Topic: A Tax to Grind, Property Tax Valuation
Thursday, 08 July 2010 by David H. LeVan
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.
Thursday, 01 July 2010 by David H. LeVan
Many companies are ill-equipped to manage property taxes effectively. According to CFO magazine, “Property tax is one of the biggest tax expenses – and the hardest to manage”. The sheer volume of jurisdictions (estimated at over 12,000 townships, counties, and states) can be overwhelming. Companies may have property in hundreds or even thousands of jurisdictions, all with their own set up rules and filing requirements. property tax – most difficult to manage
Several misconceptions regarding property taxes exist. Property taxes are often viewed as fixed costs. Receive a bill; pay a bill; nothing more. Fair market value is equated with net book value or is based solely on a formula. Finally, there is a fear of the unknown, a fear of making waves in the community.
It is not a rosy picture on the jurisdiction side either. Jurisdictions do not have the manpower or expertise to evaluate each real estate or personal property parcel individually. Out of necessity they must employ mass appraisal processes to value all of the properties in their jurisdiction. In Los Angeles County alone over 1.5 million personal property returns are filed annually. You can probably double or triple that figure for the number of real estate parcels that must be managed every year.
Is property tax a pain in your company? What steps have you taken to improve the process and minimize the pain?