Dixie Follows Her Mandate


Local (first time) developer Buck Bildur appealed his office property, which he contended suffered permanent 50% obsolescence. Dixie Phair reviewed the unfortunate facts on behalf of Any Municipal County:

Property: Speculative, multiple tenant office, two story, built 2008 in an established business park.

Highest and Best Use (H&BU): Zoning/predominant existing development is industrial but office buildings are present and allowed; H&BU as-improved is general office (medical space is not prominent due to location far from the hospital).

What Happened: The building sat vacant until 2012 when, under foreclosure threat, Buck leased the first floor and 85% of existing & possible parking spaces for 10 years (plus two 5 year options) to a medical tenant. That parking allocation effectively precludes renting to additional tenants, relegating vacancy near 50% for up to 20 years. The second floor was never built out for occupancy.

Usual Assessment Method: Despite an Ad Valorem mandate for Fee Simple value, many jurisdictions value using existing leases and award significant vacancy ongoing. But that method constitutes Leased Fee valuation! It ignores the jurisdictional mandate, leads to inconsistent assessments, and the value limiting issue expires without timely reanalysis, thus allowing extended inequity.

What Dixie Did: She opted for Fee Simple valuation as a general office per H&BU, via Discounted Cash Flow analysis (IncomeWorks has a simple fast DCF) with the following assumptions:

  • 50% occupied at general office market rent (lower than medical rates).
  • absorb the remaining space to market vacancy over 2 years.
  • allocate half the parking area to the assumed general office tenant.
  • apply buildout for the second floor as a lump sum expense.
Year 1 Year 2 Year 3 Year 4
Potential Gross Income $334,800 $341,400 $348,400 $355,200
Less Vacancy $47,642 $48,581 $49,557 $50,545
Effective Gross Income $287,158 $292,819 $298,823 $304,655
Operating Expenses
Insurance $6,000 $6,120 $6,242 $6,367
Janitorial $22,200 $22,644 $23,097 $23,559
Maintenance $43,000 $43,860 $43,737 $45,632
Real Estate Tax $43,000 $43,860 $43,737 $45,632
Management $17,800 $18,156 $18,519 $18,890
Replacement Reserves $16,400 $16,728 $17,063 $17,404
Total Operating Expenses $148,400 $151,400 $154,400 $157,400
Additional Expense
Second Floor Buildout $250,000 $0 $0 $0
Total Expenses $398,400 $151,400 $154,400 $157,400
Net Operating Income -$111,242 $141,419 $144,423 $147,255

RECAP: Dixie followed her legislative mandate for fee simple valuation, and did the assessment according to the property’s Highest & Best Use.

Fee Simple valuation mandates exist to prevent rewarding poor property stewardship.