GENERAL ASSESSMENT DEFINITIONS

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1 21st Century Appraisals, Inc. GENERAL ASSESSMENT DEFINITIONS Ad Valorem tax. A tax levied in proportion to the value of the thing(s) being taxed. Exclusive of exemptions, use-value assessment laws, and the like, the property tax is an Ad Valorem tax. Agricultural-Use Value. The Agricultural-Use Value is the amount of money that a prudent investor might invest in an acre of land and receive a reasonable rate of return from the land use itself. A productivity index for each land category is calculated, and is used to equalize the value, based on the potential of each parcel to produce. The Agricultural-Use Value does not consider all uses or the highest and best use of the property. The Agricultural-Use Value considers only the worth of that property for agricultural purposes such as tillable land, woodland, and pasture land. The basis for determining the Agricultural-Use Value comes primarily from the Income Approach to establishing value. The Clean and Green law also states that the Agricultural-Use Value must reflect the potential of the individual parcel to produce, based upon soil type productivity. Appraisal. An appraisal is an opinion of value, supported by sufficient evidence to arrive at that conclusion of value. Assessed value. The monetary amount at which a property is put on the assessment roll. Assessed values differ from the assessor's estimate of market value (appraised value) for three major reasons: fractional assessment laws, partial exemptions, and decisions by assessing officials to override market value estimates. Assessment progressivity (regressivity). An appraisal bias such that high-value properties are appraised higher (lower) than low-value properties. See also price-related differential. Average Daily Membership (ADM). Aggregate daily membership for all children on active rolls divided by the number of days the school is in session. Capitalization. The conversion of expected future benefits into a capital sum; the discounting of future incomes into present value. Capitalization rate. Any rate used to convert an estimate of income to an estimate of market value; the ratio of net operating income to market value.

2 General Assessment Definitions Page 2 Clean and Green. Clean and Green (Act Pennsylvania Farmland and Forest Land Assessment Act, as amended by Act 156 of 1998) is a state law passed in 1974 that allows land parcels, 10 acres or more in size, which are devoted to agricultural and/or forest land use, to be assessed at the value for that use, rather than Fair Market Value. The intent of the act was to encourage property owners to retain their land in agricultural or forest land use and to provide some tax relief to farm or rural property owners who are faced with much higher taxes due to new Fair Market Values. Coefficient of dispersion (COD). The average deviation of a group of numbers from the median expressed as a percentage of the median. In ratio studies, the average percentage deviation from the median ratio. It is a statistical test for tax uniformity (fairness factor). Cost Approach. One of the three approaches to value, the Cost Approach is based on the principle of substitution - that a rational, informed purchaser would pay no more for a property than the cost of building an acceptable substitute with like utility. The Cost Approach seeks to determine the replacement cost of an improvement, less depreciation, plus land value. Discount rate. (1) The rate of return on investment; the rate an investor requires to discount future income to its present worth. It is made up of an interest rate and an equity yield rate. Theoretical factors considered in setting a discount rate is the safe rate earned from a completely riskless investment (this rate may reflect anticipated loss of purchasing power due to inflation) and compensation for risk, lack of liquidity, and investment management expenses. The discount rate is most often estimated by band-of-investment analysis or a sales comparison analysis that estimates typical internal rates of return. (2) In monetary policy, the rate that the Federal Reserve Bank charges member banks to borrow. Effective age. The typical age of a structure equivalent to the one in question with respect to its utility and condition. Knowing the effective age of an old, rehabilitated structure or a building with substantial deferred maintenance is generally more informative than knowing its chronological age. Effective gross income. The estimated gross potential income, less allowances for vacancies and/or credit losses; the estimated gross potential income, less allowances for fluctuations. Effective tax rate. The tax rate expressed as a percentage of market value; this will be different from the nominal tax rate when the assessment ratio is not equal to one (1).

3 General Assessment Definitions Page 3 Fair Market Value. Fair Market Value is the value, in terms of money, which a willing, prudent, and knowledgeable seller would accept, and a willing, prudent, and knowledgeable buyer would pay, assuming that the property has been exposed to the market for a reasonable length of time, with neither buyer nor seller under pressure and both acting in their own self-interest. Gross income. Total income before the deduction of expenses. See also effective gross income. Gross income multiplier (GIM). The relationship between sale price (or value) and gross income expressed as a factor; used to estimate value as a multiple of annual gross income (usually related to potential or effective gross income). Gross rent multiplier. The factor by which gross rent is multiplied in order to obtain an estimate of value. Highest and best use. A concept in appraisal and in assessment law requiring that each property be appraised as though it were being put to its most profitable use, given probable legal, physical, and financial constraints. The concept is most commonly discussed in connection with underutilized land. Homestead/Farmstead Exclusion. The Homestead Exclusion is a way to provide real estate property tax relief to homeowners whose permanent residence is in the participating taxing jurisdiction, and to eliminate Act 511 taxes (a.k.a. nuisance taxes) such as the occupation tax. Income Approach. One of the three approaches to value, the Income Approach uses capitalization to convert the anticipated benefits of the ownership of property into an estimate of present value. The Income Approach has been defined as the present worth of future benefits. This approach calculates the economic gross annual income of a property stabilized over the economic life of the property, minus the annual operating expenses, leaving an annual Net Operating Income (NOI) before debt service. This NOI is then capitalized into a market value. The capitalization rate will vary with different properties, but it must provide a return of the investment and a return on the investment. Market rent. The amount of rental income that could be expected from a property if available for rent on the open market; the rental income level indicated by prevailing open market rental rates for comparable space, terms, and conditions as distinguished from contract rent payable under the terms of an existing lease or agreement. Same as economic rent.

4 General Assessment Definitions Page 4 Mill, millage. One mill is one-thousandth of one dollar or one-tenth of one cent. In many states, the tax rate is expressed as mills per dollar. For example, a two percent tax rate is $2 per $100, $20 per $1,000, or 20 mills per dollar. Net Operating Income (NOI). Annual net income after operating expenses are subtracted from effective gross income. Does not include payments for interest or principal. Pre-determined ratio. The pre-determined ratio is a fixed percentage that represents a portion of the base-year market value that will be taxed. Price-related differential. The mean divided by the weighted mean. The statistic has a slight bias upward. Price-related differentials above 1.03 tend to indicate assessment regressivity; price-related differentials below 0.98 tend to indicate assessment progressivity. Reassessment. Reassessments are needed when property values, used to make up the tax base, become inconsistent, unfair, and too old to reflect current trends and changes in the value of real estate. It is the legal responsibility of county commissioners to establish the Fair Market Value on all real estate within the county. This is done to establish a baseyear market value for real estate tax purposes. Sales ratio. The ratio of an appraised (or assessed) value to the sale price or adjusted sale price of a property. Sales Comparison Approach. One of three approaches to value, the Sales Comparison Approach estimates a property's value (or some other characteristic such as its depreciation) by reference to comparable sales. Validated sales are used to predict the probable selling price or current value of each and every property at a given point in time. These sales are then used to develop valuation formulas and appraisal models for the valuation of all property types. They are also used to identify specific comparable sales needed to support individual appraisals. This is done by adjusting each selling price upward or downward to adjust for the differences between the comparable sale and the subject property. Tax base. The real estate tax system is based on the market value of each parcel of real estate that is taxable within the county. This is also true for each respective taxing district.

5 General Assessment Definitions Page 5 Tax rate. The tax rate is set by each respective taxing authority such as county commissioners, township supervisors, borough councils, and school directors. It is this decision which results in the actual determination of the amount of real estate tax that will be paid. The tax rate is expressed as mills or millage. It is a percentage or flat rate, depending on the type of tax. Uniformity. Uniformity simply means each property owner paying their share based upon the best possible estimate of Fair Market Value. Use value. The value of property for a specific use. Weighted Average Daily Membership (WADM). The assignment of weight by grade level to the average daily membership. The current weighing is: half-time Kindergarten at 0.5, full-time Kindergarten at 1.0, Elementary (grades 1-6) at 1.0, and Secondary (grades 7-12) at 1.36.

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