POSSUM KINGDOM LAKE – As the deadline approaches for the packaged sale of 1,581 Brazos River Authority leased properties at Possum Kingdom Lake, Mike Patterson, who heads up the prospective purchasing group, has some concerns.

Patterson, manager and general partner for Patterson PK Land Partnership Ltd., is preparing to send out a prospectus for investors in the next few weeks. He has taken note and suggested some action concerning an ongoing local lawsuit disputing the taxable values of four BRA leaseholds.

“I thought it was about protesting tax values,” Patterson said of his first knowledge of the lawsuit and its subsequent appeal. After studying the documents, he said the case relates to the way the appraisal district was valuing property and worries the pending appeal could “prevent me from getting financing.”

A group of lessees consolidated four suits into one against the Palo Pinto Appraisal District over the 2006 property appraisal methodology – “comparable sales.” This is the same method the PPAD and many appraisal districts around the state use to determine taxable property value for property owned by a tax-exempt entity, such as the BRA.

The consolidated lawsuit was tried in the 29th District Court in 2008, and Judge Jerry Ray rendered a judgment in favor of the PPAD. The lessee group’s case is pending in the 11th Court of Appeals in Eastland, Texas.

“The appeal should be heard shortly,” said Greg Fitzgerald, an attorney for the lessees. He told the Index he didn’t think the existence of the appeal “for a 2006 tax suit” would affect Patterson’s proposed deal with the BRA.

“This lawsuit was tried and appealed before Mr. Patterson made his bid,” said Fitzgerald. “I don’t see any relationship in this appeal and his purchase.”

Meanwhile, Patterson has a pool of 200 to 250 potential investors to entice in about two weeks. He said the existence of the suit is something he has to reveal and could have a chilling effect on investors.

House Bill 3031, authored by Rep. Jim Keffer, R-Eastland, and passed this spring, allows a third-party purchaser – Patterson won the bid – to buy the 1,581 BRA properties under residential and commercial leases. BRA lessees will have the option to purchase their leased property concurrently.

“I’m about to send out a prospectus to those investing, and a great majority are leaseholders, some are others. I have to disclose everything I know, good bad and in between. I have to disclose this lawsuit,” Patterson told the Index.

He added that he might have to send out an amicus brief and, in turn, have up to 250 individual conversations with investors, which “could have an impact of chilling equity … on this deal.”

The appellants’ attorney said he doesn’t see how.

“Our lawsuit has been that we want the appraisal district [to value property] consistent with Texas law,” Fitzgerald said. “It’s a tax suit and a tax appeal [and the] brief spells it out that way. Considering that this was tried and appealed before this came up, I just don’t see the connection,” he said.



Pay off


“I know the unpredictability of lawsuits,” said Patterson, a partner with PeirsonPatterson LLP – an Arlington, Texas-based law firm specializing in the preparation of residential real estate documents throughout the nation.

He e-mailed the attorneys with an offer of $100,000 to encourage the appellants to drop the appeal and cover “reasonable attorney’s fees, if they are successful.”

“I’m willing to pay for this to go away and not be a distraction,” Patterson told the Index. “To me it’s worth $100,000 for it to go away. I don’t know the affect. After I read [the case documents] I scratched my head – I don’t know what I would think if I was an investor.”

If the appellants accept his offer, Patterson said, “They get $100,000 and the lawsuit goes away. I don’t have to disclose the existence of the lawsuit and field questions, [which] puts me in an awkward position to raise money.”

“I only have so much time to perform,” he said, adding that he hopes to close on the deal “11 months from now,” but must close by Dec. 31, 2010.

“Is this necessary right now? Do you really want to get what you’re asking for?” he said about the appeal. “What is the result of all this effort?”

“Right now, this is running outside of my goal,” he said. “I can see why it was pursued before HB 3031. It gives me the cold chills. My mind says, ‘Let’s don’t open that door.’”



Pending appeal


Fitzgerald said the appellate case is based on the true value of a leasehold estate and the methodology used for determining taxable value.

The lessee group includes Monte and Carolyn Land, of PK Lake, Robert Aldrich, of Fort Worth, Scott Heather Wheatley, of Dallas, and Alvis and Deana Jackson, of PK Lake.

“Our lawsuit involved taxable values and the question in our lawsuit is, ‘How do you appraise the taxable estate of the lessee?’” said Fitzgerald.

“Any appraisal district is required to use the equity method to appraise leasehold interests,” argue attorneys for the plaintiffs, based on court documents.

The PPAD appraises a BRA leasehold interest based on comparable sales. Fitzgerald said that the plaintiff’s argument at trial was that the appraisal district appraised property “improperly.”

“For the purposes of taxation you are not to use comparable sales under the statute,” Fitzgerald said. “It has been a battle with the appraisal district for a long time.”

Joseph Longoria, of Houston-based Perdue, Brandon, Fielder, Collins & Mott LLP – a firm he said “exclusively represents appraisal districts across the state” – represents PPAD in the lawsuit.

He said the lessee group “didn’t present what they believed [the taxable land value] to be worth. They didn’t show harm because they failed to show the judge what they thought it was worth. They didn’t show damage.”

Longoria added that there is a large number of “possessory interest” property – or real estate owned by an exempt entity like the BRA – which leases property to private individuals.

“Clearly the dirt is not taxable,” he said. “The leasehold interest – possessory interest – is taxable.”

He added that he does not now the details of the divestiture deal, but said Patterson could have a “valid concern.”

“In reading what I have, certainly [Patterson’s] trying to attract investors in his property. If that property is involved in litigation it could affect potential investors,” Longoria said. “If I were buying a new home, if there was litigation over who owns it or a tax lien, it is certainly going to make me look at how much I am going to pay for it.”

He said an additional factor could arise if the appellate court decides in favor of the appellants (lessee group) and gives a “published opinion.” Longoria said that a published opinion could have district and statewide implications and could eventually affect appraisal districts statewide.



Taxing interpretation


In a recent e-mail Patterson sent to the appellants’ attorneys, he said, “From my very limited initial review of the transcripts and filed briefs it appears that you want the 2006 PK leasehold valuations to be reappraised by Palo Pinto Tax Assessor Donna Rhoades, so that she will only take into account the lease payment for each PK BRA lease, ‘the equity approach’ and completely disregard the location and other physical aspects of each property … you also suggest that a lessee’s tax value for their lot should only be for the amount of the rent that they paid the BRA for that year.”

In this case, the annual lease payments (or rent) range from $800 to $2,049. This is the amount the plaintiffs stated they paid the BRA to lease lakefront land in 2006, on which they have built homes. In the past, when a property sold the purchaser would pay for the improvements (homes and structures) and, instead of owning the land, they owned the right to contract with the BRA to lease and use that site for a contracted period. In recent years, some homes on BRA leases have sold for over $500,000. The plaintiff’s 2006 appraised values for improvements and land ranged from $170,000 to $466,700.

“At first I thought it was about [lake property] being appraised too high. The ripple effect, if they got what they wanted, has a much larger impact than on just me,” Patterson told the Index. “Who’s it going to benefit?”

Patterson said if everybody tried to buy lots for the amount of their annual rent value – the $800 to $1,200 rate – “I don’t think the BRA would agree and there would not be a lot of sympathy for us in Palo Pinto County or [with] Texas legislators. I have a hard time believing that’s what [legislators] wanted.”

“If they get what they want, do they get a refund from the county and a refund from the school districts?” he asked.

“As a lessee I am very happy with my opportunity to buy my land at the present 2008 land tax-assessed value,” he wrote in his e-mail to the attorneys. “Do we really want to invite all the leaseholds to be reappraised? A lot of good people (including yourself) have worked very hard so we can all have a chance to buy our lots at a very reasonable price.”

The bill allows individuals to purchase their leased land from a third party based for 10 percent of the 2008 appraised values – Patterson has sweetened the deal for those who chose to purchase concurrently at his closing. But this all changes if Patterson’s transaction doesn’t take place by the Dec. 31, 2010, deadline.

Per HB 3031, if Patterson’s deal doesn’t go through before 2011, then leaseholders can buy their leasehold interests from the BRA “at whatever the assessed values are at that time,” he said. “They would be using 2009 values or 2010 values by then, but they would not be using the 2008 values. On the average [2009 values went] up 33 percent, but some lots doubled.”

“How does the pursuit of this lawsuit let us buy our lots for less than what we can buy them for now?” he asked.

“I wish they would take a step back and look at it,” Patterson said of the appellants. “What is the best interest of the lake and leaseholders? I can understand my route but I cannot understand theirs. If their goal is to best serve the lake folks then maybe explain it to us all. It should be a fairly simple question and a fairly simple answer.”



PKLA


In his e-mail and follow-up conversation with the Index, Patterson queried about the relationship between the Possum Kingdom Lake Association, the lawsuit and the appeal.

“I have great respect for the PKLA,” said Patterson, who is a member of the association. “I’m confused about the roles of four people [and am] not sure they have polled the people on what their thoughts are.”

The case involves four of the total of nine PKLA directors, including board president Monte Land and directors Aldrich and Scott Wheatley, who are also listed as legal counsel for the case. Fitzgerald, a personal injury attorney, also serves as a PKLA director. Aldrich specializes in personal injury and civil trial law and Wheatley is a partner with the law firm Jackson Walker LLP, where he serves as lead counsel in complex litigation. This includes major claims involving real estate, title and commercial disputes.

Fitzgerald said the association has been in support of the sale of the property and was part of the process of getting the bill passed.

“I’m still very grateful for all they [PKLA] have done to date, I just don’t understand this deal,” Patterson told the Index.

“I am not sure if this lawsuit is being financed by PKLA money or not. In looking at this PKLA Web page it appears to at least be sponsored [or] endorsed by the PKLA,” he wrote in his e-mail.

Patterson noted that the PKLA Web site lists the suit and asks members for financial contributions to a “tax protection fund.”

“On the PKLA website you ask PKLA membership to ‘pursue the matter through litigation as a Class Group?’” he also stated in his e-mail to attorneys. “I understand why you filed the lawsuit before HB 3031 became law, but question why you and the PKLA now are still pursuing this appeal since HB 3031 has become law. If successful I have to assume, unless you tell me otherwise, that you would also ask for all subsequent tax years, including 2008, to be reappraised.”

Patterson admitted he is a “short-termer on this deal” regarding his involvement with BRA divestiture of leased property.

“The BRA has done everything they told me they would do on this deal,” he said. “I have a much more difficult time understanding the [PKLA]. I don’t understand their motivation and goals specifically on this [appeal].”

“Is it really going to let the leaseholders buy their lots for anything less than what they can buy [them for] right now?” Patterson asked.

He told the Index that if the result of the lawsuit means the leasehold value “comes out low” he won’t be able to close.

“My deal works as is,” Patterson said. “I don’t understand their math; I don’t know what it could invite. This is the gift horse.”