Determining the value of complex, special purpose facilities can present a formidable challenge to appraisers. Because special purpose facilities may be one-of-a-kind, there is often no option of comparison to other facilities for market value determination. For this reason, the cost approach has been the historic standard for the appraisal of complex properties. Unfortunately, because the cost approach does not always consider all forms of obsolescence, it often leads to inflated estimates of fair market value.

The first step in the cost approach is to determine the Replacement Cost New (RCN) for the facility. When performing a cost approach appraisal, you must keep changing technology in mind. The natural evolution of technological process and improvements in materials over time often renders yesterday’s technology obsolete in terms of capital costs. This concept figures how much it would cost to replace the current facility with one that duplicates the utility of the existing facility using current technology and materials at current prices.

Once RCN is calculated, the next step is to quantify depreciation. Depreciation is defined as the loss in value from all causes, and its estimation is one of the most subjective areas of the cost approach. All there forms of depreciation should be taken into account: physical deterioration, functional obsolescence, and external obsolescence. Under the appraisal principle of substitution, an informed and willing buyer would pay no more for a facility than the cost to build or acquire a facility with equal utility.

Appraise a house in just 10 minutes or your money back!  If you can count doorknobs and measure windows, you too, can become a professional appraiser. Or so declares an Illinois Township Assessor, who has developed a simple method to calculate the value of a single-family residence.  Simply multiply the number of square inches of glass in a home by the number of doorknobs. That’s it!  You automatically have the assessed value of the home at one-third of market value.

The Ground Rules:

•           A typical door has a knob on each side, so you would count both

•           Fancy handles do qualify and can be included in the count

•           Don’t forget closet doors, which typically have only one knob

•           When measuring glass, be sure to include mirrors attached to the walls

For example, a typical new home has approximately 30 doorknobs and 2,500 square inches of glass. When you multiply 30 x 2,500, you get an assessment of $75,000. Multiply this figure by 3 to reflect the market value ($225,000). Older or more modest homes tend to have fewer rooms (hence, fewer doorknobs and glass) and would yield lower values. Larger homes have more rooms and, well, you get the picture.

Before you quit your day job, be forewarned: The fundamental principles of this technique are still in the experimental stages. It is yet to be determined whether constitutional law will allow appraisals based on the Glass & Knob technique. Nor is this technique applicable to commercial or industrial property.

A couple years ago, I had the opportunity to spend time in Park City, Utah. Great place! Highly recommend it. While there, we went hiking on a few trails. Crazy thing about mountain trails is sometimes with all the twists and turns I get a little confused as to where I am. Even with a map it can be difficult to figure out exactly where I am. 

Funny how similar personal property tax reporting can be to hiking mountain trails... Thirty-nine states tax personal property and each one (sometimes even each jurisdiction within a state) does it a little different. Combined, they have around 8,000 different depreciation tables, along with specific guidelines for how to apply them. I’m sure they do their best but it can be a bit confusing. 

In Utah, for example, in order to use an accelerated depreciation table (and thereby save taxes) for computer integrated machinery (class 2 for those interested), that machinery has to meet a whole list of conditions. One of those conditions states that the invoice for the machinery must be one line item; it can’t break out the computer components separately. So what happens if your equipment distributor uses a system that breaks those into two line items? Is there a tax strategy to working with them on how they invoice? What if you can’t find the invoice? 

To complicate matters, the Utah Tax Commission (R884-24 in case you’re interested) came up with the following wording to help define taxable tangible personal property: 

“... An item of taxable tangible personal property is not an individual component part of a piece of machinery or equipment, but the piece of machinery or equipment. For example, a fully functioning computer is an item of taxable tangible personal property, but the motherboard, hard drive, tower, or sound card are not.” 

What exactly does that mean? The machine is taxable but if it were broken down into components it would not be taxable? Would a valid property tax savings strategy be to take all your machinery apart before the next assessment date? What if you have computer integrated machinery broken into two line items on an invoice but not completely put together on the assessment date? 

I think I need to take a hike and sort this out.

It is human nature for us to make comparisons.  Remember when you were dating (or maybe you still are) and how you compared one date to another to find out which was more “your type”.  The fact is that we do this in many areas of our lives…. Chevy or Ford, Miller or Bud, Batman or Spiderman, PC or Mac, satellite or cable….  Comparisons of similar items help us evaluate them better.  In property taxes, comparisons are extremely important (so important that one of the three approaches to value is the “Sales Comparison Approach”).

Who has heard of the Los Angeles Dodgers?  How about the Reno Aces?  The Reno Aces is a Triple-A baseball team based out of Reno, Nevada.  They recently completed construction on a new ballpark (officially opened in April, 2009) and are disputing the value with the Washoe County Assessor.  According to the Reno Gazette Journal, the Assessor has compared the new Reno Aces stadium to the Los Angeles Dodger’s stadium, saying that the quality of the ballpark is similar to Dodger Stadium.  The attorney for Nevada Lands (owner of the stadium) argues the stadium is a minor league stadium and should be valued accordingly.

I’m just wondering if the Washoe County Assessor has ever been to Dodger Stadium to analyze its comparability to the Aces Stadium.  Let’s see where they compare and where they don’t.  Starting with where they compare… they both play the Cubs.  The Aces play the Iowa Cubs and the Dodgers play the Chicago Cubs.

Okay, let’s see where they don’t compare so much.  Aces Stadium has a capacity of 9100; Dodgers Stadium has a capacity of 56,000 (it now holds the record for being the largest major league ballpark).  The average ticket price for the Aces is $7 (very affordable for families).  The average price of a beer at Dodgers Stadium is probably at least that.  Dodgers Stadium is in Los Angeles with a population of nearly 10 million to draw from.  Aces Stadium is in Reno with about 200,000 to draw from.

Now I’m not a baseball stadium value expert and really am not sure what the going rate for baseball stadiums is, but I do know that an argument for valuing a minor-league baseball stadium against Dodger Stadium is not a fair comparison. This whole comparison thing works best when we compare things that are actually comparable.

I love a cold beer on a hot day…… a hot beer on a cold day, not so much.  According to Larimer County Colorado, Anheuser-Busch is handing them a hot beer on a cold day….a slap in the face.  AB is challenging the property tax assessment on its Ft. Collins plant, claiming the $90 million value is too high and a $50 million value is more appropriate.  The county is questioning why AB never appealed In the past and why the new owner of AB, InBev, is appealing.  Articles on the appeal credit the county with such statements as “We have a new company that is coming in and gaming the system” and “This company would be paying less than its fair share, and everyone else will be paying more than their fair share” and “I think that’s a crappy thing for an employer in Larimer County to do” -  Such harsh accusations, not to mention the language.

Now, I’m not privy to all of the facts and assumptions each side is making in their case, or the merits of each case.  However, isn’t the discussion and debating of values the reason we have the appeals process…. so that each taxpayer pays only their fair share of the property tax burden?  Since when did appealing your property taxes become “gaming” the system?  Just because a value hasn’t been appealed in the past doesn’t mean the value is correct – it may just mean that nobody cared or got around to appealing it in the past.  If the taxpayer was overpaying in the past, does that mean they should continue to overpay going forward?  I’ve seen lots of “crappy” things in my life…. And appealing property taxes is not one of them.

The plant says  “we review assessments on our property nationwide on an annual basis and in the current economic climate realize that market values have declined” and “we seek to work with the county to pay our share” – so let them appeal….. it is their right to have their case heard.  AB has chosen to skip the local Board of Equalization and go directly to the Colorado Board of Assessment Appeals.  According to the articles, Larimer County doesn’t like this.  One article describes the Colorado Board of Assessment as “a group often known to reduce assessed values”.  Excuse me but isn’t that part of their job?  As an objective third party, they listen to both sides of the story and rule to sustain or lower the value based on the merits of the case.

According to the articles the buildings are 1.811 million square feet on 125 acres of land.  At $91,798,000 (the county’s value) this equates to about $51 per square foot.  At $50,000,000 (the taxpayers estimate of value) this equates to about $28 per square foot.  There’s your range of value… now debate it at the Colorado Board of Assessment….. Not in the press!  And when all is settled, enjoy a cold, refreshing beer together.