APPRAISER & ASSESSOR Real Estate Tax Valuation Overview and Issues

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1 APPRAISER & ASSESSOR Real Estate Tax Valuation Overview and Issues James R. Johnston, MAI, SRA J. Michael Tarello, MAI, ASA, MRA February 11, 2015 BOSTON Property Advisors Vision Government Solutions

2 AGENDA Expenses Above and Below the Line Income, Rent Roll, Lease Abstracts Expenses, Ordinary and Extraordinary Cap Rate Data and Issues Land Curve Value in Use vs Highest and Best

3 AGENDA Fee Simple vs Leased Fee Mass Appraisal vs Ad Valorem Fair Cash Value 38 D & 61 A Requirements Discovery Process-Limited Data Negotiation Techniques Direct Cap vs DCF Questions and Open Discussion

4 Expenses Above and Below the Line What line are we talking about? BOSTON Property Advisors

5 Expenses Above and Below the Line

6 Summary of DCF

7 Expenses Above and Below the Line Investors Methods per PWC/Korpacz Survey: BOSTON Property Advisors

8 Income, Rent Roll and Lease Abstracts Market Rent Contract Rent Effective Rent (After concessions) Excess Rent (Above Market) Percentage Rent (Straight Percentage) Overage Rent (Above Breakpoint) Office Rent: Gross with Base Year Oper & Tax Expense Retail Rent: Net Plus Oper & Tax Exp. and Percentage Rent Industrial Rent: Net (Direct or Pass Through Expenses)

9 Income, Rent Roll and Lease Abstracts Rent Rolls Try to get two to three years of income and expense info Provide a form that is detailed, but easy to use You want it to provide you with gross income, vacancy and effective gross income Make sure form offers area to show who pays what for expenses Have area in form for sales and cost information Lease Abstracts Lease income, date terms, options for renewal, type of lease (NNN or Gross) see sample form Percentage income, CAM contribution

10 Type of Lease NNN

11 Type of Lease Gross

12 Income & Expense Form

13 Income & Expense Form

14 Lease Abstract Form

15 Expenses BOMA Office Expense Report

16 Expenses Dollars and Cents of Shopping Centers

17 Vacancy Rate Source

18 Cap Rate Data Source PWC / Korpacz Investor Survey Office Rates

19 Cap Rate Data Source

20 Cap Rate Data Source

21 Land Curve-Land Residuals Land curve developed based on market data from community or neighboring towns Land curve parameters ( based on zoning & base lot) Economy of scale Understand land to building ratio and its affects on the land curve Base prime lot (based on Zoning) Excess land, secondary lots, front foot, acreage discount Neighborhood delineation, Street or traffic adjustment Water influence factors All factors must be supported by market data

22 Land Curve Chart

23 Neighborhood Chart

24 Water Influence Factors

25 Acreage Discount Chart

26 Land Curve-Land Residuals Step One- Land and Building Rates =100% for Residential Class- One two and three family Step Two- Lower your land rates to desired median, say 95% Step Three- Run land residuals and save in excel Step Four- Lower building rates to 95% and run improved sales ratio studies By using the building bates at 100% it gives you a true indicator of what your Land Residuals are overall and for each neighborhood

27 Land Curve-Land Residuals Step One Verify sales, review data to determine any time adjustment factor Set building style rates to 100% market value based on M & S or local costs Adjust depreciation tables to current base year Based on land sales and extracted land sales, adjust land curve and neighborhood codes to 100% market value, Also determine base prime lot (usually by zoning) If limited sales available consult neighboring towns Run residuals and improved ratio studies to DOR standards and save a Copy (land residuals and ration studies should be ay 100% of MV) Step Two Lower land curve to desired median and review ratio studies for DOR requirements

28 Land Curve-Land Residuals Step Three Run the land residuals based on step two s rates In excel sort to DOR requirements Need to be run for one, two and three families Separate into neighborhood sorted by size Separate into parcels above and below primary lot acreage number to prove excess land These breakouts need to be further divided by neighborhoods, street adjustment and water influence

29 Land Curve-Land Residuals Step Four Adjust the building rates to your desired median Run all your ratio studies to meet DOR requirements Make a copy of the sales ratio studies and the Residuals These are the ratio studies you will present to the DOR rep Saving a copy of the residuals gives you a picture of all three scenarios

30 Value in Use v Highest and Best Use State Requires assessed value based on value in use or present use 100% or 0% occupied vs market vacancy Excess or potentially developable land issue Value as of January 1 Construction permits can be Jan 1 or June 30 Reconcile both dates

31 Value in Use v Highest and Best Use Key Definitions Highest and Best Use The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability. Highest and Best Use of Property As Improved The use that should be made of property as it exists. An existing property should be renovated or retained as is so long as it continues to contribute the total value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one. Value in use. The value a specific property has for a specific use. Use Value Assessment. An assessment based on the value of property as it is currently used, not on its market value considering alternative uses.

32 Fee Simple vs Leased Fee Fee Simple- Market rates for valuation date Leased Fee- Contract rents set for a specific time period Leased Fee rates may be lower, higher or similar to Fee Simple Reconcile leased fee rates to fee simple rates

33 Fee Simple vs Leased Fee Key Definitions Fee simple estate. Absolute ownership unencumbered by any other interest or state, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. Leased fee estate. An ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others. The rights of the lessor (leased fee owner) and the leased fee a specified by contract terms contained within the lease. Leasehold estate. The interest held by a lessee (the tenant or renter) through a lease conveying the rights of use and occupancy for a stated term under certain conditions. Market rent. The rental income that a property would most probably command in the open market; indicated by the current rents paid and asked for comparable space as of the date of the appraisal. Market Value as stated herein is consistent with the term Fair Cash Value, as defined in the case of Boston Gas v. Assessors of Boston: 334 Mass (1956). "This means fair market value, which is the price an owner willing but not on the compulsion to sell from one willing but not under compulsion to buy. It means the highest price that a normal purchaser not under peculiar compulsion to pay at the time, and cannot exceed the sum which the owner after reasonable effort could obtain for his property The Fair Cash Value is the value the property would have had on January 1, of any taxable year in the hands of any owner, including the present owner."

34 Mass Appraisal Ad Valorem Fair Cash value Mass Appraisal based on Fair Cash Value Mass Appraisal- Values a group of properties based on equity and specific valuation date Mass Appraisal separates land building value Mass Appraisal Value vs individual ad valorem fair cash value at ATB May have to reconcile difference

35 38D Requirements 38 D- Assessor requests I&E info for revaluation Owner or lessee required to return info under oath within 60 days Failure to respond results in automatic dismissal of filing at ATB False statement bar from statutory appeal Res penalty of $50, comm penalty of $250 BOA must inform owner or lessee

36 61A Requirements 61 A- Assessor requests I&E info for abatement review Owner or lessee required to return info under oath within 30 days Failure to respond bar from statutory appeal Unless unable to comply for reasons beyond control or made good faith effort This also applies to 38 D

37 Discovery Process limited data negotiation technique Owner or lessee appeals to ATB Request set of Interrogatories send out immediately even if you do not have a set date Work with your attorney and appraiser to ask appropriate question If return info incomplete- conf call with ATB Request for dismissal due to incomplete response ATB will give time table for response, if not returned the case will be dismissed

38 Discovery Process limited data negotiation technique When in abatement or pre trial negotiations Do not negotiate in a position of weakness Burden of proof is with owner or rep Require supporting data Do not split the baby- your assessment is already at market (unless incorrect data) Rep is an advocate of owner- will present a low figure for settlement purposes Negotiate with equity to other properties in mind

39 DCF VS Direct Cap Direct Cap utilized for mass appraisal valuation DCF used for investment and institutional valuation DCF good tool for new construction Determines stabilize income stream in an unstable property- high vacancy or in transition type of property Also used for development projects DCF information can be useful for developing a stabilized direct cap value

40 DCF VS Direct Cap

41 Questions and Open Discussion Specific issues in your community Difficult types of properties to assess