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May 1989

Property tax valuation services.

by Reilly, Robert F.

    Abstract- There are several important points for accountants to consider when calculating ad valorem property taxes. Ad valorem tax calculations are based on the value of land or property in question. An ad valorem appraisal involves: inventorying assets; conducting market research of available valuation data; and selecting and performing quantitative and qualitative appraisal methods. Accountants appraisal reports should include: explanations of market research findings; explanations of valuation techniques and methods; and general statements of valuation conclusions.

Once the property's fair market value is ascertained, as of a particular assessment or lien date, then its assessed value must be determined. The assessed value is typically a percentage of the property's fair market value. For example, in a certain jurisdiction, assessed value could be 50% of fair market value. Assessment formulas vary, but are usually the result of legislative enactment. Next, a millage rate is applied to the assessed value to determine the tax payment due. The millage rate is typically expressed in terms of dollars of tax per each $100 of assessed value. Not surprisingly, the determination of a property's fair market value, upon which the assessment and ad valorem tax is based, frequently is the subject of controversy, dispute, appeal, and litigation.

When the assessment and millage rate formulas are applied appropriately to properties in the same jurisdiction, then the ad valorem tax process is inherently fair and equitable. However, owners believe that they are not taxed fairly and equitably when the determined fair market value of their property is excessive or overstated--either in absolute terms or in comparison with other properties in the same jurisdiction. For this reason, the determination of value is a frequently appealed--and often vigorously contested--issue. Such disputes are most often resolved at varying points in the administrative or judicial process through reliance on a soundly reasoned, rigorously prepared, and comprehensively documented appraisal.

Ad Valorem Property Tax Appraisals

This section presents a discussion of the ad valorem property tax, property appraisal process, and the assessment appeal process. Generally accepted appraisal terminology and definitions are reviewed. While appraisal terminology does not seem particularly important to property owners, a cursory understanding of certain key terms affords a greater comprehension of the entire process. Finally, a discussion of dispute resolution techniques is presented.

Objectives of the Property Tax Appraisal

As discussed, the concept of ad valorem property taxation is generally considered fair. However, specific owners may be treated unfairly if their individual properties are overvalued, and, accordingly, overassessed. In such cases, property owners need the services of professional appraisers and, often, legal counsel. This assistance may be necessary to establish an initial assessment of new property, to negotiate or appeal an assessment when property ownership changes, or to contest a reassessment.

In accordance with statutory authority and judicial precedent, the assessor's objective is to treat all owners of similar type properties fairly and equally.

In some jurisdictions, it is the responsibility of the owner to file a property tax return setting forth the fair market value of the property. If the initial assessment is overstated, or if the assessing authority does not accept the owners' rendition of value, then administrative and judicial appeal processes are available to the owner.

It is the objective of the independent appraiser to prepare the most soundly reasoned, rigorously analyzed, and thoroughly documented appraisal of the subject property. Also the appraiser should remain independent and objective during the process. While appraisers can perform advisory and consultative services, and act as intermediaries for clients, independent appraisers should not become advocates or perform the advocacy function.

The Property Tax Appeal Process

During preliminary negotiations regarding an initial assessment or a reassessment of a property, the owner typically deals directly with the local assessing authority. During these negotiations, the property owner presents his evidence regarding the value of the property; and the assessor presents his evidence. A compromise position is frequently reached at this stage, a revised assessment is recorded and is accepted by both parties.

As many owners have learned, it is vitally important to retain a professional independent appraiser prior to conducting even preliminary negotiations with assessing authorities. The appraiser can prepare preliminary estimates of the property's value, and can gather evidential matter regarding market transactions of comparable properties. The appraiser can quantify appropriate income projections and capitalization rates, and quantify significant areas of functional and economic obsolescence, frequently overlooked by both assessor and owner. In other words, the appraiser can prepare his client with substantial data to allow the owner to be well prepared and informed during negotiations.

Often, it is useful for the appraiser to assist the owner with such negotiations; both the appraiser and the assessor "talk the same language" regarding appraisal procedures and approaches. Many owners are unsuccessful in these negotiations because they are unfamiliar with appropriate jargon and techniques.

If these preliminary negotiations prove unsuccessful, the owner should retain legal counsel as well as a professional appraiser during the appeal process. The appeal procedures vary by jurisdiction; however, most jurisdictions include quasi-judicial authorities such as county boards of equalization and state boards of equalization. The process before these authorities is formal, and their decisions represent important precedents in any appeal case. Accordingly, the owner should come to an appeal with a fully documented narrative appraisal report. The report should be prepared in accordance with generally accepted appraisal standards and with the definitions and the methodologies required by the local statutory authority. Invariably, during an appeal hearing, the taxpayer's appraiser will testify as an expert on the subject, content, and conclusions of his appraisal.

If either the taxpayer or the taxing authority are not satisfied at the administrative appeal authority level, then judicial appeal remedies are available. They involve formal legal proceedings in which the taxpayer must be represented by counsel. Certainly, before seeking judicial relief, the taxpayer's counsel will work with the taxpayer and the appraiser to assess the case. Counsel will prepare the appraiser for testimony. Simultaneously, the appraiser will be performing litigation support and advisory services--preparing counsel to deal with valuation and appraisal issues.

The professional appraiser's services are critical to the taxpayer's case--from the preliminary negotiations through the judicial relief and litigation process. Accordingly, it is never too early to retain a professional appraiser in these matters.

The Ad Valorem Appraisal Process

This process follows systematic procedures to answer questions regarding the value of property. It starts with the identification of the problem and ends by reporting the results.

Many different definitions of value can be determined for the same property. Examples include: financing collateral value, insurable value, use value, as completed value, investment value, going-concern value, and liquidation value. However, for ad valorem tax purposes, the most relevant definition is fair market value. There are well- established procedures for identifying and quantifying the fair market value of real and tangible personal property for ad valorem taxation.

For each appraisal, the procedures used will depend on the nature of the assignment, the types of properties, the purpose and objective of the appraisal, and the quantity and quality of available data. All appraisals generally adhere to the following procedures:

1. Define the scope, objective, and purpose of the appraisal.

2. Identify, inspect, and inventory the assets.

3. Market research and analysis of available valuation data.

4. Contemplation of the three generally accepted approaches to property appraisal.

5. Select the quantitative and qualitative appraisal techniques and procedures to be used.

6. Perform the selected appraisal techniques and procedures.

7. Integrate and synthesize the results of the techniques and approaches.

8. Report the final conclusion.

Certainly, before beginning the appraiser must have a clear and accurate understanding of the scope, objective, and purpose of the appraisal. This understanding should be put in writing, agreed to and signed by the appraiser and client.

The scope will include a description of the assets to be appraised, their location, relevant background data regarding their use, the reason for the appraisal, and any restrictions or limitations imposed by appraiser or client.

The objective should specify both the definition of value to be determined and the "as of" date. The purpose of the appraisal should be to identify its intended users, the reason for the appraisal, and any restrictions regarding its use, distribution or reliance thereon.

Clearly, it is the appraiser's responsibility to insure his understanding of the assets through physical inspection. In the case of tangible property, physical inspection will verify its existence and will allow the appraiser to assess its condition, use, and maintenance.

The market research and analysis includes examination of historical data and prospective trends that may impact the primary and secondary markets for the properties--national, regional, and local. This work has two objectives. First, it creates an understanding of the factors that influence the primary and secondary market conditions in a particular location and for a particular property. Second, it provides data to develop quantitative measurements of current market trends and conditions. These data may include historical trends in values, current and historical transactional data for comparable assets, and economic conditions that would affect the market for these properties.

This data collection and analysis is conducted in contemplation of the use of the three traditional approaches to asset valuation: the cost approach, the income approach, and the market approach. While each of these encompasses formulae and techniques, the appraiser should consider and use all three, if possible.

Definitions and Terminology

The most important definition in any appraisal is of the type of value conclusion being sought. For ad valorem taxation, the term "fair market value" is typically defined as: the price at which an asset or property would change hands between a willing buyer and a willing seller, measured in terms of money, with neither party being under undue compulsion to buy or sell, with both parties being fully cognizant of all relevant facts and circumstances, and with both parties seeking their maximum economic self interests.

Another important term is "highest and best use." The classic definition is: the reasonable and probable use that supports the highest present value as of the date of appraisal. An alternative definition is: the use, from among the reasonably probable and legal alternative uses, found to be physically possible and financially feasible that results in the highest present property value.

Another important concept in the ad valorem tax appraisal is that of the premise of value. Selection of the appropriate premise is an important early step. Assets can be appraised under either of two premises of value: value in use or value in exchange. Value in use contemplates that the assets are assembled as part of a going-concern enterprise and contribute to its economic welfare. Value in exchange contemplates that the assets will not remain assembled collectively. Rather, they will be sold piecemeal, on either an orderly or forced liquidation basis. Accordingly, value in exchange does not include any of the asset's contributory value to an overall enterprise.

The Appraisal Report

An ad valorem tax appraisal report leads the user through the appraisal process--from the initial definition of the problem to the conclusion regarding property value. The report must be well-reasoned and well-written. It must describe in appropriate detail all relevant market research and valuation data, all appropriate appraisal analyses and procedures performed, and the rationale for the conclusion.

Valuation opinion letter reports are appropriate when the owner requests only a preliminary conclusion of property value to determine whether it is reasonable to appeal an assessment. Once it is determined that the assessment will be the subject of negotiation, appeal, or litigation, then a complete narrative valuation opinion report is most common.

The traditional opinion report includes:

1. Description of the assets or properties.

2. Description of the asset or property rights encompassed by the appraisal.

3. Objective of the appraisal.

4. Purpose of the appraisal.

5. Relevant definition of value sought.

6. Explanation of the appraiser's market research and data gathering procedures.

7. Explanation of the actual analytical procedures and techniques employed--presented from the perspective of the three traditional approaches to valuation.

8. Formal valuation conclusion with respect to each appraisal approach employed.

9. Formal valuation synthesis and overall conclusion.

10. Certification of the appraiser.

11. Statement of assumptions and limiting conditions.

12. Statement of the appraiser's professional qualifications.

Dispute Resolution Services

In particular, accountants should be familiar with the dispute resolution services appraisers offer in ad valorem tax appeal and litigation procedures. Typical dispute resolution services include:

1. Prepare a preliminary opinion regarding the value of the assets subject to taxation.

2. Prepare a final opinion regarding the value of these assets.

3. Perform a critique of the taxing authority's assessment conclusion.

4. Negotiate with the assessing authority, noting obvious errors in the assessor's analysis, and presenting a preliminary or final opinion of value.

5. Perform valuation-related advisory services to attorneys.

6. Perform valuation-related research and consultation services to attorneys.

7. Perform valuation-related litigation support services to prepare attorneys for deposition and trial.

8. Perform a search of generally accepted appraisal standards and valuation-related literature, to prepare for an administrative appeal or a judicial trial.

9. Critique the opposing appraiser's expert witness testimony and appraisal report.

10. Recommend to legal counsel valuation-related questions for the deposition and cross-examination of the opposing appraisal expert witness.

11. Perform expert witness testimony, both in deposition and at trial.

Depending upon circumstances, appraisers can perform the entire appraisal process or can quantify certain valuation factors related to the assets. For example, instead of performing an entire appraisal of a property, appraisal professionals often conduct only the cost approach procedures or quantify only the functional obsolescence or economic obsolescence aspects related to the property. In such cases, obviously, appraisers do not arrive at--and cannot issue--a final valuation opinion. However, appraisers can serve the information needs of taxpayers, their accountants, or their legal counsel, in a timely, cost- efficient, and cost-effective manner.

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