INSTITUTE FOR PROFESSIONALS IN TAXATION REAL PROPERTY TAX SCHOOL REVIEW AND INTRODUCTION

Transcription

1 INSTITUTE FOR PROFESSIONALS IN TAXATION REAL PROPERTY TAX SCHOOL REVIEW AND INTRODUCTION This section is an overview of the major topics covered by IPT s Property Tax School which are directly relevant to this Real Property Tax School. The major technical aspects of this school concern real property valuation (i.e., the appraisal of real property). The objective of this review and introduction is to reinforce students understanding of the following topics, based on work experience and/or learning from the Property Tax School. Appraisal Document and Process Valuation Direct Sales Comparison Approach Cost Approach Income Approach Reconciliation Distribution or sharing of this material is strictly prohibited and may result in the assignment of a failing grade and/or termination of membership in the Institute of Professionals in Taxation.

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3 IPT, Real Property Tax School Introduction REVIEW AND INTRODUCTION TO VALUATION THEORY, PRINCIPLES AND METHODS FOR REAL PROPERTY I. APPRAISAL DOCUMENT & PROCESS It is important to understand the unique qualities of real estate that make appraisals necessary. Slide 1 THE APPRAISAL DOCUMENT Opinion of Value (not cost, price or prediction) Specific Purpose Specific Date A. Defined Appraisal is a logical process for gathering, classifying and analyzing facts about a property to estimate its value. Appraisal is an impersonal opinion of value based on objective analysis of the market supported by education, experience, and integrity. Appraisal is: 1. A documented opinion of value (not price, cost or a prediction) 2. Of a specific property 3. On a specified date 4. Specific purpose 5. That is usually written Appraisal is a research problem of interpreting the Market 1

4 Introduction IPT, Real Property Tax School B. The appraisal process Slide 2 THE APPRAISAL PROCESS 1. Investigation 2. Compilation 3. Computation Slide 3 1. Investigation -- legal ownership INVESTIGATION Define the Problem Identify Property Purpose Date of Appraisal/Inspection Legal Interests Fee Simple (Leased Fee + Leasehold) Tenants in Common Joint Tenants a. fee simple estate (most common in appraisals) (leased fee and leasehold together) b. partial interest i. leasehold estate (tenant's interest) ii. leased fee estate (landlord's interest) 2

5 IPT, Real Property Tax School Introduction c. tenants-in-common undivided interest in a specified proportion (e.g., 1/2, 1/3) d. joint tenants (characterized by the right of survivorship) (four characteristics - time, title, interest and possession are simultaneous, equal rights of all owners) Slide 4 2. Compilation COMPILATION Heart of the Appraisal Process Collect all relevant facts Analyze Quality Data Divided into General (Macro) or Specific (Micro) Slide 5 3. Computation COMPUTATION Three Approaches to Value Sales Approach Cost Approach Income Approach Reconcile to a final value conclusion Concept of Substitution in all Approaches 3

6 Introduction IPT, Real Property Tax School II. VALUATION A. Direct sales comparison approach There is an assumption that a buyer would pay no more than the price paid for comparable properties. Slide 6 DIRECT SALES COMPARISON APPROACH Compares subject property to sold properties Using appropriate units of comparison Analyze sales in order to derive most probable price Steps: 1) locate, investigate, and verify comparable sales 2) adjust comparables to subject 3) reconcile sales to indicate value of subject Slide 7 Sales Comparison Approach Steps Steps: 1. Locate, investigate and verify comparable sales 2. Adjust comparables to subject 3. Reconcile sales to indicate value of subject 4

7 IPT, Real Property Tax School Introduction Slide 8 PROCEDURE FOR SALES COMPARISON APPROACH Research the Market Verify the Data Select Relevant Units of Comparison Compare Property Characteristics Reconcile the Data Estimation of value via gross rent multiplier analysis Slide 9 MULTIPLIERS GRM - Gross Rent Multiplier sales price gross rent income PGIM - Potential Gross Income Multiplier sales price potential gross income EGIM - Effective Gross Income Multiplier (potential gross income less vacancy) sales price effective gross income 5

8 Introduction IPT, Real Property Tax School B. Cost approach There is an assumption that a buyer would pay no more than the cost of constructing an acceptable substitute. Slide 10 Cost Approach Steps Steps: 1. Estimate land value 2. Estimate construction cost 3. Estimate depreciation 4. Calculate Note for 2013: Add slide listing different depreciation types. Slide 11 COST APPROACH Cost New - Depreciation Depreciated Cost + Land Value Indicated Value Definition (Value of land & estimated depreciated cost of improvements) Cost-value relationship (Cost may not equal value and does not create value.) 6

9 IPT, Real Property Tax School Introduction Slide 12 COST = VALUE B. Income approach There is an assumption that a buyer would pay no more than the amount required to obtain an equivalent income stream. Slide 13 Income Approach Steps Steps: 1. Estimate income 2. Estimate expenses 3. Estimate capitalization rate 4. Calculate: ( Value = Income/Rate ) Steps: 1) estimate Income 2) estimate expenses 3) estimate capitalization rate 4) calculate: (Value = Income / Rate) 7

10 Introduction IPT, Real Property Tax School PGI Potential Gross Income - VAC - Vacancy Allowance EGI Effective Gross Income - OE - Operating Expenses - Reserves - Reserve Allowance NOI Net Operating Income Capitalize Indicated Value = Net Operating Income Capitalization Rate Indicated Value = Net Present Value of Cash appropriate Discount Rate Slide 14 INCOME CAPITALIZATION Potential Gross Income (PGI) - Vacancy Allowance = Effective Gross Income (EGI) - Operating Expenses (OE) - Reserve Allowance = Net Operating Income (NOI) Capitalization Rate = Indicated Value Note for 2013: Revise Slide 14 Slide 15 IRV I = Net Operating Income (NOI) R = Rate V = Value I R V 8

11 IPT, Real Property Tax School Introduction Slide 16 R I V Value V = I R V = $10, V = $100,000 Slide 17 R I V Income I = R x V I =.10 x $100,000 I = $10,000 Slide 18 R I V Rate R = I V R = $10,000 $100,000 R =.10 9

12 Introduction IPT, Real Property Tax School C. Reconciliation Given the relevancy of each approach and validity of the data, select a final value estimate of subject property value. Slide 19 Reconciliation The last phase of a valuation assignment wherein the value indications derived from the appraisal process are resolved into a value range or point estimate. Slide 20 Pre-Course Review Summary Introduction of Concepts Appraisal Document & Process Valuation Approaches Income Approach Cost Approach Sales Comparison Approach Program For The Week Financial Concepts Time Value of Money 10

13 IPT, Real Property Tax School Introduction Slide 21 Pre-Course Review Summary Questions Before Moving On? Financial Concepts Time Value of Money Formulas Calculator Keystrokes Slide 22 Demo Appraisal Introduction Slide 23 HP12C Calculator Tutorial 11

14 Introduction IPT, Real Property Tax School NOTES 12