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 method, and then appeal if need be. (Don’t have time to do all that? There are software tools that can help.)
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.
Does your property tax software make it easy to build a strong appeal? Find out what your software should be doing that can give your team a leg up.
How To Use Commercial Property Valuation Methods To Appeal
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.
The Traditional Fair Market Value Approach
Three valuation methods are commonly used to do this—the cost, market, and income approaches.
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 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.
Wish you had more time to focus on appeals? These three trends in tax technology can give your team the time back they need to focus on what's valuable.
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.
Using These Commercial Property Valuation Methods For An Appeal
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.
Build Better Appeals With Property Tax Software
To use these commercial property valuation methods successfully, you need time. You may have as few as 30 days to respond to assessment notifications, which can be especially challenging with a large number of properties.
To get the time you need to build a better case, take advantage of sophisticated property tax software like MetaTasker and TotalPropertyTax (TPT). MetaTasker automatically extracts important data—including due dates for appeals—from tax documents in a fraction of the time it would take your team to do it manually. It then seamlessly imports that data into TPT, where you can easily manage your tax documentation to help you prepare for appeals. It also makes filing your appeals easier because the appeal forms are included in the software. TPT can even integrate with your current AP system for check writing.