You’ve just received an assessment notice for one of your commercial properties—now what? If the amount seems too high, hopefully you or another member of your property tax team will check the accuracy of the valuation by using one or more commercial property valuation methods, and then appeal if need be.
The appeals process was put in place for your benefit. For the most part, assessors are doing “mass” appraisals—in some cases they’re looking at entire towns or cities and using averages for metrics. You’re the only advocate for your particular property. You know which properties are most comparable to yours; you may also have access to detailed information that an assessor wouldn’t. So it’s up to you to make a course correction if needed—and that means gathering the right evidence to prove your case.
This post provides information and resources that can help you assess your appeal opportunities, and, should you decide to proceed, support your commercial property tax appeal with factual evidence.
Don’t have time for appeals? See how CrowdReason property tax software saves you significant time in other areas so you can make time to protest unfair assessments.
4 Commercial Property Valuation Methods (& How To Use Them)
There are two ways to determine whether your assessment is fair or not: the traditional market approach, which involves determining the actual value of the asset in one of three ways; and the “fair and equitable” approach, also known as uniformity.
It’s smart to use all of these methods, which will likely yield somewhat different valuation amounts. If the fair and equitable method produces an amount lower than the fair market value, the equitable method trumps it—you should be assessed fairly alongside everyone else. If, on the other hand, the market approach amount is below the fair and equitable amount, then the market amount trumps—your property can’t be assessed any higher than the market value of that asset.
The Traditional Fair Market Value Approach
Three valuation methods are commonly used to do this—the cost, market, and income approaches.
The Cost Approach
The basis of the cost approach is to ask: What would it cost to replace this asset? This approach assumes you’d have to first buy a piece of land of similar quality and in (nearly) the same location; on top of that, you’d have to factor in the cost of constructing a new asset. In most cases, your building is not brand new, so you need to make allowances and adjustments for its age, current condition, depreciation, etc.
This approach works on the principle of substitution. Investors looking at your property would not buy it if they could build a similar property next door that would generate the same economic value; they would pay more for a new building. So the cost approach puts a ceiling on the market value of a particular piece of property.
The Market Approach
The market approach compares your asset to other, similar properties and ensures it is priced accordingly. No one would buy your building if it was priced much higher than the other buildings around it; on the other hand, someone would quickly pick it up if everything else was selling for more. So if a similar building across the street from yours sold last month, we can assume you would obtain the same price in the marketplace. Not everything is directly comparable, though—you may need to make adjustments to equalize the assets, accounting for things like age, size, or functionality.
The Income Approach
Some commercial buildings generate income through lease payments. The income approach determines value by asking what present value would reasonably support that future cash flow. To answer this, gauge your future expected revenue minus estimated expenses (like property taxes, upkeep and maintenance, management fees, etc.) and discount that amount into the current value to determine the present value. The discount rate you use should be comparable to the risk associated with the expected income; you’ll require a higher rate of return if values are uncertain. So if the income is highly volatile (maybe you’re unsure about certain tenants, for example), you can try to account for that with a higher discount rate. On the flip side, if you’re confident you can make a fairly accurate estimate of future income (the building has secure tenants with long-term agreements in place), you would not require as high a discount rate. There is a way to determine the discount rate fundamentally or from the market, but we will save that discussion for another blog post.
A Note About The Market & Income Approaches
When using the market and income approaches it’s important to realize that the ultimate value of your asset may not be fully taxable by your jurisdiction, which may only tax tangibles. You may be including intangible elements in your valuation, for example, the value of a brand (like a Marriott hotel building vs. a generic hotel building). Even though investors would pay more for a Marriott building because it will generate higher income, you shouldn't attribute the value of that brand to the tangible building, which is ultimately the taxable asset. As a result, you’ll need to extract the value of intangible elements to take this into account.
Uniformity—The Fair & Equitable Approach
Another approach you could take is to determine if your assessment is uniform with other, similar neighboring buildings. Simply look at the assessments of other properties and adjust the values enough to be comparable to your specific asset. If those assessments are lower than yours, you can present them as part of your case for being overassessed.
7 Useful Software Applications For Analyzing Appeal Opportunities
Software can help with both analyzing your appeal opportunities and supporting your appeal, and there’s an option for (almost) every commercial property valuation method available. Those listed below are the ones we recommend; some are industry standards and others are promising new offerings. If you aren’t using one or more of these already, you might not be saving your organization as much money as you could.
ARGUS is an industry-leading software tool that can help you translate lease information into financial data. It calculates expected future cash flow based on information you enter about current leases in a building and the rental market in which the building is located. The software also has lots of additional features that make gathering intelligence about a property easier, like detailed valuation reports and summary reports. It’s particularly helpful if the property you’re valuing has many different leases with different expiration dates and complex lease provisions. ARGUS is a good tool for the income approach.
2. Black Knight
One of the largest tech companies in the industry, Black Knight maintains an extensive commercial property data set featuring information on more than 99.9% of the U.S. population. (It is also a leading data provider for Reonomy.) Subscribers get access to property tax estimates, comparables, and valuations. Black Knight collects data directly from county assessors’ offices across the U.S., and updates and verifies each record to ensure reliable information.
Another solid choice is CoreLogic, whose databases contain advanced property and ownership information for more than 99% of U.S. properties. Users can run narrowly defined queries to find specific property types; you can then gain access to a wide variety of data including tax assessments, property characteristics, parcel maps, property photos, transaction histories, and more. It also includes analytics tools to help you gain better insights from the data.
If you’re using the market approach, you’ll need the most current real estate values available—and you can get those from CoStar. CoStar updates and verifies its market information at least every 30 days, and it is widely relied upon by many industry professionals. And you can access the information fast, which is a bonus when you’re performing multiple calculations to find the valuation that’s most advantageous for you.
If you’re trying to determine what it would cost to replace a commercial asset today, you need access to the commercial building cost information provided by Marshall & Swift. It includes regularly updated building cost indexes for more than 800 geographical areas in the U.S. and Canada, making it one of the most comprehensive databases in the marketplace. And to make sure you get a “complete and defendable” determination of value, its building costs also incorporate three cost methodologies (square foot, segregated, and unit-in-place). There’s just no better resource for accurate, current cost information.
This startup’s detailed database utilizes more than 100 sources of commercial property data—including multiple public and proprietary data feeds and crowdsourced information—that are then analyzed using artificial intelligence. Designed for developers, investors, acquirers and anyone else who works in the area of commercial property, Reonomy makes it easy to search for commercial assets by address, size, age, tax history, and other specific characteristics. Reonomy is a potential alternative for CoStar.
7. Yardi Matrix
The Yardi Matrix database offers access to property-level information for multifamily apartment, office, industrial, and self storage properties across the U.S. It includes a rating system that makes like-for-like comparisons of property types possible. Yardi also produces a full spectrum of reporting on the above-noted markets, so you can get more information surrounding things like apartment inventory status, sale activity, new development, and rental market conditions.
What’s next? Prepare your commercial property tax appeal with TotalPropertyTax.
Once you’ve determined a need to appeal your assessment(s) and compiled the necessary data to support an appeal, you can use TotalPropertyTax (TPT) software to help file and manage it. From an Argus report, for example, you can upload data into TPT for recordkeeping. Our software then helps you:
- Track missing assessment notices according to protest deadlines.
- Create appeal packages quickly, including appeal forms/letters and custom attachments.
- Track hearing dates and locations, and create notes related to your appeal.
To discuss how our own software can help your organization successfully navigate commercial property tax management and appeals, get in touch. We’d love to hear from you.