Equal and Uniform Issues for Equal and Uniform Issues for Industrial PropertiesIndustrial Properties

David Hugin, PartnerDavid Hugin, Partner

Sebastian Rodrigano, DirectorSebastian Rodrigano, Director

Popp, Gray and Hutcheson, LLPPopp, Gray and Hutcheson, LLP

Tex. Tax Code Tex. Tax Code § 42.26(a)(3)§ 42.26(a)(3)

Originally enacted as a stand-alone Originally enacted as a stand-alone provision as provision as § 42.26(d)§ 42.26(d)

Seen as a part of then-Governor Seen as a part of then-Governor Bush’s tax reform initiatives; held to be Bush’s tax reform initiatives; held to be

“remedial” statute“remedial” statute

Tex. Tax Code Tex. Tax Code § 42.26(a)(3)§ 42.26(a)(3)

The district court shall grant relief on the The district court shall grant relief on the ground that a property is appraised unequally ground that a property is appraised unequally

if: . . .the appraised value of the property if: . . .the appraised value of the property exceeds the median appraised value of a exceeds the median appraised value of a

reasonable number of comparable properties reasonable number of comparable properties appropriately adjusted.appropriately adjusted.

Similarities to Comparable Sales Similarities to Comparable Sales Approach to ValueApproach to Value

Properties used to determine equity must Properties used to determine equity must be comparable to subjectbe comparable to subject

Properties must be adjusted to subjectProperties must be adjusted to subject

Properties should be in the same Properties should be in the same “neighborhood” “neighborhood”

Assessed values are used in place of Assessed values are used in place of salessales

Differences to Comparable Sales Differences to Comparable Sales Approach to ValueApproach to Value

Median appraised value is to be used Median appraised value is to be used rather than weighting of properties rather than weighting of properties according to comparabilityaccording to comparability

All values assessed as of January 1All values assessed as of January 1stst of of the year for which equity is being testedthe year for which equity is being tested

Comparables limited to the State of TexasComparables limited to the State of Texas

AdjustmentsAdjustments

SizeSize– RCN adjustment for economies of scaleRCN adjustment for economies of scale– Different operating cost basis for different economies Different operating cost basis for different economies

of scaleof scale

TechnologyTechnology– Feedstock, route, process type, complexity, heat rateFeedstock, route, process type, complexity, heat rate

LocationLocation– NOx non attainment zone vs. compliantNOx non attainment zone vs. compliant– Water access vs. landlockedWater access vs. landlocked

OthersOthers

Measures of comparisonMeasures of comparison

Refining industryRefining industry– $/EDC$/EDC

Self adjusting unit of comparisonSelf adjusting unit of comparison

– $/BBL$/BBLRequires RCN testingRequires RCN testing

Petrochemical industryPetrochemical industry– $/unit capacity$/unit capacity

Accurate when comparables are properly selected and adjustedAccurate when comparables are properly selected and adjusted

– % RCN% RCNRequires testing of RCN against cost curveRequires testing of RCN against cost curve

Power Generation industryPower Generation industry– $/(KW/MMBTU)$/(KW/MMBTU)

Requires properly selected comps (i.e. same grid)Requires properly selected comps (i.e. same grid)

Real Life Example Real Life Example

Alon USA vs. Howard CADAlon USA vs. Howard CAD

Where are Refineries? Where are Refineries?

Texas Refinery Map 1981 Texas Refinery Map 2007

Alon Refinery Unlike Any Other Alon Refinery Unlike Any Other Property in Howard CountyProperty in Howard County

Sid Richardson Carbon Black Plant – Court Sid Richardson Carbon Black Plant – Court took judicial notice it was not comparabletook judicial notice it was not comparable

Could the law really be that if a particular type Could the law really be that if a particular type of property was the only one of its kind within of property was the only one of its kind within a particular appraisal district that such a a particular appraisal district that such a property would forfeit its right to be taxed property would forfeit its right to be taxed equally?equally?

Out-of-District ClaimOut-of-District Claim

Relief was sought under Texas Tax Code Relief was sought under Texas Tax Code § § 42.26(a)(3):42.26(a)(3):

““The district court shall grant relief on the ground that a property is The district court shall grant relief on the ground that a property is appraised unequally if the appraised value of the property exceeds the appraised unequally if the appraised value of the property exceeds the median appraised value of a reasonable number of comparable properties median appraised value of a reasonable number of comparable properties appropriately adjusted.”appropriately adjusted.”

Notably absent from (a)(3) is any language Notably absent from (a)(3) is any language requiring that the comparable properties be requiring that the comparable properties be located within the appraisal districtlocated within the appraisal district

§ 42.26(a)(1) & (2)§ 42.26(a)(1) & (2)

By contrast, both By contrast, both § 42.26(a)(1) & (2) do contain § 42.26(a)(1) & (2) do contain language that requires properties be located in language that requires properties be located in the appraisal district:the appraisal district:

(a)(1): “the appraisal ratio of the property exceeds by at least 10 (a)(1): “the appraisal ratio of the property exceeds by at least 10 percent the median level of appraisal of a reasonable and percent the median level of appraisal of a reasonable and representative sample of other properties representative sample of other properties in the appraisal districtin the appraisal district””

(a)(2): “the appraisal ratio of the property exceeds by at least 10 (a)(2): “the appraisal ratio of the property exceeds by at least 10 percent the median level of appraisal of a sample of properties percent the median level of appraisal of a sample of properties in in the appraisal districtthe appraisal district consisting of a reasonable number of other consisting of a reasonable number of other properties similarly situated to, or of the same general kind or properties similarly situated to, or of the same general kind or character as, the property the subject to the appeal”character as, the property the subject to the appeal”

Equal & Uniform ClaimEqual & Uniform Claim

After examining all refineries in Texas, E & U After examining all refineries in Texas, E & U expert decided on a sample of six refineries, expert decided on a sample of six refineries, which captured every refinery with a capacity which captured every refinery with a capacity between 60,000-120,000 bpcd:between 60,000-120,000 bpcd:

Houston:Houston: 90,000 bpcd 90,000 bpcd

Pasadena:Pasadena: 117,000 bpcd117,000 bpcdTexas City:Texas City: 72,000 bpcd 72,000 bpcdThree Rivers:Three Rivers: 96,000 bpcd 96,000 bpcdTyler:Tyler: 60,000 bpcd 60,000 bpcdWestern:Western: 117,000 bpcd117,000 bpcd

(Alon Big Spring capacity:(Alon Big Spring capacity: 70,000 bpcd) 70,000 bpcd)

Equal & Uniform ClaimEqual & Uniform Claim

E & U Expert then took the appraised value of E & U Expert then took the appraised value of each of the six refineries and adjusted them each of the six refineries and adjusted them by:by:

(1)(1) dividing each refinery’s appraised value by its capacity;dividing each refinery’s appraised value by its capacity;(2)(2) dividing each refinery’s appraised value by its RCN; anddividing each refinery’s appraised value by its RCN; and(3)(3) dividing each refinery’s appraised value by its EDC.dividing each refinery’s appraised value by its EDC.

Three medians were then determined by arraying the Three medians were then determined by arraying the six data points for each of the above three metrics. six data points for each of the above three metrics. Each median was then compared to the same three Each median was then compared to the same three metrics as to the Alon Big Spring Refinery. As to all metrics as to the Alon Big Spring Refinery. As to all three metrics, the Big Spring Refinery’s data point was three metrics, the Big Spring Refinery’s data point was well in excess of the median.well in excess of the median.

Equal & Uniform ClaimEqual & Uniform Claim

Each of the three medians were then Each of the three medians were then multiplied by the corresponding metric for multiplied by the corresponding metric for the subject (the subject (i.ei.e., capacity, RCN and EDC) ., capacity, RCN and EDC) to develop three “calculated median to develop three “calculated median appraised values”appraised values”

Equal & Uniform ClaimEqual & Uniform Claim

The three “calculated median appraised The three “calculated median appraised values” were then averaged – that values” were then averaged – that average was the Expert’s opinion of the E average was the Expert’s opinion of the E & U value of the Alon Big Spring Refinery& U value of the Alon Big Spring Refinery

Closing ThoughtsClosing Thoughts

The Court indicated at the pre-trial hearing it would The Court indicated at the pre-trial hearing it would “carry” all evidentiary admissibility questions.“carry” all evidentiary admissibility questions.Again, on the first day of trial, the Court indicated it Again, on the first day of trial, the Court indicated it would “carry” all evidentiary admissibility questions.would “carry” all evidentiary admissibility questions.When the out-of-district equity analysis was offered, the When the out-of-district equity analysis was offered, the Court entertained lengthy argument from counsel, yet Court entertained lengthy argument from counsel, yet ultimately admitted the evidence and clearly overruled ultimately admitted the evidence and clearly overruled the objection on the record.the objection on the record.In a jury trial, perhaps the Court would have ruled In a jury trial, perhaps the Court would have ruled differently.differently.The Final Judgment made no explicit finding on the E&U The Final Judgment made no explicit finding on the E&U claim.claim.