Chapter 3 Real and Personal Property. Louisiana Mid-Continent Oil and Gas Association and Louisiana Oil and Gas Association

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1 Chapter 3 Real and Personal Property Louisiana Mid-Continent Oil and Gas Association and Louisiana Oil and Gas Association

2 Table of Contents Proposed Revisions for 2009 LTC Rules and Regulations Chapters 3 Real and Personal Property Louisiana Mid-Continent Oil and Gas Association and Louisiana Oil and Gas Association Summary and Explanation of Proposed Revisions. 1 Proposed Revisions.. 2 Page Exhibits Exhibit Functional Obsolescence Article from ASA M&TS Journal.. 1 External Obsolescence Article from Journal of Property Valuation and Taxation. 2 Munificence (Negative Obsolescence) Research 3

3 Summary and Explanation of Proposed Revisions for 2009 LTC Rules and Regulations Chapter 3 Real and Personal Property Louisiana Mid-Continent Oil and Gas Association and Louisiana Oil and Gas Association Summary Add steps to the Cost Approach to Value. Add obsolescence language to apply to all sections Add affidavit language for LAT forms and clarify notary no longer requested. Explanation Steps to the Cost Approach to Value The Cost Approach is the primary approach recommended by the LTC and used by assessors for most business property. In an effort to improve consistency with all types of business property, we propose most obsolescence language to be moved from other chapters to this chapter. The steps in the Cost Approach are added for general reference and context for the new obsolescence language that immediately follows. This is not intended to instruct assessors as much as provide the proper context for obsolescence. Obsolescence Appeals and litigation in recent years have prompted a lot of discussion about the obsolescence provisions in the LTC rules and regulations. What is it really? Is it required by law? Are the provisions consistent in each chapter? Do the rules and regulations provide enough how to guidance for assessors? Article VII, Section 18 requires fair market value for taxable property, which is defined in R.S. 47:2321, so any adjustment to best estimate fair market value is not only legal, it is required by law. The proposed language is intended to provide more how to guidance regarding the calculation of obsolescence. It is not intended to address all possible valuation challenges. Sound and knowledgeable appraisal judgment will continue to be necessary as assessors estimate fair market value. Affidavit and Notary As LMOGA and LOGA are known to present proposed revisions each year to the LTC rules and regulations, we were approached by non-oil and gas businesses to propose removing the notary requirement on LAT forms. They stated, and we agree, that many businesses don t notarize their LAT forms and it s an additional administrative burden to businesses that do get the forms notarized. We contend this is an unnecessary burden as taxpayers and their agents are subject to penalties of filing false reports, with or without the notary. An affidavit is proposed to affirm the expectation of taxpayers and their agents when they file LAT forms. Our proposal also addresses the LAA s concern for a legible name and contact information by requiring a typed or printed contact name and contact information on the forms. 1

4 Proposal for 2009 LTC Rules and Regulations By LMOGA and LOGA Chapter 3. Real and Personal Property 301. Definitions Three Approaches to Value 2. Cost Approach: In the absence of an active market, yielding comparable and reliable data, which can be used in determining market value, use of the cost approach as provided herein is the best approach. The steps in the cost approach to value are generally as follows: a. Estimate land (site) value as if vacant and available for development to its highest and best use. b. Estimate the total cost new of the improvements and/or personal property as of the appraisal date. c. Estimate the total amount of accrued depreciation attributable to physical deterioration, functional obsolescence, and external (economic) obsolescence. d. Subtract the total amount of accrued depreciation from the total cost new of the improvements and/or personal property to arrive at the depreciated cost of improvements and/or personal property. e. Add land (site) value to the depreciated cost of the improvements and/or personal property to arrive at a value indication by the cost approach. Cost and physical depreciation guidelines are provided in the following sections. Obsolescence guidance is provided below, which applies to all property where obsolescence is evident. Upon showing evidence of a loss in value due to obsolescence, substantiated by the taxpayer in writing, functional and/or external (economic) obsolescence will be appropriately recognized. Failure to appropriately recognize obsolescence in appraised values is a failure to assess taxable property at the applicable percent of fair market value as required by the state constitution and law. Examples of obsolescence include, but are not limited to, the following. i. Excess Operating Cost Properties may perform as originally intended, but advances in technology, design, or efficiency can make the older property more expensive to operate compared to the latest technology. Excess operating cost translates to a loss of profits or return on investment compared to a more current replacement property. This form of obsolescence is calculated as follows: Direct Capitalization Method: Typical Excess Operating Cost for One Year / Appropriate Discount Rate = Net Present Value of Excess Operating Cost (obsolescence) Underlines are additions. Strikethroughs are deletions. 2

5 or Discounted Cash Flow (DCF) Method: Estimated Excess Operating Cost for Each Year Over Economic Life / Appropriate Discount Rate = Net Present Value of Excess Operating Cost (obsolescence) ii. Under Utilization For properties with a measurable throughput and capacity (e.g., pipelines), obsolescence related to under utilization is commonly measured by comparing the recent or anticipated throughput with design capacity. This type of obsolescence is commonly experienced with property that has clearly passed its optimum use and is therefore superadequate for its current and anticipated use; it is also common in market sectors subject to significant volatility in the business cycle. Such obsolescence is appropriately recognized with a service factor calculated using the following formula: Service Factor = (Actual Throughput/Rated Capacity) 0.6 iii. Product Price or Transportation Fee Decline A property may operate at full or near full capacity, but have significant obsolescence if it experiences a decline in the product price or fee to transport the product. This is generally due to a decline in the economics of a specific industry. This form of obsolescence, an income shortfall, is calculated as follows: (Required Return on Investment Current Return on Investment) / Required Return on Investment iv. Government Law or Regulation Business properties are generally constructed or installed with the expectation there will be no major changes in laws or regulations in the foreseeable future. If a new law or regulation restricts the operations of a property, its ability to produce income is adversely affected, thus decreasing the value of the property. This form of obsolescence is calculated similar to iii above; obsolescence was incurred in a similar manner (reduced income), but a different cause. v. Other Many other factors, too numerous to list, both internal and external to a property, affect its fair market value. All factors that can be reasonably identified should be recognized in the assessor s determination of fair market value. Underlines are additions. Strikethroughs are deletions. 3

6 305. Real Property Report Forms A. If an assessor chooses to use the self-reporting form, he shall furnish the appropriate self-reporting form for real property to each property owner within his respective parish or district, on or before February 15, in the year in which the property is to be appraised. Upon completion, the property owner shall return the form to the assessor by the first day of April of that year or, 45 days after receipt, whichever is later. The self-reporting forms are to assist the assessor in determining the fair market value of the real property and, if used, shall be delivered to each person in whose name the real property is assessed. Each real property form shall require a typed or printed (legible) contact name and contact information and signature by the owner or owner s authorized agent to attest to the following statement: I declare under the penalties for filing false reports (R.S. 14:125; up to $500 fine or imprisonment up to one year or both, plus additional penalties defined in Act 2330B of the 1989 Regular Session) that this return has been examined by me and to the best of my knowledge and belief is a true, correct, and complete return. If the return is prepared by other than the taxpayer, his declaration is based on all information relating to the matters required to be reported in the return of which he has knowledge. The real property report forms are not required to be notarized Personal Property Report Forms. A. The appropriate self-reporting Personal Property Report Form, is to be forwarded each year, on or before February 15 in the year in which the property is to be appraised, to each person in whose name the property is assessed. Upon completion, the property owner shall return the form to the assessor by the first day of April of that year or 45 days after receipt, whichever is later. Each personal property form shall require a typed or printed (legible) contact name and contact information and signature by the owner or owner s authorized agent to attest to the following statement: I declare under the penalties for filing false reports (R.S. 14:125; up to $500 fine or imprisonment up to one year or both, plus additional penalties defined in Act 2330B of the 1989 Regular Session) that this return has been examined by me and to the best of my knowledge and belief is a true, correct, and complete return. If the return is prepared by other than the taxpayer, his declaration is based on all information relating to the matters required to be reported in the return of which he has knowledge. The personal property report forms are not required to be notarized. Underlines are additions. Strikethroughs are deletions. 4

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22 Munificence (Negative Obsolescence) LMOGA-LOGA researched various sources for munificence in the context (negative obsolescence) as stated in 2501H of the LTC Real/Personal Property Rules and Regulations and found the following: Recognized Appraisal Texbooks Appraisal of Real Estate (Appraisal Institute) Appraising Machinery & Equipment (American Society of Appraisers) Property Assessment Valuation (International Association of Assessing Officers) Findings: Obsolescence is described as a loss in value. Munificence or negative obsolescence (gain in value) was not mentioned. These appraisal textbooks indicated obsolescence is present and should be appropriately recognized in the appraisal or it is not present and no obsolescence is indicated in the appraisal. Property Tax Law of Various States Commercial Clearing House (CCH) Tax Research Network at (subscription required) was used to research property tax laws and regulations of certain states (23) with a large amount of business property and states that border Louisiana. Munificence and negative obsolescence were the search terms. States searched were: Alabama, Arkansas, California, Colorado, Florida, Georgia, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New York, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, and Washington. Findings: Only Louisiana has a property tax law or regulation with munificence/negative obsolescence. Although these search terms may not have completely covered the concept, the results of this search indicate munificence/negative obsolescence is not a generally recognized appraisal concept or practice. Online Financial and General Glossaries Dictionary.com at Goggle at Investopedia at Investor Words at The Free Dictionary at Webster s at Wikepedia at Word Reference at Findings: Munificence is defined as liberal in giving, very generous. There was no reference to this term regarding appraisal or valuation. Obsolescence referred to a loss in value or becoming obsolete. A search for negative obsolescence in Google pulled only 55 hits, and some of these were blogs and academic discussion, an indication it is rare. A search for munificence and obsolescence pulled more hits, but most referred to munificence with its common meaning, which is generosity, not obsolescence or valuation.