 S.W.3d at 816–17.
We observe, however, that both Teel’s and Bach’s expert testimony must
nevertheless be competent to support the trial court’s findings. See Hous.
Unlimited, Inc. Metal Processing, 443 S.W.3d at 829. Thus, we construe the
remainder of the complaints in Amelang’s first issue—including the complaint that
Teel’s testimony was incompetent and, thus, could not support the trial court’s
findings in this case—as challenges to the sufficiency of the evidence.
11
Accordingly, we address those arguments in connection with Amelang’s third and
fourth issues below.
Burden of Proof
In its second issue, Amelang argues that the trial court erred in concluding
that it had the burden of proof at trial. Amelang filed a pre-trial brief arguing that
HCAD had the burden of proof under Tax Code section 23.01(e), and it asserted
the same argument in its motion for new trial. It argues that the trial court
disregarded this authority in concluding that Amelang had the burden of proof.2
Amelang’s argument on the burden of proof ignores the precedent of this
Court. This Court has assigned the burden of proof to the taxpayer in tax appraisal
suits. Cypress Creek Fayridge, L.P. v. Harris Cnty. Appraisal Dist., No. 01-16-
00003-CV, 2016 WL 7164032, at *4 (Tex. App.—Houston [1st Dist.] Dec. 8,
2016, no pet.) (mem. op.); see Briggs Equip. Tr. v. Harris Cnty. Appraisal Dist.,
294 S.W.3d 667, 670 (Tex. App.—Houston [1st Dist.] 2009, pet. denied) (taxpayer
had burden to prove that market value of its inventory differed from district’s
appraisal); Starflight 50, L.L.C. v. Harris Cnty. Appraisal Dist., 287 S.W.3d 741,
2
HCAD argues that Amelang failed to preserve this complaint. We observe,
however, that Amelang requested findings of fact and conclusions of law and that
Amelang’s motion for new trial complained of the trial court’s legal conclusion
regarding the burden of proof. See Grisel v. Everest Int’l, LLC, No. 02-19-00401-
CV, 2022 WL 714516, at *13 (Tex. App.—Fort Worth Mar. 10, 2022, pet. denied)
(party preserves matter-of-law issue for appellate review by, among other
methods, filing new-trial motion) (citing T.O. Stanley Boot Co. v. Bank of El Paso,
847 S.W.3d 218, 220 (Tex. 1992)).
12
745–46 (Tex. App.––Houston [1st Dist.] 2009, no pet.) (reciting test applicable
when party with burden of proof challenges legal sufficiency in suit in which
taxpayer appealed from trial court’s adverse finding); Pizzitola v. Galveston Cnty.
Cent. Appraisal Dist., 808 S.W.2d 244, 246 (Tex. App.––Houston [1st Dist.] 1991,
no writ) (same).
Amelang urges us to depart from this generally established rule, arguing that
Tax Code section 23.01(e) places the burden on HCAD to establish the market
value of the properties. We disagree with Amelang.
Section 23.01 governs “appraisals generally,” and subsection (e) provides:
Notwithstanding any provision of this subchapter to the contrary, if
the appraised value of property in a tax year is lowered under Subtitle
F, the appraised value of the property as finally determined under that
subtitle is considered to be the appraised value of the property for that
tax year. In the next tax year in which the property is appraised, the
chief appraiser may not increase the appraised value of the property
unless the increase by the chief appraiser is reasonably supported by
clear and convincing evidence when all of the reliable and probative
evidence in the record is considered as a whole. If the appraised value
is finally determined in a protest under Section 41.41(a)(2) or an
appeal under Section 42.26, the chief appraiser may satisfy the
requirement to reasonably support by clear and convincing evidence
an increase in the appraised value of the property in the next tax year
in which the property is appraised by presenting evidence showing
that the inequality in the appraisal of property has been corrected with
regard to the properties that were considered in determining the value
of the subject property. The burden of proof is on the chief appraiser
to support an increase in the appraised value of property under the
circumstances described by this subsection.
TEX. TAX CODE § 23.01(e).
13
Amelang argues that this section applies in this suit to shift the burden for
establishing the fair market value of the properties to HCAD. Prior to filing this
challenge of the 2017 and 2018 appraisals, Amelang protested the appraised values
of the properties for the 2016 tax year and settled those values in an agreed final
judgment. Amelang asserts that, under section 23.01(e), HCAD had the burden to
support its increase in the appraised value of the properties for the 2017 tax year
with clear and convincing evidence. See id.
Section 23.01(e) governs the obligations of the chief appraiser in making the
initial appraisal. See id. But this proceeding is not based on the chief appraiser’s
initial appraisal, nor is the chief appraiser a proper party to this appeal. See TEX.
TAX CODE § 42.21(b) (designating parties to petition for review of ARB’s
determination). Amelang challenged the appraisals before the ARB, pursuant to
Tax Code chapter 41, and the ARB found in favor of HCAD. Amelang then
pursued a de novo review of the ARB’s determination pursuant to Tax Code
chapter 42. Nothing in the language of section 23.01(e) purports to address the
burden of proof in de novo proceedings pursuant to chapter 42.
To the contrary, section 42.23(a) provides, “Review [of the ARB’s order] is
by trial de novo. The district court shall try all issues of fact and law raised by the
pleadings in the manner applicable to civil suits generally.” TEX. TAX CODE
§ 42.23(a). Generally, in civil suits, the party seeking relief bears the burden of
14
proof. See TRO-X, L.P. v. Anadarko Petroleum Corp., 548 S.W.3d 458, 464–65
(Tex. 2018) (noting “well accepted postulate of the common law” that civil litigant
asserting affirmative claim for relief has burden of proof). And, as discussed
above, this Court has held that the taxpayer has the burden to prove that the market
value of its property differed from the taxing district’s appraisal. See, e.g., Briggs
Equip. Tr., 294 S.W.3d at 670.
We overrule Amelang’s second issue.
Sufficiency of Evidence
In its third issue, Amelang argues that the trial court erred in finding that
Amelang “failed to meet its burden of proof on establishing the market value for its
warehouses.” In its fourth issue, Amelang argues that the trial court erred in
finding that the testimony Amelang’s expert and of its company representative was
not credible. As part of its complaints regarding the sufficiency of the evidence,
Amelang argues that the trial court failed to follow Texas law and other relevant
authority regarding the proper valuations for the properties in that it disregarded
the existence of Amelang’s long-term lease.
A. Standard of Review
When a party challenges the legal sufficiency of an adverse finding on an
issue on which that party has the burden of proof, the party must demonstrate on
appeal that the evidence establishes, as a matter of law, all vital facts in support of
15
the issue. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241 (Tex. 2001) (per
curiam); Aspenwood Apts. Partners, LP v. Harris Cnty. Appraisal Dist., No. 01-
20-00335-CV, 2022 WL 1249956, at *8 (Tex. App.—Houston [1st Dist.] Apr. 28,
2022, no pet.) (mem. op.).
When a party challenges the factual sufficiency of an adverse finding on an
issue on which that party has the burden of proof, the party “must demonstrate on
appeal that the adverse finding is against the great weight and preponderance of the
evidence.” Aspenwood Apts. Partners, LP, 2022 WL 1249956, at *9 (citing
Nguyen v. Yovan, 317 S.W.3d 261, 270 (Tex. App.—Houston [1st Dist.] 2009, pet.
denied), and Dow Chem.Co., 46 S.W.3d at 242). In reviewing a factual sufficiency
challenge, we must “consider and weigh all of the evidence,” and we may “set
aside a verdict only if the evidence is so weak or if the finding is so against the
great weight and preponderance of the evidence that it is clearly wrong and
unjust.” Id.; see Crosstex N. Tex. Pipeline, L.P. v. Gardiner, 505 S.W.3d 580, 615
(Tex. 2016).
B. Analysis
Amelang challenges the trial court’s finding that Amelang failed to establish
the market value of the properties for the 2017 and 2018 tax years and, thus, failed
to prove its right to relief pursuant to its excessive-appraisal claim. Amelang
further complains about the trial court’s findings that its expert, Bach, and property
16
manager Stevens were not credible witnesses. Because it had the burden of proof
on its claim for excessive appraisal, Amelang must demonstrate on appeal that it
established, as a matter of law, all the vital facts in support of its claim. See Dow
Chem. Co., 46 S.W.3d at 241.
Amelang was entitled to relief for excessive appraisal if it proved to the
court “that the appraised value of property according to the appraisal roll exceeds
the appraised value required by law.” See TEX. TAX CODE § 42.25 (“If the court
determines that the appraised value of property according to the appraisal roll
exceeds the appraised value required by law, the property owner is entitled to a
reduction of the appraised value on the appraisal roll to the appraised value
determined by the court.”). The law requires that the properties be appraised at
their fair market value on January 1 of each tax year. See id. 23.01(a); Cherokee
Water Co. v. Gregg Cnty. Appraisal Dist., 801 S.W.2d 872, 877 (Tex. 1990)
(“Appraised value according to law is fair market value.”); In re Valero Ref.—Tex.,
LP, 415 S.W.3d 567, 571 (Tex. App.—Houston [1st Dist.] 2013, orig. proceeding).
Thus, to prevail on its excessive-appraisal claim, Amelang had to prove the fair
market value of the properties and then demonstrate that the value on HCAD’s
appraisal roll exceeds that fair market value. See TEX. TAX CODE § 42.25.
Market value is “the price the property will bring when offered for sale by
one who desires to sell, but is not obligated to sell, and is bought by one who
17
desires to buy, but is under no necessity of buying.” City of Harlingen v. Estate of
Sharboneau, 48 S.W.3d 177, 182 (Tex. 2001). The Texas Tax Code defines
“market value” as:
the price at which a property would transfer for cash or its equivalent
under prevailing market conditions if:
(A) exposed for sale in the open market with a reasonable time for the
seller to find a purchaser;
(B) both the seller and the purchaser know of all the uses and
purposes to which the property is adapted and for which it is capable
of being used and of the enforceable restrictions on its use; and
(C) both the seller and purchaser seek to maximize their gains and
neither is in a position to take advantage of the exigencies of the other.
TEX. TAX CODE § 1.04(7).
The market value must be determined by applying “generally accepted
appraisal methods and techniques” and by using the same or similar methods and
techniques in appraising the same or similar kinds of property. Id. § 23.01(b);
Aspenwood Apts. Partners, 2022 WL 1249956, at *9. The three accepted methods
of determining the market value of property are (1) the market data comparison
method, (2) the income method, and (3) the cost method. EXLP Leasing, LLC v.
Galveston Cent. Appraisal Dist., 554 S.W.3d 572, 577 (Tex. 2018) (citing TEX.
TAX CODE §§ 23.011, .012, .013); Key Energy Servs., LLC v. Shelby Cnty.
Appraisal Dist., 428 S.W.3d 133, 143 (Tex. App.—Tyler 2014, pet. denied); see
TEX. TAX CODE. § 23.0101 (providing that taxing entity determines market value
18
of property by considering “the cost, income, and market data comparison methods
of appraisal and use[s] the most appropriate method”). The expert’s valuation must
also account for “basic marketplace realities.” Pike, 610 S.W.3d at 789.
“Courts have long favored the comparable sales approach when determining
the market value of real property.” Estate of Sharboneau, 48 S.W.3d at 182. “If the
goal of an appraisal is to ascertain market value, then logically there can be no
better guide than the prices that willing buyers and sellers actually negotiate in the
relevant market.” Id. Under a comparable sales analysis, the appraiser finds data
for sales of similar property, then makes upward or downward adjustments to these
sales prices based on differences in the subject property. Id. Comparable sales must
be voluntary and should take place near in time to the condemnation, occur in the
vicinity of the condemned property, and involve land with similar characteristics.
Id. Comparable sales need not be in the immediate vicinity of the subject land, so
long as they meet the test of similarity. Id. But if the comparison is so attenuated
that the appraiser and the fact-finder cannot make valid adjustments for these
differences, a court should refuse to admit the sale as comparable. Id.
Amelang’s expert, Bach, rejected the comparable sale approach, testifying in
a conclusory manner that the comparable “sales that are out there in the
19
marketplace are lease fee going concern sales,”3 or other sales that he believed
were too different from Amelang’s properties at issue here. Bach relied exclusively
on the income approach to value the properties. See id. at 183 (“When comparable
sales figures are lacking or the method is otherwise inadequate as a measure of fair
market value, courts have accepted testimony based on the cost approach and the
income approach.”).
“The income approach consists of estimating the net operating income
stream of a property and applying a capitalization rate to determine the property’s
present value.” State v. Bristol Hotel Asset Co., 293 S.W.3d 170, 172 (Tex. 2009)
(per curiam). Generally, the use of the income approach “is appropriate when
property would, in the open market, be priced according to the income that it
already generates.” Estate of Sharboneau, 48 S.W.3d at 183. “The income
approach to value proceeds on the premise that a buyer of income-producing
3
See, e.g., Gregg Cnty. Appraisal Dist. v. Laidlaw Waste Sys., Inc., 907 S.W.2d 12,
18–20 (Tex. App.—Tyler 1995, writ denied) (discussing “leased fee approach” to
income method of property valuation and describing this approach as involving
“estimating future lease proceeds . . . , deducting appropriate expenses and then
discounting the figures to the present worth”). Appraisal districts generally
consider income generated from the use of land, but not from other assets such as
“the use of capital, trucks, equipment, machinery, trained personnel, contracts, and
business acumen.” Id. at 20 (citing G.R. KARVEL AND P.J. PATCHIN (MAI
appraisers), Land Appraisal Journal, October Issue, 1992 (“To the extent that
business or going concern value exists, it should be recognized as a value separate
and distinct from the value of the real property with which it is associated. . . .
Common valuation errors and inclusion of business value may occur if the value
of management and retail operations are not excluded when using the income . . .
approach to value.”)).
20
property is primarily interested in the income that his property will generate.” Key
Energy Servs., 428 S.W.3d at 143.
Bach’s reliance on the income method was based exclusively on the fact that
the properties were currently improved with warehouses that had a “remaining life
[of] 5 to 10 years.” Bach recognized that Amelang’s master lease rent terms were
below market rate and, thus, not useful here. Bach considered instead the market
rent, terms, and restrictions from comparable properties in appraising Amelang’s
properties.
Thus, Bach’s testimony supports a conclusion that the properties here were
not attractive to potential buyers for the income that the warehouses would
generate, as is generally the case when property is valued using the income
approach. See id. The warehouses were at the end of their useful life and currently
leased at below-market rates. Bach testified that if the Amelang’s properties did
not contain the existing improvements—the warehouses—their best use would be
for mid- or high-rise office or residential use, not for leasing out as warehouse
space. Neither Bach nor any other witness for Amelang presented any evidence of
the value of the properties under the comparable sale method.
Given the nature of Bach’s testimony, relying solely on the income valuation
method despite his testimony and other evidence indicating that the properties
would not, in the open market, be priced according to the income that they already
21
generate, we cannot say that Amelang proved, as a matter of law, the vital facts of
its excessive appraisal claim. See Estate of Sharboneau, 48 S.W.3d at 183
(discussing income approach to valuation); see Dow Chem. Co., 46 S.W.3d at 241
(providing standard of review for challenges to sufficiency of the evidence).
Amelang nevertheless argues that, “under controlling appraisal methodology
and applicable Texas law, an appraiser cannot ignore the existence of a lease.”
Amelang essentially argues that “Bach applied controlling law and appraisal
methodology,” and thus, the trial court erred in concluding that his testimony was
not competent to prove the properties’ fair market value. See Gunn, 554 S.W.3d at
661–62 (holding that incompetent evidence from expert is legally insufficient to
support judgment, even if admitted without objection). Amelang cites numerous
legal authorities to support the contention that the law required the trial court to
consider the impact of the lease on the market value of the property. See, e.g., TEX.
TAX CODE § 23.01(b); Key Energy Servs., 428 S.W.3d at 149 (“Each property
should be appraised based on the individual characteristics that affect the
property’s market value.”); W. AH 406 Ltd. v. Cent. Appraisal Dist. of Taylor
Cnty., 213 S.W.3d 544, 545–47 (Tex. App.—Eastland 2007, pet. denied).
Amelang is correct that the Tax Code requires appraisal districts to appraise
property “based upon the individual characteristics that affect the property’s
market value.” TEX. TAX CODE § 23.01(b); Cypress Creek Fayridge, L.P., 2016
22
WL 7164032, at *6. “This requirement, however, does not mandate reliance upon a
specific type of data over any other type.” Cypress Creek Fayridge, L.P., 2016 WL
7164032, at *6 (citing W. AH 406 Ltd., 213 S.W.3d at 546–47 (requiring rent and
occupancy restrictions to be taken into account), and Haney v. Cooke Cnty. Tax
Appraisal Dist., 782 S.W.2d 349, 351–52 (Tex. App.––Fort Worth 1989, no writ)
(requiring structural damage to be taken into account)). None of the cases cited
support Amelang’s contention that the trial court was required to credit Bach’s
reliance on the income approach.
Rather, determining whether the terms of a particular lease is an individual
characteristic that impacts the market value of the property is necessarily fact-
specific and must be done on a case-by-case basis. See TEX. TAX CODE § 23.01(b)
(“[E]ach property shall be appraised based upon the individual characteristics that
affect the property’s market value, and all available evidence that is specific to the
value of the property shall be taken into account in determining the property’s
market value.”). Amelang relies on Western AH 406 to support its contention that
the existence of the lease here compelled the trial court to credit Bach’s valuation
under the income approach. In Western AH 406, the court of appeals considered
the effect on fair market value of an apartment complex subject to an agreement
between the Air Force and Western that established the maximum amount of rent
charged to Air Force personnel and restricted the occupancy of the apartment
23
complex, with priority being given to Air Force personnel. W. AH 406, 213 S.W.3d
at 545.
The Western court concluded that the agreements between Western and the
Air Force did need to be considered in valuing the property:
[T]he agreements between Western and the Air Force are individual
characteristics of the property to be considered in determining the
market value of the property. Therefore, the trial court erred in
ordering that the property be appraised without considering the
agreements restricting the rent and occupancy of the property. . . . The
trial court’s final judgment determined the market value of the
property based upon TCAD’s appraisal that does not include the effect
of the agreements between the Air Force and Western restricting rent
and occupancy.
213 S.W.3d at 546–47.
But the Western court’s conclusion does not require that all agreements or
leases are individual characteristics that affect a property’s fair market value. The
Western court’s determination was based on the particular agreements at issue in
that case. Id. The court reached a different conclusion when faced with different
facts. In Land v. Palo Pinto Appraisal District, the court concluded that specific
lease terms were not individual characteristics affecting the valuation of property
interests. 321 S.W.3d 722, 726 (Tex. App.—Eastland 2010, no pet.) (observing
that trial court “heard uncontroverted evidence that, at least as of [the] date [of
valuation], the market did not discount sales prices because of the remaining length
of a lease or because of any other specific lease provision”).
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Here, the trial court heard conflicting evidence regarding the impact of the
lease on the market value of the property. Stevens, Amelang’s property manager,
explained the terms of the master lease, testifying that the long-term lease
prevented Amelang or any subsequent purchaser of the properties from removing
the buildings and redeveloping the lots for some other purpose. Like Stevens, Bach
determined that the income approach was the proper method for valuing the
properties because the properties in question were subject to a lease that does not
expire until 2023. He also testified that the lease currently in place for the
properties was below market value, so he used other comparable market figures to
determine the value of the properties. Thus, Bach did not provide any evidence
regarding the impact that the lease would have on the market value on the
comparable sales approach.
Teel, HCAD’s expert, testified that he considered the nature of the
improvements to the properties and the existence of the lease in making his
determination of the highest and best use of the properties. He disagreed with Bach
regarding the effect of the lease on the highest and best use analysis. Teel testified:
[W]e looked at the income approach. And—and after you capitalize—
the market rent, and Mr. Bach has done that too, it’s just, I’m not sure
where he came up with his vacant land sales because the analysis of
the income at—Mr. Bach very well proves that the income approach
is not applicable, or at least that is not the highest and best use of the
land[.]
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Teel testified that the improvements were essentially at the end of their useful life,
and the increased property values in the area led him to conclude that appraising
the value of the properties as vacant land was most appropriate:
[I]n this case, because of the low density of development and the
escalation of land values within that Greenway Plaza area, the land
value has certainly overtaken the ability to lease those improvements
and get a fair rate of return. That’s a business decision if you want to
lease it. I don’t have any argument with that. But from an appraisal
standpoint and a fee simple market value, the land value is certainly
much greater than potential income.
Both Bach and Teel testified that they approached the appraisal using
industry-standard methods and began with a highest-and-best use analysis. They
both provided a basis for their opinions consisting of market research, but they
reached different conclusions regarding the impact of the lease on the market value
of the property. “Proof that one expert testified to the contrary of the opponent’s
expert is not proof that the opponent’s methodology is flawed.” CBS Outdoor, Inc.
v. Potter, No. 01-11-00650-CV, 2013 WL 269091, at *14 (Tex. App.—Houston
[1st Dist.] Jan. 24, 2013, pet. denied) (mem. op.). The trial court resolved the
conflicting evidence from the experts by determining that Bach’s testimony was
not competent to establish the fair market value of the properties. Conflicts
between the experts’ testimony were left to the factfinder to resolve. See id.;
Creech v. Columbia Med. Ctr. of Las Colinas Subsidiary, L.P., 411 S.W.3d 1, 14–
26
15 (Tex. App.—Dallas 2013, no pet.) (holding that, when evidence presents “battle
of the experts,” appellate court defers to factfinder’s resolution of conflicts).
Given the conflicting nature of the evidence, we conclude that Amelang
failed to meet its burden in challenging the trial court’s fact findings that Stevens
and Bach failed to provide competent evidence to establish the fair market value of
Amelang’s properties.
And, as discussed above, none of the authorities cited by Amelang support
its contention that the existence of its master lease here required an appraiser to use
the income approach in determining the fair market value of the properties.
Amelang argues that cases like Enbridge Pipelines (E. Tx.) L.P. v. Avinger Timber,
LLC, 386 S.W.3d 256, 261 (Tex. 2012), holding that the existing use of land is
presumed to be its highest and best use, compel a conclusion that the income
approach is the only appropriate approach here. But neither Enbridge nor any of
the other cases cited by Amelang support a conclusion that the fair market value of
a property is limited by a taxpayer’s use of the land. To the contrary, in
determining a property’s fair market value, the factfinder is not limited by the
current use of the property—“the factfinder may consider the highest and best use
to which the land taken can be adapted.” Exxon Pipeline Co. v. Zwahr, 88 S.W.3d
623, 628 (Tex. 2002); Morello v. Seaway Crude Pipeline Co., 585 S.W.3d 1, 30
27
(Tex. App.—Houston [1st Dist.] 2018, pet. denied) (holding same in context of
determining fair market value for takings purposes).
Bach’s own testimony indicated that, if the warehouses were removed from
the property, the land would have a different and more valuable use as mid- or
high-rise commercial or residential property. He relied, in part, on Amelang’s
business decisions about retaining the improvements and leasing the warehouses.
However, fair market value is not determined based on the owner’s own estimation
of the value of the property or its business decisions. Fair market value is “the
price the property will bring when offered for sale by one who desires to sell, but is
not obligated to sell, and is bought by one who desires to buy, but is under no
necessity of buying.” Estate of Sharboneau, 48 S.W.3d at 182. This requires a
consideration of “prevailing market conditions,” including that “both the seller and
the purchaser know of all the uses and purposes to which the property is adapted
and for which it is capable of being used and of the enforceable restrictions on its
use” and that “both the seller and purchaser seek to maximize their gains and
neither is in a position to take advantage of the exigencies of the other.” See TEX.
TAX CODE § 1.04(7).
Even if we conclude that the Enbridge presumption—that the existing use of
the land is its highest and best use—is applicable here, it is just a presumption.
That presumption was rebutted by Teel’s expert testimony that the “low density of
28
development and the escalation of land values within that Greenway Plaza area”
caused the “land value [to overtake] the ability to lease those improvements and
get a fair rate of return.” Teel pointed out that Amelang’s continued leasing of the
properties was “a business decision” that did not affect the appraisal value, stating,
“[F]rom an appraisal standpoint and a fee simple market value, the land value is
certainly much greater than potential income.”
Finally, Amelang challenges the basis of Teel’s appraised value of the
properties, citing concerns about the properties Teel identified as comparable sales.
However, we need not address the sufficiency of Teel’s expert testimony to
establish a fair market value for this property. The trial court did not make a
determination of Amelang’s properties’ fair market value. Rather, the trial court’s
findings in support of its judgment were that Amelang failed to meet its burden to
prove that the fair market value of the properties was different than the value
assigned by HCAD. The trial court did not render a judgment providing an
appraisal amount based on Teel’s claims. Instead, it denied Amelang’s claim
asking for relief for an excessive appraisal based on Amelang’s own failure to
demonstrate that HCAD’s appraisal was excessive. The findings by the trial court
do not implicate or rely on the comparable sales identified in Teel’s expert report
and testimony, and, thus, we do not address these complaints.
We overrule Amelang’s third and fourth issues.
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Attorney’s Fees
In its fifth issue, Amelang argues that, if we reverse the judgment of the trial
court on its first four issues, the trial court also “erred on its attorney’s fees
findings of fact and conclusions of law.” Tax Code section 42.29 provides that a
“property owner who prevails in an appeal to the court under Section 42.25 or
42.26 may be awarded reasonable attorney’s fees.” TEX. TAX CODE § 42.29(a). The
trial court rendered a take-nothing judgment on Amelang’s excessive-appraisal
claim, and we have affirmed that judgment. Accordingly, Amelang was not a
prevailing party on its claim pursuant to section 42.25 and, thus, is not entitled to
attorney’s fees. See id.
We overrule Amelang’s fifth issue.
Conclusion
We affirm the trial court’s take-nothing judgment on Amelang’s excessive
appraisal claim.
Richard Hightower
Justice
Panel consists of Justices Landau, Hightower, and Rivas-Molloy.
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