                               ATTORNEYGENERAL                     OF   TEXAS
                                            GREG       ABBOTT




                                               August 20,2003



The Honorable Mike A. Stafford                              Opinion No. GA-009 1
Harris County Attorney
Appraisal District Section                                  Re: Valuing repairs made to a residence
Post Office Box 920975                                      homestead necessitated by flood, wind, fire, or
Houston, Texas 77292-0975                                   other damage under sections 11.26 and 23.23
                                                            of the Tax Code (RQ-0023-GA)


Dear Mr. Stafford:

         On behalf of the Harris County Appraisal District (the “District”), you ask how, under
sections 11.26 and 23.23 of the Tax Code, the District should value repairs made to a residence
homestead that were necessitated by floods, hurricanes, “fire, earthquake, wind, hail, ground shifts,
termites, environmental contamination, or any other similar event.“*

I.      Backmound

         You indicate that in June 2001 approximately 40,000 Harris County homes were damaged
as a result of Tropical Storm Allison and that many of the same homes were flooded again in 2002.
See Memorandum Brief, supra note 1, at 1. The District is uncertain how it should value the restored
homes under section 23.23 of the Tax Code, which limits a residence homestead’s appraised value
for a tax year, and section 11.26 of the same code, which limits the amount of tax that a school
district may impose on homesteads of adults who are sixty-five or over (“seniors”). See id. at 2-4.

II.     Relevant Statutes

         Section 11 .Ol of the Tax Code directs that “[a]11real and tangible personal property” located
in this state is taxable unless other law exempts the property. TEX. TAX CODE ANN. 8 11.01(a)
(Vernon 2001). Generally, an appraisal district must appraise all taxable property in the district “at
its market value as of January 1.” Id. 8 23.01( a) ; see also id. $0 1.04(7) (defining the term “market
value”), 23 .O101 -.013 (setting forth methods for calculating market value). Your questions concern
the valuation of certain improvements made to a residence homestead during the year under sections
23.23 and 11.26. See Memorandum Brief, supra note 1, at 3.


           ‘Letter from Honorable Mike Stafford, Harris County Attorney, to Honorable Greg Abbott, Texas Attorney
General (Mar. 6, 2003) (on file with the Opinion Committee); Memorandum Brief attached to Request Letter, supra,
at 3 [hereinafter Memorandum Brief].
The Honorable Mike Stafford      - Page 2        (GA-0091)




        Section 23.23(a) limits a residence homestead’s      appraised value:

                   The appraised value of a residence homestead for a tax year may
                not exceed the lesser of:

                        (1) the market value of the property; or

                        (2) the sum of:

                          (A) 10 percent of the appraised value of the property
                        for the last year in which the property was appraised
                        for taxation times the number of years since the
                        property was last appraised;

                          (B) the appraised value of the property for the last
                        year in which the property was appraised; and

                           (C) the market value of all new improvements         to
                        the property.

TEX. TAX CODE ANN. 8 23.23(a) (Vernon 2001).        For the sake of brevity, we refer to the amount
defined in subsection (a)(2) as the “capped value.” See Memorandum Brief, supra note 2, at 2-3.
Subsection (e) restricts the meaning of the phrase “new improvement”:

                        In this section, “new improvement” means an improvement
                to a residence homestead that is made after the appraisal of the
                property for the preceding year and that increases the market value of
                the property. The term does not include ordinary maintenance of an
                existing structure or the grounds or another feature of the property.

TEX. TAX CODE ANN. 6 23.23(e) (Vernon 2001).

         All or part of a certain homestead’s appraised value may be eligible for an exemption from
taxation or for a restriction on the permissible tax. See generally id. ch. 11 (“Taxable Property and
Exemptions”).     You mention, in particular, section 11.26, which freezes the amount of ad valorem
tax a school district may impose on a senior’s residence homestead at the amount the school district
imposed in the first tax year in which the individual qualified as a senior. See id. 9 11.26(a).
Thereafter, improvements to the senior’s residence homestead, “other than improvements required
to comply with governmental requirements or repairs,” permit the school district to increase the tax
to reflect the improvements’ value in the first year the homestead’s value is increased on the
appraisal roll. Id. 8 11.26(b). The tax is then frozen at the increased level unless further
improvements are made. See id.

        Neither section 23.23 nor section 11.26 appear to use the term “improvements” consistently
with the general definition stated in section 1.04 of the Tax Code: “(A) a building, structure, fixture,
The Honorable Mike Stafford        - Page 3    (GA-0091)




or fence erected on or affixed to land”; or “(B) a transportable structure that is designed to be
occupied for residential or business purposes.” Id. 9 1.04(3)(A)-(B). Section 23.23’s exclusion of
“ordinary maintenance of an existing structure” would be unnecessary if improvements included only
new buildings, structures, fixtures, fences, or transportable structures. See id. $5 1.04(3), 23.23(e).
Similarly, section 11.26, which excludes “improvements required to comply with governmental
regulations or repairs,” suggests a definition of the term “improvements” other than section 1.04
provides. See id. 59 1.04(3), 11.26(b). In each case, the specific statutes vary from section 1.04’s
general definition. See TEX. GOV’T CODE ANN. 5 3 11.026 (Vernon 1998) (stating that a specific
provision prevails as an exception to a general provision where the two cannot be harmonized).

III.    Hypothetical   Scenarios

        You set out four scenarios to which you ask us to apply either section 23.23 or section 11.26.
See Memorandum Brief, supra note 1, at 2-3. For each, you ask us to assume “that the properties
were appraised in 2000, 2001, 2002, and 2003.” Id. at 2. In all four scenarios, you describe a
homestead with a market value for 2001 of $100,000, which, because of the ten percent cap set by
section 23.23(a)(2), had an appraised value of $70,000 in 2001. See id. at 2-3.

                         Scenario One: The home suffered $15,000 in damage from
                [Tlropical [S]torm Allison.    The damage was not repaired as of
                January 1, 2002.       The appraisal district determined that the
                [property’s] market value . . . was $85,000 for 2002. [Taking the
                lesser of the homestead’s market value and the capped valued
                ($70,000 + $7,000)’ in accordance with section 23.23(a),] . . . the
                2002 appraised valued would be $77,000, a ten percent increase even
                though the district had reduced the market value. As of January 1,
                2003, the damage was fully repaired[,] and the district estimates that
                the repairs add $15,000 to the [home’s] value . . . . The 2003 market
                value will be $100,000, back to its pre-flood value. . . . Had there
                been no damage to the home, [its] appraised value would have been
                $84,700 for 2003.

                         Scenario Two:      [T]he home in this scenario . . . was
                completely destroyed by the storm in June 2001. Its 2001 market
                value was $100,000, of which $20,000 was attributable to the land
                and $80,000 to the improvement. . . . [T]he capped appraised value
                for 2001 was $70,000. On January 1, 2002, repairs had not been
                made[, and t]he appraisal district determined the [property’s] market
                value . . . to be $20,000. [Under section 23.23, the homestead’s
                market value is less than the 2002 capped value ($77,000), so the]
                appraised value for 2002 [is $20,000]. As of January 1, 2003, a
                completely new home had been built on the property. The appraisal
                district estimates that the market value of the new improvement is
                $80,000 and that the [land’s] market value . . . is $20,000. The total
                market value is $100,000 for 2003. . . . Had [the home not been
The Honorable Mike Stafford    - Page 4       (GA-0091)




               damaged], the 2003 appraised value would have been $84,700 . . . .
               [The capped value is the sum of the preceding year’s value plus ten
               percent plus the value of the new improvements: $20,000 + $2,000 +
               $80,000 =$102,000.]

                         Scenario Three: Assume that in Scenarios One and Two
               . . . the property owner also qualified for the over-65 “ceiling” on
               school taxes [under slection 11.26. Each owner’s school tax levy was
               fixed at $500 prior to 2001. For 2002, there would be no change in
               the maximum levy amount, even though the tax for that year might be
               lower.     Unlike the ten percent homestead cap [under section
               23.23(a)(2)], reductions in value do not change a frozen school tax
               levy. The question again concerns how 2003 will be handled.

                        Scenario Four: [T]he repairs . . . bring the property to a
               better than pre-flood state as worn or outdated components are
               replaced with new, up-to-date components.         For example, a flood-
               damaged kitchen might have new cabinets, counter tops, flooring, and
               appliances installed [, which may enhance] the value of the property
               over its pre-flood value. Similarly, if the property owner builds a new
               structure on an elevated foundation, its value may be significantly
               greater than that of the pre-flood property. The enhancement in
               value, however, is incidental to the repair; the homeowner . . . simply
               intend[s] to restore his home to a functional state. . . . Moreover, if
               the owner makes significant other enhancements, such as adding an
               extra bath or increasing the size of the home, should value added by
               these enhancements be treated differently?

Id. at 2-3.

IV.     First Issue: Whether Post-Flood Rehabilitation     is a “New Improvement”        for Purposes
        of Tax Code Section 23.23

        The pivotal issue in determining how to value recent reconstructive work on a homestead is
to decide whether the work is a “new improvement,” which by definition “increases” the property’s
market value, under section 23.23(e). See TEX. TAX CODEANN. 9 23.23(e) (Vernon 2001). “[Tlhe
market value of all new improvements” is one of the three numbers that must be added together to
determine a homestead’s capped value. Id. 9 23.23(a).

        Section 23.23(e) excludes from the scope of work that is a new improvement “ordinary
maintenance.”    Compare id. 5 11.26(b) with id. 8 23.23(e). We find no helpful case law defining
the term “ordinary maintenance,” but the term “ordinary” by itself signifies “usual or common.” El
Paso EZec. v. Real Estate Mart, Inc., 650 P.2d 12, 18 (NM. Ct. App. 1982); see also X OXFORD
ENGLISH DICTIONARY 912 (2d ed. 1989) (defining the term “ordinary” as “[clommonly practi[c]ed
or experienced; common, customary, usual” and “not exceptional”).           The term “maintenance”
The Honorable Mike Stafford      - Page 5       (GA-0091)




suggests “keeping” a building “in working order, in repair.” IX OXFORDENGLISHDICTIONARY225
(2d ed. 1989); see TEX. GOV’T CODE ANN. 8 3 11 .Ol l(a) (Vernon 1998) (directing that words and
phrases be construed according to the rules of grammar and common usage). A Louisiana court
classified certain repairs as “ordinary”: painting; repairing leaks; removing glass mould; replacing
one frame of glass; erecting an iron post around an electrical substation; removing a small tree;
and repairing the air conditioning system. See Succession ofcrain, 450 So. 2d 1374, 1376 (La. Ct.
App. 1984).

         Given its common meaning, the term “ordinary maintenance” does not include substantial
repairs and reconstruction necessitated by an extraordinary event like a tropical storm or hurricane.
Whether repairs necessitated by other causes, such as termite infestation, constitute ordinary
maintenance is a question of fact that the opinion process cannot resolve. See Tex. Att’y Gen. Op.
No. GA-0003 (2002) at 1 (stating that the opinion process does not determine facts). Rather, the
chief appraiser must determine the ordinariness of particular maintenance, subject to appraisal
district board and judicial review. See TEX. TAX CODE ANN. $5 6.03(a), 6.05(c) (Vernon 2001)
(setting out appraisal board’s and appraiser’s authority).

        For those improvements that increase a property’s market value and that are not ordinary
maintenance, we are compelled to read section 23.23(a)(2) to require the appraiser to include their
value in the calculation of the residence homestead’s appraised value. See id. § 23.23(a), (e).

        You suggest that the term “ordinary maintenance,” which is excepted from new
improvements that increase a homestead’s appraised value, should be defined to mean “repairs,”
which are excepted from improvements for purposes of section 11.26 of the Tax Code. See
Memorandum Brief, supra note 1, at 4. Even if the terms “maintenance” and “repair” may be
synonymous, section 23.23(e)‘s use of the adjective “ordinary” greatly limits the scope of the
maintenance work that is excepted from new improvements for purposes of section 23.23. Thus, we
cannot construe the phrases “ordinary maintenance” and “repairs” synonymously.

         Moreover, the legislature has evaluated property loss that occurs due to a natural disaster and
has determined that the appropriate remedy is not to adjust the homestead’s appraised value in the
way you suggest, but to allow a taxing unit to authorize the damaged property’s reappraisal
immediately following the disaster. Section 23.02 of the Tax Code permits “[tlhe governing body
of a taxing unit that is located partly or entirely inside an area declared to be a natural disaster area
by the governor [to] authorize reappraisal of all property damaged in the disaster at its market
value[,] immediately after the disaster.” TEX. TAX CODEANN. 5 23.02(a) (Vernon 2001). If a taxing
unit authorizes a reappraisal, “the governing body [must] provide for prorating the taxes on the
property for the year in which the disaster occurred.” Id. 8 23.02(d). Although the statute does not
define the term “natural disaster,” it must be a catastrophe officially declared a disaster by the
governor. Seeid. ~23.02(a);seeaZsoT~~.G0~‘~C0~~AN~.~418.014(Vemon1998)(authorizing
the governor to declare a state of disaster if he or she finds that a disaster has occurred or that a
threatened disaster is imminent).

        A new subsection (f), added to section 23.23 in 2003 by the Seventy-eighth Legislature, does
not apply to the homeowners in your hypotheticals, all of whom repaired or reconstructed their
The Honorable Mike Stafford      - Page 6        (GA-0091)




damaged homesteads by January 1, 2003. The new section 23.23(f) excludes from the class of
improvements     that would otherwise constitute new improvements        under subsection (e) “a
replacement structure for a structure that was rendered uninhabitable or unusable by a casualty or
by mold or water damage.” Act of June 1, 2003’78th Leg., R.S., S.B. 340, 5 9 (to be codified at
TEX. TAX CODE ANN. 8 23.23(f)). This new exclusion applies to property appraisals for tax years
beginning on or after January 1,2004, even if the casualty, mold, or water damage occurred before
that date. See id. 8 12(a), (d).

        You also ask, in the fourth scenario, how improvements that increase the pre-flood value of
the house, such as new countertops, new appliances, an extra bath, or additional square footage,
affect a homestead’s valuation under section 23.23 when the improvements are made in the course
of repairs from a tropical storm or similar disaster. Upgrades to the residence homestead that
increase its market value are not ordinary maintenance and are plainly new improvements         for
purposes of section 23.23(a). Their value must be included in the capped value calculation.

v.      Whether Post-Flood      Rehabilitation   is an “Improvement”       for Purposes of Tax Code
        Section 11.26

        You similarly ask whether the restorations described in scenarios one and two trigger a
school tax increase under section 11.26(b) of the Tax Code. See Memorandum Brief, supra note 1,
at 3-4. Because “repairs” are not improvements for purposes of section 11.26, we must consider the
meaning of the term “repair.” See TEX. TAX CODE ANN. 5 11.26(b) (Vernon 2001).

         The term “repair,” which is not defined for purposes of section 11.26, must be defined
consistently with its “common usage.” TEX. GOV’T CODE ANN. 5 3 11 .Ol 1(a) (Vernon 1998); see
TEX. TAX CODE ANN. $5 1.04, 11.26 (Vernon 2001).                  Case law suggests that repairs are
reconstructive work performed after partial, but not total, destruction. “To repair means to restore
to a sound or good state, after decay, injury, dilapitation, or partial destruction.” GuZf City St. Ry. &
Real Estate Co. v. City of Galveston, 7 S.W. 520, 521 (Tex. 1888) (citing Webster’s Dictionary).
Thus, the term “repair” does not encompass rebuilding a structure that was totally destroyed by fire.
See ReaZty & Rebldg. Co. v. Rea, 194 P. 1024, 1029 (Cal. 1920) (stating that the term “repair” does
not mean “replace”: the first means “to mend an old thing,” while the second means “to make a new
thing”).    In a patent case, a Michigan court described the difference between repair and
reconstruction: “‘[I]f the new parts so dominate the structural substance of the whole as to justify
the conclusion that it has been made anew, there is a rebuilding or reconstruction; and conversely,
where the original parts, after replacement, are so large a part of the whole structural substance as
to preponderate over the new, there has not been a reconstruction but only repair. “‘Micromatic Hone
Corp. v. Mid- West Abrasive Co., 78 F. Supp. 641,645 (E-D. Mich. 1948) (quoting Automotive Parts
Co. v. Wis. Axle Co., 8 1 F.2d 125, 127 (6th Cir. 1935))’ afld, 177 F.2d 934, 937 (6th Cir. 1949).

         In a particular case, an appraiser must determine in the first instance whether work done on
a particular structure constitutes repair. In the two scenarios you have set out, one residence suffered
$15,000 in damage, while the other was completely destroyed. In accordance with the definition of
the term “repair,” the latter cannot be repaired; it must be rebuilt, and the rebuilt structure is an
improvement for purposes of section 11.26(b). According to section 11.26’s plain language, the tax
The Honorable Mike Stafford      - Page 7      (GA-0091)




may be increased accordingly. See TEX. TAX CODE ANN. 5 11.26(b) (Vernon 2001). On the other
hand, whether the former residence can be repaired or must be reconstructed is a question that
requires the weighing of facts, which is not a function of this office. See Tex. Att’y Gen. Op. No.
GA-0003 (2002) at 1 (stating that the opinion process does not determine facts). Moreover, the
statute does not suggest how an appraiser should determine whether a homestead was partially
destroyed, and therefore may be repaired, or totally destroyed and may not be repaired. Because the
value of the damage totaled less than half of the homestead’s original value, an appraiser reasonably
could find that the homestead was repaired, although the ultimate determination is for the appraiser.
If an appraiser determines that a particular residence has indeed been repaired, section 11.26 of the
Tax Code compels the conclusion that the homestead has not been improved, and the tax may not
be increased. See TEX. TAX CODE ANN. 4 11.26(b) (Vernon 2001).

         You also ask about those situations in which a homeowner “bring[s] the property to a better
than pre-flood state as worn or outdated components are replaced with new, up-to-date components”
or makes significant other upgrades, above and beyond replacing old components with new, modem
components. Memorandum Brief, supra note 1, at 3. In either case, you state that the residence’s
post-restoration value exceeds its pre-flood value. See id.

         Ultimately, the decision regarding whether a residence homestead has been repaired or
improved for purposes of section 11.26 involves fact determinations that the appraiser must resolve
in the first instance. We provide only guidance in this regard.

         In the first situation you posit, upgrading fixtures and appliances constitutes repair for
purposes of section 11.26 so long as the components of the original structure “preponderate.” See
Micromatic Hone Corp., 78 F. Supp. at 645 (quoting Automotive Parts Co., 8 1 F.2d at 127). Section
11.26(c) refers to improvements      and repairs “to the . . . residence homestead,” not repairs to
individual components. TEX. TAX CODE ANN. 8 11.26(b) (Vernon 2001). ~ Thus, although a
dishwasher, for example, may be damaged beyond repair and require replacement, the residence
homestead itself is repaired by installing a new dishwasher.

         On the other hand, building a new structure on an elevated foundation is not a repair because
the structure is new; you tell us that the original structure was completely destroyed. See GuZfCity
St. Ry. &Real Estate Co., 7 S.W. at 521 (defining the word “repair” to mean restoration after “partial
destruction”) (quoting Webster’s Dictionary).

         Adding an extra bath or increasing the size of the home, which you list as examples of
“significant other enhancements” that a senior homestead owner may make in the course of restoring
the residence, are not repairs under section 11.26. The term “repair” does not include enhancements
to a residence’s value. Consequently, a school district may increase the tax proportional to the
increase in value. See TEX. TAX CODE ANN. § 11.26(b) (Vernon 2001).
The Honorable Mike Stafford    - Page 8      (GA-0091)




                                       SUMMARY

                       For purposes of section 23.23 of the Tax Code, which caps the
               market value of a residence homestead’s appraised value, the term
               “new improvement” includes repairs made following a natural
               disaster because the repairs are not “ordinary maintenance.”
               Enhancements that increase a homestead’s market value are new
               improvements for purposes of section 23.23(a)(2), and their value
               must be included in the calculation of a homestead’s          capped
               appraised value.

                       For purposes of section 11.26(b) of the Tax Code, which
               permits a school district to increase the tax on a senior’s residence
               homestead if the homestead has been improved, an appraiser must
               determine whether a homestead damaged by a natural disaster has
               been repaired or improved.




BARRY R. MCBEE
First Assistant Attorney General

DON R. WILLETT
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Kymberly K. Oltrogge
Assistant Attorney General, Opinion Committee
