All Cards (Basic, PP, RE) - Updated Flashcards
(167 cards)
1
Q
Trade level
A
The value of inventory increases at each stage of production. Also used to analyze the costs of self-constructed machinery & equipment items. These items may be booked at costs that do not reflect the level of expenditure that would have been incurred if purchased.
2
Q
Abatement
A
An incentive used by local taxing jurisdictions to entice companies to expand operations or relocate to their jurisdictions by offering to reduce the full amount of property taxes paid over a period of years by an agreed-upon percentage, provided minimum spending thresholds are met. (1st yr – 100% abatement, 2nd yr – 90% abatement, etc.)
3
Q
Actual Age
A
The number of years that have passed since the asset was acquired or constructed. (aka historical age &/or
chronological age)
4
Q
Age-life method
A
A method to estimate total depreciation using the cost approach, but does not allocate depreciation among its components (i.e., physical deterioration, functional obsolescence, and external obsolescence).
To estimate total depreciation, appraisers use economic life and effective age. This is the simplest method for developing depreciation estimates.
- Effective Age / Economic Life = Depreciation %
- Cost New ($) x Depreciation (%) = Depreciation ($)
5
Q
Agricultural Use Value
A
This tax saving device involves land that the facility owns and uses for agricultural purposes. Some states, such as Ohio and Texas, have a provision that agricultural land is to be valued at less than market value. These savings can be significant.
Be cautioned, however, that if the land is subsequently sold, in many cases, payment of the tax savings enjoyed over the past five years must be repaid to the taxing jurisdiction at the time of sale.
6
Q
Capitalization Rate
A
Any rate used to convert income into value. A ratio that expresses a relationship between income and value. The rate includes annual capital recovery in addition to interest components. Can also contain the effective tax rate.
The rate of return on capital an investor will demand from the investment property, or the rate of return that the property will actually produce.
7
Q
Appraisal
A
Logical process for gathering, classifying and analyzing facts about a property to estimate value. Impersonal opinion of value based on analysis of the market supported by education, experience, and integrity.
- Documented opinion of value
- Of a specific property
- On a specified due date
- Specific Purpose
- Is usually written
Research problem of interpreting the market
8
Q
Appraisal Process
A
- Investigation - Identify property, Date of Appraisal/Inspection, Legal Interest (Fee Simple, Tenants in Common, Joint Tenants)
- Compilation - Collect all relevant facts, Analyze, Quality Data
- Computation - Three Approaches to value, concept of substitution in all approaches
9
Q
Assessment Level
A
The percentage of the property’s market value that is subject to taxation.
For example, in CA the assessment level is 100% and in GA it is 40%. An assessment level that is less than 100% of market value is known as a fractional assessment.
10
Q
Average Daily Rate (ADR)
A
The rental rate on a per-room basis for a hotel or other short-term hostelry
11
Q
Band of Investment Technique
A
A technique in which the capitalization rates attributable to components of a capital investment are weighted and combined to derive a weighted average rate attributable to the total investment.
Loan-to-Value Ratio*Mortgage Constant \+Equity Ratio*Equity Capitalization Rate then divide by Overall Capitalization Rate
If the effective tax rate is also provided, we need to add this to the overall Cap. Rate as well.
12
Q
Breakdown Method
A
The breakdown method estimates total depreciation, and it does allocate depreciation among its components (i.e., physical deterioration, functional obsolescence, and external obsolescence). This is the most comprehensive and detailed method for developing depreciation estimates.
13
Q
Building Residual Technique
A
A valuation technique where the land value is known, along with the building & land capitalization rate & NOI. We would estimate the income attributable to the land. Once the income to the land is calculated, we determine the income attributable to the building and calculate the value of the building.
14
Q
Capital Asset Pricing Model
A
A model of the relationship between expected risk and expected return. The model is grounded in the theory that investors demand higher returns for greater risks. It says that the return on an asset or a security is equal to the risk free return, such as the return on a short-term treasury security, plus a risk premium.
15
Q
Cash Equivalency
A
The conversion of a non-cash consideration or non-market financial term into a value that is stated in dollars
Favorable Financing (cash equivalence adjustments for favorable financing – Adjust for the difference between “Normal” financing and “Special” financing) Financing is different from Market financing at the date of sale; Cash Equivalence Sample
(Favorable = better than the market)
This is an adjustment for individual differences between this sale financing and the ‘market’ conditions.
16
Q
Cash Flows
A
The periodic or total income attributable to a business activity or property rental. Cash flows are used to calculate an indicated value via the DCF method.
The remaining positive or negative amount of income an investment produces after subtracting all operating expenses & debt service from gross income.
17
Q
Classified/Non-Classified States
A
The description of property based on its class for assessment purposes. As a result, it may result in different tax rates and assessment ratios for different types of property.
There are two kinds: Classified State & Non-Classified State
-Classified State – Different property types can have different assessment ratios. For example, TPP may be assessed at 30% and different types of real property may have different rates (Commercial – 40%, Industrial – 40% and Agricultural 15%)
-Non-Classified State – All Property is assessed at the same ratio.
In some states that are classified, commercial & industrial properties have a higher assessment ratio, thus putting more of the tax burden on these properties.
In addition, can also refer to the classification of buildings by class as determined by Marshall & Swift.
18
Q
Coefficient of Dispersion
A
A statistical measure that examines the level of uniformity with the individual assessments of real property. It measures the percentage deviation from the median ratio. The smaller the coefficient of dispersion, the closer the individual ratios are to the median ratio and are indicative of a more consistent level of assessment, whereas a larger coefficient of dispersion indicates a less consistent level of assessment. For residential property, 15 percent or less is good and for commercial property, 20 percent or less is good.
- Subtract the median ratio from each ratio in the study
- Take the absolute value of the calculated differences
- Sum the absolute differences
- Divide by the number of ratios to obtain “average absolute deviation”
- Divide by the median ratio
- Multiply times 100
19
Q
Comparable Sales
A
A shortened term for similar property sales, rentals or operating expenses used for comparison in the valuation process. (aka: comps)
20
Q
Comparative Unit Method
A
A method used to estimate the value of real property in terms of dollars per unit of area or volume based on known costs of similar structures that are adjusted for time and physical differences usually applied to total building area.
This method provides the least amount of detail of the 3 methods of using the cost approach and is most commonly used in the property tax field. Easier to use, because data is more readily available.
a. Cost per unit
b. All direct & indirect costs
c. Cost services
d. Adjust for location & time
21
Q
Components of Asset Costs
A
The individual components that comprise the total cost for a piece of equipment or property. The components can be taxable or non-taxable.
Personal Property – Components include the cost of the equipment, freight, installation, sales tax, the special foundation needed, engineering, warranties, etc.
Real Property – Components include land, construction costs, legal fees, architect fees, site preparation costs, financing costs, commission fees, etc.
22
Q
Cosigned Goods
A
Merchandise that is for sale that is not owned by the seller. Upon the sale, the seller will remit an agreed-upon percentage of the sales price to the owner.
For example, a craftsperson might have produced 100 ornate wood items. In order to sell the items, the person asks a local merchant to take five of the items on consignment. This means that the merchant has possession of the five items and will attempt to sell them for a commission, but the merchant does not own the items. Those five items are consigned goods. (When the merchant sells one of the items, the merchant might be required to remit 80% of the selling price to the craftspersons and can keep 20% as a commission.) The merchant is the consignee and the craftsperson is the consignor.
23
Q
Cost Approach
A
One of 3 approaches to value TPP & RP. Assumes that a buyer would pay no more than the cost of constructing an acceptable substitute. Relies on the principle of substitution. The majority of taxing jurisdictions concentrate on the cost approach & some use only the cost approach. The cost approach is calculated as follows:
Cost of New Improvements
+ Soft Costs
+ Entrepreneurial Profit
- Depreciation and Obsolescence
+ Land Value
= Total Value
24
Q
Cost to Capacity (External Obsolescence)
A
Measures the loss in value due to reduced utilization of an asset.
[ 1 - (Capacity B / Capacity A)^n ] x 100
Capacity A = Rated/Design Capacity
Capacity B = actual production
n = scale factor
25
Curable
The deterioration is economically feasible to cure through repair or replacement since the value added by the cure exceeds the cost of the cure
26
Debt Coverage Ratio (DCR)
The ratio of net operating income to annual debt service.
Measures the ability of a property to pay its debt service out of the net operation income, how many times can you "cover" your debt.
DCR = NOI (Io) / Debt Service (Im)
27
Debt Coverage Ratio Technique (Ro)
Indirectly calculated from debt coverage ratios (DCR) of comparable sales
- Comparable for NOI not needed
- Derives a market-based capitalization rate
Ro = DCR x Rm x M
28
Debt Service (Im)
The periodic payment that covers interest on and retirement of the outstanding principal of the mortgage loan. The monthly or annual payment on borrowed funds. (aka: mortgage debt service)
Debt Service (Im) = Mortgage Amount (Vm) x Mortgage Constant (Rm)
29
Depreciation
Depreciation is the difference between the market value of an improvement and its reproduction or replacement cost (cost new). It refers generally to loss in value.
The various methods of depreciation are: Straight-Line, Declining Balance, Sum of the Year’s Digits, Service Hours & Units of Output
Depreciation can be curable or incurable. It is considered curable if it is economically feasible to cure (i.e., when the cost to cure increases total property value by an amount equal to or greater than the expenditure). Furthermore, it is considered incurable when it cannot be practically or economically corrected.
Physical – Refers to wear & tear from regular use and the impact of the elements (peeling paint, carpet stains, leaks in roof, etc.). Curable & Incurable
Functional is caused by a flaw in the structure, materials, or design that diminishes the function, utility & value of the improvement (poor building layout, bottlenecks, multiple building sections). Curable & Incurable
External is a loss in value caused by factors external to the property (zoning changes, proximity to nuisances, new highway construction). Usually incurable
Curable – A defect caused by physical deterioration that can be practically and economically corrected. (Physical & Functional)
Incurable (Physical) – A defect caused by a physical deterioration that cannot be practically or economically corrected.
Incurable (Functional) – A defect caused by a deficiency or super adequacy in the structure, materials, or design, which cannot be practically or economically corrected.
Obsolescence is also the difference between the reproduction cost and replacement cost of an asset.
30
Depth Factor
A factor or percentage that represents the relative value of a lot of a given depth as compared to the value of a lot of standard depth.
31
Depth Table
A table of depth factors shows the estimated percentage relationship between the front foot value of a lot of a given depth and the front foot value of a lot of standard depth.
32
Direct Capitalization
A method used to convert an estimate of a single year’s income expectancy into an indication of value in one direct step, either by dividing the income estimate by an appropriate rate or by multiplying the income by an appropriate factor. Suited when an income stream is fairly constant year over year.
(Requires only ONE year of income)
I = Annual NOI, R = Cap. Rate, V = Market Value
I/R = V
NOI/Ro = MV
33
Direct Costs
These are costs directly related to the production of products &/or constructing real property.
Examples of direct costs include: labor, materials, equipment, construction rental equipment, subcontractor’s fees
34
Income Approach
One of 3 approaches to value TPP & RP. Assumes that a buyer would pay no more than the amount equal to obtain an equivalent income stream.
I=R*V, where I = Net Operating Income, R = Capitalization Rate & V = Value PGI – V&C = EGI – Op. Expenses = NOI
Establishes value by converting future benefits into present value (PV) through the capitalization process.
Reflects motivations and considerations of investors
- Time Value of Money (TVM)
- Income Potential and holding period
- Risk
35
Discount Rate or Present Worth Factor
A rate of return commensurate with the perceived risk used to convert future payments or receipts to a present value.
Rate an investor desires/anticipates on an investment. Used to value future cash flows.
36
Discounted Cash Flow Method (Income Approach)
A method used in valuing a property using the income approach where a property owner has an irregular but predictable income stream.
A financial analysis to identify the discounted value of the cash flow of an investment over a given number of years. An investor will pay more for an asset that has a long remaining lease life compared to an asset that is near the end of its useful life period.
Ex. Vehicle has greater value during the first year of its lease vs. the 5th year of the lease.
37
Economic Life
The period over which personal property and improvements to real property contribute to property value. Relates to market extraction & age life method of estimating depreciation.
38
Economic Rent
The rent amount that a new tenant would pay based on market conditions. (aka: market rent)
39
Effective Age
The age of an asset that is indicated by its condition and utility. The effective age of an asset can be greater or less than the actual age of the asset. If the effective age is greater than the actual age, the asset is being used more than its original intent and possibly will not last as long. If the effective age is less than the actual age, the asset is being used less than its original intent and possibly will last longer than intended.
40
Effective Gross Income (EGI)
In the income approach, this is the income amount that is remaining once the vacancy & collection loss has been deducted from the potential gross income.
41
Effective Gross Income Multiplier (EGIM) Technique
Comparables' NOI not needed
Derives a market-based capitalization rate
Requires:
- Gross Income Data
- Operating Expense Ratio (OER)
- Ro = (1-OER) / EGIM
EGIM: The ratio between the sale price (value) of a property and its effective gross income (EGI). For a single or annual average of several years' EGI
EGIM = Sale Price (Value) / EGI
Additional on Slide 67
42
Effective Rent
The total amount of rent that is paid over the life of the lease to account for free months of rent.
For example, in a 12-month lease, you may have 2 months of free rent, so one would spread the remaining 10 months of rent over the 12-month period
43
Effective Tax Rate
The ratio between the annual property tax and its market value
Estimated in TWO ways:
- directly: comparable sales
- indirectly: assessment ratios and official tax rates
```
ETR = Total Tax/Total Value
ETR = Assessment Ratio x Official Tax Rate
```
44
Efficiency Ratio
The ratio between the net leasable area to gross leaseable area. This is a measure that identifies how much space in a leased property can be leased to a tenant. A higher efficiency ratio indicates that the property is designed in such a way that there is not a lot of wasted space and that the majority of the space is leaseable to tenants.
A lower efficiency ratio indicates that the property is designed in such a way that it has a lot of common space or other space that is not leaseable (Lower ratios are more prevalent in Corporate HQ)
45
Entrepreneurial Incentive/Profit
The amount an entrepreneur expects to receive as profit for their investment. This is measured from the market:
market value
- land value
- total depreciated cost
= entrepreneurial profit
If we have a positive remainder, this could signal the presence of an intangible influence (goodwill, trade name, etc.) on value as a normal entrepreneurial profit. A negative remainder could signal external obsolescence.
46
Environmental Problems
Onsite or offsite contamination or other physical detrimental factors that may affect property value
47
Equalization
The process in which a governmental body attempts to ensure that all property under its jurisdiction is assessed at the same assessment ratio or at the ratio or ratios provided by law.
An averaging of assessed valuations in an area to compensate for ad valorem inequities.
48
Equity Dividend
A rate that reflects the relationship between the equity dividend and the equity investment (i.e. a single year’s net income before recapture less the debt service divided by the equity investment. Also, a rate used to convert the equity dividend into an indicator of equity value (aka: equity dividend rate)
49
Equity Yield
A rate of return on equity capital as distinguished from the rate of return on debt capital (the interest rate); the equity investor’s rate of return. The equity yield rate considers the effect of debt financing on the cash flow to the equity investor. The ratio of equity dividend to equity value.
50
Potential Gross Income (PGI)
The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted.
Usually Annual Income
Reflects 100% Occupancy
Can Include:
- Market Rent
- % Rent
- Overage Rent
- Other Income
- Expenses Recoveries
- Concessions
51
Excess Costs
Costs legitimately included in the capital costs that do not add FMV in exchange and should not be included when valuing personal property
- excessive labor, installation, shipping, etc.
- expediting costs
- changes in scope or layout
- excess debugging
- unscheduled delays
- rearrangement of equipment
52
Excess Rent
A situation where the contract rent (rent specified in the lease) is greater than the market rent (a rental rate that is currently available in the open market). This is created by a favorable lease to the landlord and may reflect a locational advantage, unusual management, unknowledgeable parties, or a lease execution in an earlier, stronger rental market. Due to the higher risk inherent in the receipt of excess rent, it may be calculated separately and capitalized at a higher rate in the income approach.
53
Expense Stop
The maximum amount of expenses in dollars or percentage that a tenant will reimburse a landlord for actual out-of-pocket expenses.
54
Exposure to Elements (Physical Depr.)
Effects of mother nature or effects of hostile environment
55
External Obsolescence
Obsolescence that is measured by the loss in value caused by factors external to the property (zoning changes, proximity to nuisances, new highway construction). Can impact a specific asset, a group of assets, or an entire facility. Usually incurable, but can be temporary.
56
Fee Simple
Type of property where there are no encumbrances on the property. The owner is free to do whatever they choose to the property within the limit of the law. One of 3 kinds of property interests. The highest form of legal ownership of real property.
57
Fixture
A fixture is an item of tangible property, the nature of which was originally personalty, but which is classified as realty for property tax purposes because it is physically or constructively attached to the realty with the intent that it remain attached indefinitely. Fixtures are segregated into 2 classes:
- Structural Fixture – These are valued as part of the realty, because the item if removed, will cause substantial damage to the structure.
- Trade Fixture – These are valued as part of personal property because the item can be removed without causing damage to the structure.
58
Foreign Trade Zones
An area designated by the United States government to provide property tax exemptions for American manufactured goods that are intended to be exported. Used to help American companies compete with low-cost goods manufactured overseas, by offering incentives to American companies in the hope that it will keep costs lower.
59
Freeport Exemption
The Freeport exemption excuses certain inventory from ad valorem taxes. Normally, the availability of this exemption depends both, on whether the inventory has established situs within the jurisdiction and on the owner’s intent. The time factor varies from a few months to less than one year or an assessment cycle. The intent factor creates complexities. Freeport exemptions require that the owner intends to ship the inventory out of the jurisdiction. Some states require shipment out of state. Some states require that the inventory must have been brought into the state to qualify; also, it may have to be held in a public warehouse. Additionally, it is generally required that the inventory must not change physical status (i.e. liquid to solid or vice-versa) or be used as a raw material in a manufacturing process. Most states allow repackaging of inventory into smaller or larger packages, without affecting the exemptions.
Freeport Exemption State: GA, MS, OK, TX, WV
60
Freight On Board (FOB) types and Transfer of Title
It can’t be overstated how important it is to know when and where transfer of inventory ownership takes place. This is important for determination of reporting responsibility, tax liability, and for exemption purposes.
FOB Origin - buyer assumes title when carrier signs bill of lading
FOB Destination - buyer assumes title upon delivery at destination
61
Frequency of Operating Use (Physical Depr.)
If property is heavily used it may wear quicker than a property in normal use.
- Ex. Equipment used 24 hours a day will wear quicker than equipment only used 5 days a week for 8 hours
62
Front Foot
Standard measurement of land, applied at the frontage of its street line or water. It is used for lots of generally uniform depth in downtown areas.
The Front Foot is the width (in ft.) of the parcel that adjoins the street or water line.
63
Functional obsolescence
Obsolescence is caused by a flaw in the structure, materials, or design that diminishes the function, utility, and value of the improvement.
- Superadequacy – more space or production capability than needed
- Inadequacy – lack of utility
a. Curable – A defect caused by a deterioration that can be practically and economically corrected.
b. Incurable – A defect caused by a deficiency or super adequacy in the structure, materials, or design, which cannot be practically or economically corrected
Examples: Poor Building Layout, Multiple building sections, outdated construction materials, bottlenecks, excessive material handling, excess operating costs, necessary capital expenditures, technology innovations, design changes, production improvements.
64
Ghost Assets
These are assets that are still listed on the fixed asset list but have been permanently removed from service and no longer located on the premises as of a specific date in question.
65
Going Concern Value
The value created by a proven property operation or business. It includes the value of the real property, personal property, labor, marketing operation, and the intangible assets & rights. It is considered as a separate entity to be valued with an established business.
Goodwill is the difference between a company's liquidation value and going-concern value. Goodwill is made up of a intangible assets, such as customer loyalty, trademarks and brand name to mention but a few. All things being equal, the going-concern value will always be greater than the liquidation value because the purchase value of a company is added to the going-concern value of that company.
Example: Assume the liquidation value of a Widget corporation is 10 million USD (includes the value of the company's building, the current value of the company and other important value assuming the company is totally liquidated). The going-concern value of the Widget corporation company could be 60 million USD because the company's overall value depends on it patent and associated rights, and is ability to make money through future cash flows.
66
Goods in Transit
Merchandise for sale that is in transit from one location to another, either from manufacturer to retailer or manufacturer to manufacturer. It also relates to tangible personal property items in transit from one plant to another, etc.
67
Grantor/Grantee
A grantor is a person who transfers property by deed or grants property rights through a trust instrument or other document.
A grantee is a person to whom property is transferred by deed or to whom property rights are granted by a trust instrument or other document.
68
Gross Rent Multiplier (GRM)
A shortcut method for estimating the value of an income property. The procedure involves multiplying the property’s gross monthly rent times a multiplier that reflects the ratio between gross monthly rent and sale price that is typical for similar properties in the area.
Gross Rent Multiplier (GRM) = Sales Price / Gross Rent Income
69
Gross Income Multipliers
The ratio between the sale price (or value) of a property and its gross income
A single year's gross income expectancy or an annual average of several years' gross income expectancies
Value = PGI x PGIM
Value = EGI x PGIM
70
Highest and Best Use
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, legally permissible, appropriately supported, financially feasible, and that results in the highest value.
The following 4 criteria must be met as well: legal permissibility, physical possibility, financial feasibility & maximum profitability.
71
Historical Cost Survey
A formal or informal study of historical costs that form the basis for a study of economic patterns related to the use and utility of the tangible property.
72
How many states DON'T tax business personal property?
12
Delaware
Hawaii
Illinois
Iowa
Minnesota
New Hampshire
New Jersey
New York
North Dakota
Ohio
Pennsylvania
South Dakota
73
Gross Lease
A lease in which the landlord receives the stipulated rent and is obligated to pay all or most of the fixed and operating expenses attributable to the real estate.
74
In-Lieu Tax
A payment in lieu of taxes (usually abbreviated as PILOT, or sometimes as PILT[1]) is a payment made to compensate a government for some or all of the property tax revenue lost due to tax-exempt ownership or use of real property.
75
Income Approach
One of 3 approaches to value TPP & RP. Assumes that a buyer would pay no more than the amount equal to obtain an equivalent income stream. Based on the principle of anticipation and the principle of substitution.
Anticipation of Change
Supply and Demand
Risk
I=R*V, where I = Net Operating Income, R = Capitalization Rate &
V = Value PGI – V&C = EGI – Op. Expenses = NOI
76
Incurable (Physical Depr.)
Deterioration is not economically feasible to cure through repair or replacement since the value added by the cure does not exceed the cost of the cure.
Ex. Vehicle worth $500, but new or rebuilt engine costs $1,500. The cost to cure exceeds the value of the vehicle.
77
Index Factors
A factor that is applied to the cost of an asset to reflect reproduction cost new at a point in time. This factor can increase or decrease the cost depending on the effects of inflation from the asset acquisition date to the valuation date. The trend factor is a cost index and is applied to the cost of an asset. (aka: Trend Factor)
78
Indexed Cost (trending)
Derived by applying a trend factor to the base or historical cost. Most often used by assessors to update the current cost of an older asset. Not generally reliable.
Indexed Cost = Base Cost x Trend Factor
Trend Factor = Present Index / Former Index
79
Indirect Costs = soft costs = other necessary costs
In construction, expenditures for items other than labor and materials, such as administrative costs, professional fees, financing costs, and interest paid on permanent & construction loans, taxes and builder’s or developer’s all-risk insurance during construction; and marketing, sales, and lease-up costs incurred in achieving occupancy or sale.
80
Intangible Property
These are assets that represent a right rather than a physical object. Intangibles cannot be perceived by the senses and are usually represented by tokens, such as stocks, bonds, notes, mortgages, cash, patents, accounts receivable, and goodwill to name a few examples. In other words, intangible property is everything that is not real property or tangible property.
81
Internal Rate of Return (IRR)
The rate at which inflows (income) from an income property investment must be discounted in order for the total outflows over time to equal the initial outlay, expressed as a percent; may include projected proceeds from the future sale of the property as an inflow.
82
Interstate Commerce
Between states. This term can be used in determining the amount of inventory that is eligible for a Freeport exemption where a calculation is needed to determine the amount of shipments that is made to locations outside a particular state.
83
Intrastate Commerce
Within a single state. This term can be used in determining the amount of inventory that is eligible for a Freeport exemption where a calculation is needed to determine the amount of shipments that is made to locations within a particular state.
84
Inventory
All goods owned and held for sale in the regular course of business, goods in the process of production for such sale, or goods to be currently consumed in production.
Raw Materials, WIP, Finished Goods, Goods held for sale/stock, Supplies consumed during admin or manufacturing process.
85
Inventory - Full Absorption
A method to value inventory that includes both direct & indirect (overhead) costs, but does not include general administrative or selling costs. For real property, the consumption of available vacant property in a building or market.
Assessors generally accept this method.
86
Inventory - Retail Method
This method computes inventory value by developing a ratio of cost to the selling price. The "mark-up" percentage for a given period is the weighted average of all purchases at their cost relative to the retail price.
(Cost = 100% & a Mark-Up = 30%, so the Sales Price = 130%)
(Sales Price/Cost = Mark-Up %)
87
Inventory Accounting Methods - FIFO vs LIFO
FIFO (First In First Out)
LIFO (Last In First Out) - LIFO is not accepted by jurisdictions. If inventory is booked at LIFO, it may be necessary to add the LIFO reserve back when reporting to the jurisdictions.
FIFO - LIFO = LIFO Reserve
88
Cost of Goods Sold (Inventory Components)
The cost of products sold in the ordinary course of business
- materials
- labor
- shipping and overhead
Be aware of booked embedded intangible items such as intellectual property, taxes, and advertising costs which may not be taxable.
89
Inventory Systems - Periodic/Perpetual
Periodic - brought up to date only at the end of the accounting period; all the goods on hand counted and priced; products of low unit value usually put on periodic system (Example: retail products)
Perpetual - inventory on hand is shown at all times with continuous updating; as goods are sold, the costs are transferred out; products of high unit value usually put on perpetual system (Example: automobiles)
90
Land Residual Technique
A valuation technique where the building value is known, along with the building & land capitalization rate & NOI. We would estimate the income attributable to the building. Once the income to the building is calculated, we determine the income attributable to the land and calculate the value of the land.
91
Land to Building Ratio
The proportion of land area to the gross building area. A typical land-to-building ratio exists with properties that combine land and building components into a functional economic unit.
=Land Area (Sq. Ft.) / Building Area (Sq. Ft.)
=Area (Acres) x 43,560 Sq. Ft. / Building Area
92
Lease Types
Gross Lease/Full Service Lease - In a gross lease, the tenant’s rent covers all property operating expenses. These expenses can include, but aren’t limited to, property taxes, utilities, maintenance, insurance, etc. The landlord pays these expenses using the tenant’s rent to offset the costs. As a result, the base rent is typically relatively high but is the only cost to the tenant.
Modified Gross Lease/Modified Net Lease - The third major type of commercial real estate lease is the modified gross lease (or modified net lease) and offers a happy middle ground for both tenants and landlords. The modified gross allows a broader range of negotiations when it comes to operating expenses. The base rent will then be subjected to the terms agreed upon by both parties like the gross lease. The differentiating factor is that the lease rate remains fixed even if costs increase or decrease.
Triple Net (NNN) - a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property, including real estate taxes, building insurance, and maintenance. These expenses are in addition to the cost of rent and utilities.
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Leased Equipment Types
Operating - These leases are generally short term in nature. The value of these leases does not appear on company ledgers (books).
Capitalized - These leases of equipment are required to be capitalized on the company books due to IRS regulations. They are generally long term in nature and expensive.
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Lessor’s & Lessee’s Interest
A real property interest created by the division of the bundle of rights by a lease.
Leased Fee Estate – An ownership interest held by a landlord with the right of use and occupancy conveyed by lease to others; the rights of the lessor or the leased fee owner and leased fee are specified by contract terms contained in the lease. Leased fee is equivalent to the contract rent.
Leasehold Estate – The interest held by the lessee (tenant) through a lease conveying the rights to use and occupy for a stated term under certain conditions.
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Leasehold Interest
The lessee’s interest in a property. The right to use and occupy real property during the term of a lease, subject to any contractual restrictions. The leasehold value only exists when the market has changed, such as when the contract rent is less than market rent, which allows the lessee to sublease at a profit.
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Level of Trade
An accounting method that assigns a different cost to an item as it moves through the production process.
For example, at the manufacturing stage, an item may cost $10, at the distribution stage this item may cost $13 and at the retail level, it may cost $15.
Depending on the jurisdiction, this margin may be deducted from the inventory value, if reports involve lower divisions of the company.
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Loaded Capitalization Rate (Rot)
Direct Capitalization Only
- Eliminate the RE Tax Expense
- Estimate NOI
- Determine the overall Cap Rate
Overall Cap Rate (Ro) + Effective Tax Rate = Loaded overall capitalization rate (Rot)
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Loan to Value Ratio (M)
Ratio of the loan amount to the value of the property
M = Loan / Value or M = Vm / Vo
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Market Extraction Method (Est. Depr.)
The market extraction method estimates total depreciation but does not allocate depreciation among its components, (i.e., physical deterioration, functional obsolescence, and external obsolescence). Preferred technique when sufficient sales data is available on competitive properties
- Knowledge of the basis of the NOI calc.
- Sales Price
Ro = Io / Vo
a. Steps to calculate depreciation
b. Compile comparable sales
c. Subtract land value
d. Adjust sales
e. Estimate cost new for sales
f. Subtract depreciated cost from cost new
g. Convert lump-sum depreciation to percentage
h. Annualize percentage by using actual or effective age
i. Reconcile range of depreciation rates to develop rate for the subject
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Metes and Bounds
This is the oldest known land survey system that measures and identifies land by describing its boundaries. This system goes back to the time when a property owner would walk off the perimeter of a property and establish landmarks along the way. This is popular in Europe and a lot of states in the U.S. (Connecticut, Hawaii, New York, etc.).
Under this system there are three elements:
Point of beginning (POB) – This is the primary survey reference point. The perimeter must start and end here.
Bounds – this refers to the POB and all intermediate points. Points are also referred to as monuments. They are basically referencing points.
Metes – The direction one moves from one point to another and the distances between each point.
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Mixed-use properties
Mixed-use properties refer to properties intentionally used for a variety of purposes, including commercial, residential, retail, office, or parking space. For instance, if you had an apartment complex, retail stores, and businesses located within the same area, this would be a mixed-use property.
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Mortgage Capitalization Rate (Rm) or Mortgage Constant
The capitalization rate for debt, the ratio of annual debt service to the principal amount of the mortgage loan.
Payment of amortizing $1
Can be multiplied by any loan amount to find the debt service
Rm = Im / Vm
Rm = mortgage constant
Im = debt service
Vm = loan amount
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Mortgage Principal/Interest
The principal is the amount you borrowed and have to pay back, and interest is what the lender charges for lending you the money.
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Net Book Value
This is an accounting term that reflects the remaining value left in an asset. Once an asset obtains a NBV of 0, it no longer has any value. But for property tax purposes, assets with a NBV of 0 still need to be reported on the return.
Asset Cost - Depreciation = NBV
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Net Rentable Area
Building’s actual square-unit ready for lease or rent to tenants. This is the area used to compute expected lease or rental payments. Common areas, elevator shafts, stairways, and space devoted to cooling, heating, or other equipment are typical excluded areas.
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Occupancy rate
This is the ratio of occupied space to total available rentable space in a leased facility.
For example: if we have 100 sq. ft and 90 sq. ft is leased, we have a 90% occupancy rate.
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Expense Ratio
The ratio of total expenses, excluding debt service, to either the potential or effective gross income. (Total expenses/effective gross income)
ER = Total Expense / EGI or PGI
The complement to Net Income Ratio (NIR)
ER = 1 - NIR
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Operating Expenses (OE)
The periodic expenditures necessary to maintain the real property and continue production of the effective gross income, assuming prudent and competent management.
Fixed Expenses (insurance prem., prop taxes, admin)
Variable Expenses (Utilities, Payrolls, Management expenses)
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Original Cost vs. Historical Cost
Original Cost - In terms of real property or personal property, the cost to the current owner. (If the current owner is the original owner, then historical cost and original cost, are the same)
Historical Cost - the cost of a property at the time it was first placed into service. (if the original purchaser still retains ownership, this is the cost that is carried on the fixed asset ledger for the company.)
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Overall Capitalization Rate
An income rate for a total property interest that reflects the relationship between a single year’s net operating income expectancy, or an annual average of several year’s income expectancies and total price of value; used to convert net operating income into an indication of overall property value.
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Overhead
The costs not included in the direct or indirect costs of manufactured or other goods sold. (Ex: utilities, supervision of employees, taxes & insurance, R&D, indirect labor (management & corporate level), supplies, and depreciation)
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Overriding Royalty Interest
An interest in unsevered mineral rights (oil & gas) that the lessee retains when executing a sublease or assignment. A royalty interest that is paid to a property rights owner before other equity or operating interests are compensated.
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Physical Depreciation (PP)
Loss in value due to physical wear and tear during usage and/or from forces of nature
- Age
- Frequency of operating Usage
- Regular or Deferred Maintenance
- Exposure to Elements
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Physical Deterioration (RE)
Physical deterioration refers to wear and tear from regular use and the impact of the elements.
a. Curable - A defect caused by physical deterioration that can be practically and economically corrected
b. Incurable - A defect caused by physical deterioration that cannot be practically or economically corrected.
Examples: Peeling Paint, Broken Windows, Termite Damage, Cracked Foundation, Leaking Roof
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Possessory Interest
The right to the occupancy use of any benefit in a transferred property, granted under the lease, permit, license, concession or other contracts. A right to use or possess a property that does not include an interest in the fee simple title to the property.
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Prepaid Freight
A set of purchase terms set by a vendor, which means the purchaser pays for the freight on the items they purchase. In some states, freight is not part of the cost basis for personal property purposes.
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Principle of Contribution
Many non-value added or exempt costs may be incurred during construction of a new property. These costs are generally a “cost of doing business” and may not enhance the total property value. Appraisers must consider the contributory value of these costs.
The principle of contribution holds that the value of a component part of a property depends upon how much it contributes to the value of the whole. The present worth of the improvements, as of the valuation date, is a measure of their contribution to the total property value.
Pre-construction
Contractors Cost
Developers Cost
Consultants Feee
Change Orders
Personal Property
Post Construction Costs
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Property Interest (3 types)
a. fee simple – no encumbrances
b. leased fee – landlord’s interest
(lessor)
c. leaseholds – tenant’s interest (lessee)
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Property Management Fee
The fee to manage a property or business. Mostly used to describe the costs to run a property. If a property has low management fees, it can be assumed that the property is managed efficiently, whereas if the property has high management fees, it can be assumed that the property is inefficiently.
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Property Residual Technique
A capitalization technique in which the net operating income is attributable to the property as a whole, not to separate land and building components.
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Quantity Survey
Identification of the quantity and quality of all materials, labor, & other components of a property’s construction. Used mostly in new construction valuations.
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Quantity Survey Method (QSM)
A method used to produce a real property cost estimate based on detailed inventory of the labor, materials and equipment used in constructing the improvement. This is the most detailed method used in producing an estimate of value and is most used when costing new construction projects.
a. Most comprehensive
b. Time-consuming
c. Used mostly with new construction projects
d. Detailed plans generally
e. Quantities and prices for component parts
f. Similar to contractor’s bid
g. Materials in place
h. Add indirect costs and entrepreneurial profit
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Rate Base
The amount of assessable property in a single jurisdiction. In calculating the tax rate, this is the denominator, where the total amount of tax needed to fund operations is the numerator.
(Tax Amount Needed/Rate Base = Tax Rate)
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Ratio of Assessment
The ratio of taxable value to assessed value. In states where the assessment level is less than 100%, we have a fractional assessment ratio.
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Real Estate
The physical land and any man-made or naturally created object affixed to the land. (Used interchangeably with real property)
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Real Property
The interests, benefits, and rights inherent in the ownership of real estate.
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Recapture
The recovery of value over a specified time period over and above a return on the investment in the property itself.
Recapture Rate – The annual rate at which capital investment is returned to an investor over a specified time period; the annual amount, in addition to interest or return on investment (compound interest) which can be recaptured from an investment, divided by the original amount invested. In the past, it was used in reference to wasting assets, but now it applies to situations in which some regular income may be provided to
compensate for the loss in invested capital.
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Reconciliation of Values
The process of consolidating and synthesizing the results of the three approaches to value (sales, cost & income) being aware of the strengths and limitations of each approach in arriving at the final estimate of value for the property. (All 3 approaches should be within 10% of each other and NEVER average the 3 values to arrive at a final value)
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Reconciliation Criteria
A. Appropriateness
- property type and market availability
- relevance of comparable properties and adjustments
B. Accuracy
- not just mathematical accuracy
- measured by the appraiser's confidence
- correctness of data
- adjustments
C. Quantity of evidence: is the date utilized sufficient for supporatble conclusion
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Reconciliation Process
A. Review Appraisal
- is the data consistent
- are the conclusions consistent
B. Apply test of reasonableness to summary conclusions
C. Resolve any inconsistencies
- value approaches versus highest and best use
- are value indications consistent with highest and best use
- are value indications consistent with assessment law
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Rectangular Survey - Township/Section measurements
Acres in Township
1 Township = 36 Sections of Land
1 Section = 640 Acres
36 Sections x 640 Acres = 23,040 Acres
Square feet in a section of land
1 Section = 640 Acres
1 Acre = 43,560 Sq. ft.
640 Acres x 43,560 Sq. ft. = 27,878,400 Sq. Ft.
1 Linear Mile = 5,280 ft. = 1.6 K
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Rectangular Survey
A method of describing the location and size of property on distances from imaginary lines running north-south (known as principal meridians) and east-west (known as baselines) and rectangular block sizes.
Range lines - north-south lines (parallel with principal meridian)
Township lines - east-west lines (parallel with baseline)
Each of these lines is six miles apart.
Township - the rectangles created by the intersection of these lines, an area of 6 miles square. Each township is divided into 36 sections. Each section is one square mile or 640 acres.
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Regular or Deferred Maintenance (Physical Depr.)
If a maintenance schedule is not followed or followed loosely it may effect the ware and tear of the property
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Remaining Economic Life
The estimated time in years that improvements &/or equipment continue to contribute to value from a buyer’s perspective.
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Remaining Useful Life
The amount of time that an asset has left in which it is reasonably expected to perform the function for which it was designed. (aka: estimated remaining economic life)
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Rent Types
Contract Rent - The rent amount that is specified in a lease between the lessor and lessee. The use of contract rent implies a “leased fee” appraisal.
Market Rent - The rent that is most probable in the open market. The use of contract rent implies a “fee-simple” appraisal.
Scheduled Rent - rent due under existing lease
Excess Rent - Situation where the contract rent (rent specified in lease) is greater than the market rent (rental rate that is currently available in the open market). This is created by a favorable lease to the landlord and may reflect a
locational advantage, unusual management, unknowledgeable parties or a lease execution in an earlier, stronger rental market. Due to the higher risk inherent in the receipt of excess rent, it may be calculated separately and capitalized at a higher rate in the income approach.
Overage Rent - Rental agreement where the lessee will pay a percentage of rent over and above the guaranteed base rent. Most likely used for retail stores. For example, contract rent is $100,000/year plus 10% for total sales over $10M.
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Replacement Allowance (expenses) or Reserves for Replacement
An allowance that provides for the periodic replacement of building components that wear out more rapidly than the building itself and must be replaced during the building's economic life.
- Floor cover
- Roofing
- Plumbing
- Pavement
- HVAC
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Replacement Cost
The estimated cost to construct, as of the effective appraisal date, a building with utility equivalent to the building being appraised, using contemporary materials standards, design and layout. When this cost basis is used some of the existing obsolescence is assumed to be cured. Removes some forms of functional obsolescence.
(Ex. replace 2011 computer with current year's model)
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Reproduction Cost
The estimated cost to construct, as of the effective appraisal date, an exact duplicate or replica of the building being appraised, insofar as possible using the same materials, construction standards, design, layout, and quality of workmanship and embodying all the deficiencies, super adequacies, and obsolescence of the subject building. Includes all forms of obsolescence.
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Return ON & OF Investment
Return ON Investment is the additional amount received as compensation (profit or reward) for the use of an investor’s capital until it is recaptured. (aka: interest rate earned). Return OF Investment is the recovery of invested capital, usually through income &/or reversion. Income approach.
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Reversion
This is a future cash flow that represents the anticipated return of a capital sum at the end of the investment. The proceeds from the sale of a property at the end of a holding period in a cash flow analysis. (aka: the selling price of a property at a future time)
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Sales Comparison Approach
One of 3 approaches to value to TPP or RP. This approach assumes that a buyer would pay no more than the price paid for a comparable property. Relies on the principles of substitution & balance.
3 Steps Involved:
1. ) locate, investigate & verify comparables,
2. ) adjust comparables
3. ) reconcile sales to indicate the value of subject
For superior properties, you adjust downward and for inferior properties, you adjust upward. The property with the least amount of adjustments is the most comparable
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Sales Expenses
The costs involved in selling a specific property
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Sales Ratio or Ratio Study
The comparison of assessed values with sales prices to calculate an equalization rate. Used to assist taxpayers to verify if their property is properly valued to neighboring properties.
Sales Ratio = AV / MV
Typically based on a sample of sales (or all sales) that occurred in a given period of time. Typically calculated on the entire market, by market area, and by property type.
IAAO recommends taking the median of all individual sales ratios, medians are less affected by significant outliers.
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Salient characteristics
The important characteristics of a specific property. These characteristics differ depending on who will be using the property.
The term is used in connection with a “brand name or equal” purchase description.
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Situs
Is the place where the property is permanently located or regularly used.
Personal property that acquires a more or less permanent or fixed situs can only be taxed by the jurisdiction in which it resides. Personal property that does not have a fixed situs is usually assessed in the jurisdiction of the owner's residence or place of business.
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Six Functions of a Dollar
All of the traditional financial analysis applications are seen below.
future value of $1
future value of periodic payment of $1
monthly payment and annual constant per $1 loan
present value of $1
present value of $1 per period
periodic payment to grow to $1
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Standard Cost
The cost associated with producing a product and variances in standard cost account for the difference in the actual cost of a product. This cost is usually determined by management.
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States that Tax Inventory
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Alaska
Arkansas
Georgia
Kentucky
Louisiana
Mississippi
Oklahoma
Rhode Island
Tennessee
Texas
Vermont
West Virginia
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(Maryland - reportable, not taxable)
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Stock & Debt Approach
A method used to value the business as a whole and not the assets. Used in unit valuations for utilities. Similar to the band of investment method where one calculates the return to debt and return to equity.
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Straight Line (Physical Depr. Calc.)
This is the most common method used to estimate depreciation because the depreciation amount is the same each year.
Ex. Asset with 15 yr. life would receive 6.6% depreciation per year (1/15 = 6.6%)
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Tangible Property
Property that is the subject of ownership and that is not permanently affixed to the real property. Tangible property includes inventory, machinery & equipment, furniture & fixtures and computers.
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Three-Pronged Test (Not Mutually Exclusive)
Manner of Annexation - asset is affixed to real property in such a manner that it cannot be easily moved, its removal would cause structural damage to the real property, or if the cost of removal is greater than the current value of the assets, then it is real
Primary Purpose (Adaption) - if the purpose of the asset is to support the general use of the real property, properly classified as real property. If the asset's primary purpose is to support a specific process, the tendency is personal property.
Owner's Intent - If the property owner intended to make the asset a permanent part of the realty, then it should be real property. If the property owner intended annexation with future removal, then the asset could be properly classified as personal.
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Time-Location Factor
Factors in the sales comparison approach that affect the price of property.
Time – An adjustment is made depending on market conditions of when the property is sold. This can be caused by supply & demand, tastes & preferences of buyers and laws & regulations.
Location – An adjustment is made based on the access to the property (traffic counts – how many travel the road on a daily basis) and (traffic arteries – how developed are the roads leading to the property). In addition, the view that a property has and the address of the property (prestige address) will also cause an adjustment in a sales price.
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Types of Capitalized Costs
Used assets - historical cost differs from original cost.
New assets - original and historical costs are synonymous
Capitalized Leased Assets - similar to new assets. (watch for double taxation, lessor may be reporting assets on your behalf)
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Unit Valuation
A valuation method that includes all the components of a business to value the business as a whole. Used most widely in valuing utility or other companies that operate in a multi-state environment (airlines, etc.)
157
Unit-in-Place or Segregated Costs
A cost method designed to allow the appraiser to give separate consideration to all of the major construction assemblies or systems (components) of a building with a minimum of time-consuming counting and measuring to arrive at a reasonable replacement cost in a reasonably short time.
a. Modification of quantity survey method
b. Cost of component units
c. Materials in Place
d. Add indirect costs and entrepreneurial profit
Users should read all instructions and determine what costs are included in any unit price quote.
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Upgrades, Repairs, Rehabilitation and Replacement of assets (often used interchangeably)
Upgrade - Improvement to a property that may increase efficiency
Repair - ordinary and recurring expenses, repair, and maintenance that do not improve or add to the useful life. Generally expensed
Rehabilitation - major overhauling which prolongs useful life, increases utility or capacity
Replacement - as components wear out, they are taken out and new parts are put in (make sure the company does not leave new and old costs on books)
- Remove old component
- Remove new component
- Back Trend
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Useful life
the period of time over which a structure or asset may reasonably be expected to perform the function for which it was designed.
160
Vacancy and collection loss (VCL)
Deduction from PGI made to reflect income reductions due to vacancies, tenant turnover, and nonpayment of rent.
Often reflected as % of PGI and should reflect the competitive market. Its treatment can differ according to the interest being appraised, property type, capitalization method, and whether the property is at stabilized occupancy
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Valuation Principles
Anticipation – The belief that value is created by the expectation of receiving a future benefit
Change – The idea that we forecast the future in the hope that future events can possibly change the value of a property. Change is affected by either a physical, economical, social, or political event
Substitution – The concept that one will not pay more for a property than the cost to acquire a similar property of equal utility with undue delay.
Highest & Best Use - The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The following 4 criteria must be met as well: legal permissibility, physical possibility, financial feasibility & maximum profitability.
Balance – The concept that 4 factors: capital, land, management & labor when equally weighted will maximize the value of a property
Contribution - The concept that the value of a component part of a property depends on how much it contributes to the value of the property as a whole.
Conformity – The concept that value is maximized when properties are compatible and consistent with nearby properties.
-Progression – The value of an inferior property is enhanced by association
with a superior property
-Regression – The value of a superior property is reduced by association
with an inferior property
Plottage – The idea that small parcels are worth more once combined than if the parcels are sold separately. Increasing/Decreasing Returns – The theory that the more a property owner adds to their property, the more a property value increases, however; as a property owner adds more to their property, the value may not increase.
Supply & Demand – The theory in which the less available a property is, the more a property will demand. (Low Supply = High Demand) (High Supply = Low Demand) aka Competition
Externality – Factors outside the control of the property that affect the property value (Park by House = High Value, & Landfill by house = Low Value)
Competition - Occurs when many buyers choose from among goods offered
by many potential sellers. Profits encourage sellers to enter the market breeding competition. Competition limits price increases by adding supply to the market. A market with excessive profits tends to breed ruinous competition.
Opportunity Cost – The return missed due to using a property for a particular use instead of an alternative use
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Value in Exchange
A value concept based upon a relative comparison of available alternatives from which a potential buyer may make a choice.
163
Value in Use
A value concept based upon the productivity of a property to its current owner/user.
164
Variation Among Ratios
In the income approach, it is important to understand how any variation in the rental rate, vacancy & collection loss ratio, expense ratio, and overall cap rate used can affect the indicated value of a property. Any slight change in any of the above ratios can affect the value of a property, which can affect whether the decision to appeal a property or not appeal a property.
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Yield Capitalization
Capitalization method that converts future benefits into present value by discounting each future benefit as an appropriate yield rate or by developing an overall rate that explicitly reflects the investment's income pattern, value change, and yield rate. (aka: discount rate or NPV approach)
166
Annuity
A series of equal or nearly equal periodic payments or receipts. Regular and predictable income stream.
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Net Income Ratio
The ratio of net income to effective gross income
NOI/EGI = NIR
