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Section 2: Legal Instructions - Personalty and Realty

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Policy

Under the law, the state is required to compensate a property owner only for the real property acquired and for damages, if any, caused to remaining real property. No payment can be made for personal property; hence, proper legal classification of a particular item must often be decided. Generally, the challenge of identifying an item as personalty or realty requires determining whether it constitutes a “fixture,” as the laws of this state comprehend that term. The term “fixture” is generally used to denote an item of personal property that has become so annexed to land or buildings that is has become a part of the realty. Making this determination is often not an easy matter. The courts have no fixed rule classifying forever any certain item as a fixture. However, certain definite rules have been developed which are to be followed in determining whether an item is a fixture. For this reason, the determination must necessarily be made in the field. The ROW Division will assist in any way possible. Emphasis is placed on the investigation and study to be made, and the analysis should be as objective as possible. The conclusion reached should not be swayed or influenced by sympathy for or statements made by the property owner, nor should it be swayed or influenced by the desire to save money for the state. The appraiser must identify the items considered in the appraisal to be real property as well as those major items identified as personal property in the appraisal report (49 CFR 24.103(a)(1)).

If the status of the item is not obvious to the appraiser, he/she should request legal instructions and should state in his/her report that the property has been appraised in accordance with such legal opinion. The appraiser’s personal opinion may not be in agreement with the legal opinion; however, this is a legal rather than an appraisal matter. The appraiser should follow such instructions, setting out in the report that the resulting value is “subject to the instructions” rather than an “instructed value.” When questionable items exist, the appraiser should be furnished with a copy of form ROW-A-9, Property Classification Agreement, with the owner/tenant regarding items of personalty and realty.

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Criteria

The Texas Supreme Court specified the criteria for ascertaining whether personal property has become a fixture. The determination is made by the combined application of the following factors:

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  • Has there been a real or constructive annexation of the item to the realty?
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  • Has the item been fitted or adapted to the uses or purposes of the realty to which it is connected?
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  • Would a hypothetical owner of the unit-fee making the annexation have intended the item to become a permanent part of the realty?

Of these three factors, intention is the most important. In fact, the first and second factors listed above are considered merely evidence of the third factor, the party's intent. Caution should be exercised, for the “intention” which is determinative is not a secret intention, but is that which is expressly declared or has become apparent from the action, declarations, and purposes to be served.

If the item is so securely attached to a building that it cannot be removed without extensive damage to the building, consideration should be given to the idea that the intention was to make it a part of the realty. However, regardless of the mode of annexation or attachment, if an item was annexed for only a temporary purpose, it is not a fixture.

Attention should also be given to the second factor, because the purpose or use for which the item was annexed to the building also may demonstrate intent.

While the first two factors are evidenced in the third, all three should be considered. In order to do so, it readily becomes apparent that a detailed study of the factual situation surrounding the annexation of the item to the realty is necessary if a conclusion is to be reached which can be justified and sustained if questioned. Therefore, too much care cannot be exercised in ascertaining all of the facts relating to an item. In those instances where an expensive, but questionable, item is involved, it would be advisable to preserve the basis of the conclusion reached, whether as a fixture or not, through means of written memorandums, photographs, and/or other means.

To illustrate the importance of detailed information, an examination of an example would be helpful. Therefore, assume this limited-fact situation:

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  • An apartment house has window air-conditioning units with 220-volt wiring for each unit. All of the apartments are furnished and the halls and stairways have carpeting over finished hardwood floors.
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    • Air-conditioning units: Ordinarily such units are not permanently affixed to a building and are designed to be easily removable without damage to the building. They are usually designed for installation in any type building rather than specific buildings. The purpose for such units is to provide temporary relief from the heat; therefore, the conclusion would be that these units are not fixtures. However, an opposite conclusion would be justified if the units were mounted in special spaces cut in the walls or if the window frames required considerable alteration in order to install the units.
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    • Furniture: All items will be considered personal property, including gas stoves and electric refrigerators. However, under certain circumstances a different conclusion may be reached if some of the items of furniture are “built-in units.” i.e. dishwashers.
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    • Carpeting: Under this limited fact situation, it appears that the carpet was merely put down to protect the finished floors as distinguished from making it a permanent part of the building. Therefore, it would be concluded that it has the nature of personal property even though it may be secured in certain spots by tacks or some other means to prevent slipping. However, if there were wall-to-wall carpeting on an unfinished floor of wood or concrete, then an opposite conclusion would be justified.

A further complication often arises in connection with machinery or equipment even after the three factors have been applied and the determination has been made that it is a fixture. This complication pertains to items or parts which are not in themselves physically annexed to the realty, but which are used in connection with or associated with machinery or equipment that is annexed to the realty. The answers to the following questions should be used in resolving this complication:

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  • Will the removal of such non-annexed part leave the principal part of the machinery (a fixture) unfit for use?
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  • Are such non-annexed parts capable of being put to general use elsewhere?

These two questions should be applied together and not separately.

If it is determined that a certain type of non-annexed item is an integral part of the annexed machinery, and as such is constructively annexed to the realty, then it must also be classified as a fixture. A distinction may be justified in classifying such parts as not being a fixture based on the condition or serviceability of such parts. The key to making this type of determination is the particular plan or scheme of operation. A non-annexed item may be the most important component in the entire operation; without it, valuable permanently annexed items may be rendered useless. Some examples are:

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  • exhaust vents for specialized machinery or equipment (i.e., commercial ovens, laundry equipment, painting facilities)
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  • exterior plumbing and electrical connections, conduit, piping servicing an item of personal property.
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  • heating and cooling systems installed specifically for use by an item of personal property (i.e. security system, computers, communications)
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  • specialized hoists, conveyors, lifts attached to the exterior of the wall, ceiling, floor.
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  • air and water filtration systems attached to the exterior of a structure utilized for a specific item(s) of personal property.

A further explanation of policy is necessary concerning the handling of items of service station equipment. If the fee owner does not solely own service station equipment, it is the practice of oil companies to furnish various units of equipment to the owner under a lease agreement. If a lease agreement exists, a copy should be attached to the appraisal report.

In many lease agreements, the oil company specifically designates certain items of equipment as personal property of the oil company. This agreement fixes the rights of, and is binding upon, the parties thereto. For TxDOT’s acquisition, the characterization of the item as real or personal property in the lease agreement cannot be considered. Instead, the classification of the equipment as personalty or realty shall be based upon whether the equipment has become so annexed to the building or land that it becomes part of the realty. Underground tanks, hydraulic lift grease racks, and similar items integrated into the structures are to be treated as part of the realty, based on condition and ease of movement, and can be valued by the appraiser as such. Movable equipment, such as kerosene or oil dispensers on rollers, will be treated as personal property and will not be included in the appraisal process.

Other items are difficult to classify as personalty or realty, such as gasoline pumps or ATM machines. Even if there is a declared intent within a lease agreement that these and/or other items are to be considered as personal property, the determination still must be made in accordance with the criteria specified above.

When other questionable items such as machinery, equipment, appliances, etc. are involved, the appraiser should determine the classification of such items as personalty or realty to insure proper handling, and may seek assistance from TxDOT. Such documentation should be made a part of the report. When the report is submitted to ROW Division for review, the reviewing appraiser should include a statement in their review comments, identifying which questionable items have been properly determined to be realty items.

Therefore, at pre-appraisal contact, TxDOT, the owner, and tenant-occupant(s) of the parcel should agree upon those improvements to be considered as personalty (using form ROW-A-9, Property Classification Agreement, releasing TxDOT from any payment for such items as realty. A copy of this agreement should be given to the appraiser and be made a part of the appraisal report.

There may be instances where TxDOT disagrees with the owner’s/tenants decision to declare an item as personalty or realty. In this case, and only then, TxDOT may allow the appraiser’s discretion in identifying the personalty/realty status of the item under disagreement. If the appraiser requires assistance in this, he or she may contact TxDOT.

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