Given that money is involved, tax appeals are often contentious affairs. This can be uncomfortable for some, so I have a suggestion aimed at making it a bit easier.
I was originally trained as a rights-of-way appraiser for highway land acquisition. As you know, highway acquisitions involve folks who, of course, didn’t ask for their property to be appropriated. We were taught to always treat the property owners with respect and give them the benefit of doubt at every opportunity.
During the rights-of-way appraisal inspection, we seized upon opportunities to demonstrate fairness in land and improvement value calculation. Property owners could easily see that we were trying to be as fair as possible; this usually went a long way toward making the acquisition process more acceptable.
Here are three examples of how to actively demonstrate similar fairness in tax appeals when using the income approach for assessment determination:
- Select a market rent that all parties will immediately judge as readily achievable in the local market.
- Make sure that a market based vacancy factor is applied, even if the appellant has not included one in their own analysis.
- Give up a quarter point on your cap rate selection… how precise can we be, really?
The intent is for the appellant to quickly recognize your effort to achieve equity. This may soften the conversation.
Many of these posts are intended to assist the newer Assessment Professional in learning commercial and industrial (C/I) property valuation. Some folks have previously mastered the basics of single family residential (SFR) valuation, so the learning curve can be shorter since they already understand the stratification process.
The biggest difference between SFR and C/I is the complexity of stratification, as C/I contains many uniquely diverse property types. But both realms begin the stratification process with property type and subtype.
The relative desirability of location is specific to both type and subtype of use. For example, lodging and industrial developers rarely compete for the same sites, as hotels and warehouses are completely different property types. Similarly, the SFR subtypes of tract homes and large estates have different locational needs.
As in SFR where each jurisdiction is a collection of neighborhoods, C/I refers to submarkets. When valuing SFR, you may find three SFR neighborhoods rated the same among a collection of twelve neighborhoods. Similarly, there could be three hotel submarkets in one jurisdiction comprised of interstate, CBD, and university locations with the latter two rated identical in terms of locational desirability.
In both SFR and C/I, stratification only begins with type of use. Every other aspect of the comparison process depends on maintaining consistency of type. Most properties are not average in all respects – location, quality of construction, design, and functionality all combine to make the comparison process meaningful.
A winning hand in valuation starts with understanding stratification.
Note from Tim: We do not rely on store sales in commercial real estate valuation. With that understood, this post is an interesting explanation about the relationship between sales and rents.
We all collect local market data such as rents for quick serve restaurants (QSRs) to aid in an income-based analysis. Since a well regarded national restaurant tracking organization has just published recent QSR store sales data, we can check general relationships of annual restaurant sales and rent allocations to see if the numbers make sense… and they do!
Using an industry standard factor of rent = 7% of annual sales, we can estimate the high and low rent thresholds that should be apparent in rent surveys. This is certainly a nationally generalized and inexact methodology, but it can serve to roughly validate what we see out there. The methodology uses the assumption that stores range in size from 2,000 SF to 4,000 SF. A summary of the published data:
| Product Type
||# of Brands
||Average Annual Sales Per Location
The data suggest a rounded average annual sales range of $800,000 to $1,800,000 per location.
Using the general 7% rent factor returns a rent allocation range of $56,000 to $126,000.
Finally, application of the store size assumption yields the following results:
| Store Size
|| Average Rent Range per SF
| 2,000 SF
|| $28.00 to $63.00
|| 4,000 SF
|| $14.00 to $31.50
As it happens, we commonly see similar rent ranges, with the low end extremes from poorly located properties and the highest rents found at stores within high traffic malls. The food sales have to justify the rents.
Most states by now have adopted strict rules for real estate professionals establishing the concept of “agency”. Simply, the agency concept commands brokers to pick a side in negotiation, and make that pick obvious to the public.
So, either you are an agent for the seller or an agent for the buyer. If you choose both, a precarious tightrope has been woven to lawfully complete a transaction.
Such dual agency is now so fraught with performance tests as to render the additional fees not worth the trouble, as solemnly lamented by the old timers.
But as an Assessment Professional, your careful, concurrent attention to both the public and property ownership positions is the path to equity.
The goal is to achieve a result described by all as reasonable, or at least minimally harmful. You can happily embrace a dual agency role!
The big box ownership argument that their buildings largely represent branding efforts, which in turn causes inherent obsolescence, always mystifies me. Those big box owners would have you believe the obsolescence diminishes their property both coming and going!
First, the initial expenditure for the (largely unspecified) additional features so important for brand identification will never be recaptured… yet, they are critical for operation of their business. So, the big box hardware retailers would like us to believe that the actual big box store itself has many unique aspects that are intrinsically ingrained in the structure. Apparently a hammer must be purchased in a highly curated environment.
Then, when it is time to sell the property, the results of that initial expenditure will largely render the property unmarketable due to their uniqueness. What appears to the uninitiated as an unadorned exterior wall is actually a highly technical architectural feature? With subliminal suggestive capability too scientific to explain to this or any audience?
When the large hardware big box store is sold to a non-hardware retailer, will customers seek out the hammer aisle? No way.
My original training in real property valuation was as a rights-of-way appraiser for a state highway department. The instruction for this job repeatedly stressed the principle of giving the property owner the benefit of the doubt in all matters involving compensation for property rights acquired.
The “benefit of the doubt” principle has solid application in mass appraisal, where we are all careful to ensure the property owner is equitably treated. This means:
- Estimate market rent based on what is locally achievable, rather than aspirational.
- Always include vacancy allocation that is locally supported, even if the property is the best in the submarket.
- Base expenses on submarket performance rather than on general or broad allotments by property sector.
- Derive capitalization rates locally rather than using national survey data.
So to the extent you err from perfect, “err fair” and point any benefit toward the property owner.
The law of averages says… well… nothing you want to hear, because it is pretty much a misunderstanding of probability. The fact something has not occurred in a series of trials does not necessarily improve the chance of occurrence in the near future.
This realization has application for Assessment Professionals when trying to make stratification decisions based on limited comparable data.
Don’t automatically assume that missing data would surely materialize given just a few more market transactions. That void in the data may not be from missing data at all, but instead could indicate market indifference or even aversion. Continue reading
The Any Municipality County assessment department enlisted Dixie’s help on a new retail development, due to her experience as Commercial Real Property Analyst. Dixie reviewed the file but no matter how many times she processed the income-based numbers, the value still did not approach the recent sale price. Her standard market research did not seem to apply to this property, at this price. Dixie knew further analysis was required.
Dixie visited the property, which appeared outwardly to be a good quality multiple tenant strip retail center. She then walked into some of the shops and found they were all relatively small in terms of square footage, yet they contained extensive branding related to interior build out. Most of the tenants were engaged in curated retail sales, described as having a narrower product focus with greater personalization and brand relevancy.
These retailers tend to focus on niche products such as kitchenware, cosmetics, fashion, artisan jewelry, etc. The tenant suites are usually small compared to the size of standard inline retail space, which in turn results in higher rents. Also, contract term lengths are generally longer compared to what is typically found. Developers of these projects seek to provide the branding-related build out, amortizing those costs in the leases over those longer multiple year terms. Continue reading
Type “crane counts” into your search engine, and the result will be scads of articles about various regional and national birdwatching organizations, and their annual counts of sandhill cranes, blue heron, and whooping cranes.
But appearing with the reports from the birders are construction crane counts. For example, the Rider Levett Bucknall index, compiled by construction and cost management entities, tracks real property investment activity. For those of us involved in commercial real estate, this is news we can use!
What do the counts mean to assessment professionals? They reflect construction and renovation activity (supply) and portend future changes in rents and cap rates, thus impacting property values.
Consider the early 2017 general trend in crane counts from major markets: Continue reading
An appraisal submitted for appeal evidence on a midwestern 144 garden-style apartment property reflected an expense ratio of 70% of Effective Gross Income (EGI). That ratio was closely supported by actual operating statements from the past two years.
For some perspective, the subject’s 70% ratio was compared to the following tabulation of median expense ratios from a well known Income & Expense Survey relevant to the matching years. The survey results reflect the same expense basis (% of EGI) for the same type of property (garden apartments):
||Expense % Ratio
|Same city as property under appeal
|Same region as property under appeal
Note that the actual expense ratios for the appealed property, at 70%, were much higher than market. This result bears a closer look at the actual expenses of the property under appeal, to identify any outlier or rogue charges. If inflated or nonrecurring expenses have been reported, these can often be found within the following major expense categories…
Administration: Legal expenses from previous tax appeals and lawsuits, expensive vehicle and equipment leases, and higher than typical management fees and payroll.
Maintenance: Capital upgrades masked as ongoing maintenance/repair such as major appliance and recreational equipment purchases. Also look for any architectural updates such as opening up kitchen areas or the addition of laundry facilities.
Utilities: Higher than typical utility costs can (legitimately) indicate inherent obsolescence such as lack of insulation or poorly performing & outdated building systems including HVAC, electrical, or plumbing.
Fixed costs: Insurance is usually the main variable here and ownerships with multiple properties may load select projects with disproportionate expense from aggregated policies.
If you opened a fortune cookie on this topic, it would read: Reveal the details and you will be rewarded.