Small apartment 71 B form

[gregb]

To get the annual tax amounts I will just multiply the assessed value by the tax rate. Yet the subject property is a legal nonconforming property and the only density allowed per city is a duplex when the subject is an 8 unit property! I verified it with the city. So as for the highest & best use as vacant it is duplex because it is the maximally productive and legal use. Current highest & best use would be 8 unit legal nonconforming. What are your thoughts on this?

Think again about the real estate taxes you are going to report on the expense page. You have the current, actual taxes, then your projected property taxes, which a potential buyer is going to anticipate as part of the expenses. The property taxes projected by you on the right side of the column are based on the market value of the subject property, not on its current assessed value.

A common problem encountered by appraisers using the capitalization approach to value (where net income is factored into a value estimate) is not knowing the market value to begin with-a Catch 22 situation. There are two ways out: the first is to use the value estimate obtained through the other two approaches (which is what I typically do); the second is to omit property taxes from the expense estimate and add the tax rate to the capitalization rate.

Above was paraphrased from the Apartment Building Operating Expense Guideline, published by Joseph G. Queen.

 

[Michigan CG]

To get the annual tax amounts I will just multiply the assessed value by the tax rate. Yet the subject property is a legal nonconforming property and the only density allowed per city is a duplex when the subject is an 8 unit property! I verified it with the city. So as for the highest & best use as vacant it is duplex because it is the maximally productive and legal use. Current highest & best use would be 8 unit legal nonconforming. What are your thoughts on this?

Why would you need to multiply the assessed value by the tax rate to estimate taxes as that would be the ACTUAL taxes being paid? FWIW, that is the wrong thing to do.

My thoughts are that you might be in over your head, not to mention your license level.

 

[Michigan CG]

Think again about the real estate taxes you are going to report on the expense page. You have the current, actual taxes, then your projected property taxes, which a potential buyer is going to anticipate as part of the expenses. The property taxes projected by you on the right side of the column are based on the market value of the subject property, not on its current assessed value.

A common problem encountered by appraisers using the capitalization approach to value (where net income is factored into a value estimate) is not knowing the market value to begin with-a Catch 22 situation. There are two ways out: the first is to use the value estimate obtained through the other two approaches (which is what I typically do); the second is to omit property taxes from the expense estimate and add the tax rate to the capitalization rate.

Above was paraphrased from the Apartment Building Operating Expense Guideline, published by Joseph G. Queen.

And, listen to this guy.

 

[hastalavista]

And, listen to this guy.

I agree (regarding the tax expense).

But your appraisal problem has a complexity that kicks it up to another level.
If I understand you correctly, the property, as-improved, is a multifamily improvement/use (8-units), when the current zoning only allows 2-units.
The current 8-unit use is grandfathered.
Question: Under what circumstances would the 8-unit configuration be allowed to be rebuilt?

 

[valuecommando]

So even for a non purchase assignment, the forecasted tax amount has to be calculated like that? Why would the tax amount change that high if it won't transfer?:new_multi: Btw, I meant to say assessed value / new tax rate, that's because the tax rates are increasing resulting in higher taxes. You are saying income approach value / tax rate = forecasted taxes. :new_smile-l:
As for the highest & best use, the property cannot be rebuilt if over 50 percent is torn down. If less than 50 percent is torn down then it can be rebuilt. The property has been grandfathered in as legal nonconforming status. The question is does the highest & best use as vacant as a duplex sound fine or any curve balls that you see since only a duplex could be rebuilt? I'd like to hear your expert opinion.woohoo Thanks.

 

[hastalavista]

As far as the taxes go, they need to be calculated based on the income approach's indicated value. Why? Because all the approaches to value provide an indication of what the subject is worth in the market based on a hypothetical sale. If someone were to purchase your subject today, the taxes they pay are going to be based upon the fair market value of the property on the day it transfers. In the income approach, the analysis is supposed to mimic how market participants (investors) value the property. An investor is going to know that the tax expense is going to reflect the fair market value so an investor is going to use the forecasted taxes in her or his investment analysis. In California, because of Prop. 13, the change in the tax expense can be significant and if not analyzed correctly, will really skew the outcome.
There are two ways to obtain the correct tax expense based on the IA's indicated value (there may be more, but these two are the common ways):
1. Load the tax rate
2. Iteration

If neither of those answers make any sense, I suggest you hook up with an experienced appraiser before you finish your assignment. If you haven't done this type of assignment before, finish it with someone who has.


As to the H&BU, here's my opinion:
The H&BU of the site, vacant & ready for development, is 2 units. I asked about the rebuild because, if there were no restrictions on the subject being rebuilt as an 8-unit, then I'd argue the site should be valued as a multifamily site that can support 8 units.
My guess is that the value of the site that can support 2 units is less than the value of the site if it could support 8 units. The duplex land value may be $100k/unit. The 8-unit land value may be $40k/unit. So correctly identifying the H&BU of the site, as vacant, in this case is critical (and, sounds like you've done that).

Here's where the additional complexity level comes in (and, this is why H&BU as-vacant and as-improved is necessary to analyze for any market value assignment).
Logic says that an 8-unit improvement sited on land that allows for that use is going to be worth more than the 8-unit improvement sited on land that only allows for 2 units, assuming value increases as the unit-density increases, and assuming all other things are the same.
This is obvious in the cost approach discussion above if site value increases as allowable density increases. In my example, the value of a 2-unit site is $200k, but the value of an 8-unit site is $320k. If you were doing the cost approach on two properties that were identical except for the zoning, you can see that the grandfathered 8-unit property is going to be worth $120k less unless there is some reason to adjust it.

For your assignment, the ideal comparables are 8-unit properties that have the same zoning as your subject. Any impact of the zoning restrictions are already baked into the sale prices of those comparables.
Without those comparables, you are going to have to consider and analyze what impact (if any) exists due to the non-conformity of your subject, and if it does exist, then figure out how to address it in the cost approach, income approach, and sales comparison approach.

Maybe another will not see the same level of complexity as I do, but that's what I see here on a Saturday morning.

Good luck!!!

 

[gregb]

As far as the taxes go, they need to be calculated based on the income approach's indicated value. Why? Because all the approaches to value provide an indication of what the subject is worth in the market based on a hypothetical sale. If someone were to purchase your subject today, the taxes they pay are going to be based upon the fair market value of the property on the day it transfers. In the income approach, the analysis is supposed to mimic how market participants (investors) value the property. An investor is going to know that the tax expense is going to reflect the fair market value so an investor is going to use the forecasted taxes in her or his investment analysis. In California, because of Prop. 13, the change in the tax expense can be significant and if not analyzed correctly, will really skew the outcome.
There are two ways to obtain the correct tax expense based on the IA's indicated value (there may be more, but these two are the common ways):
1. Load the tax rate
2. Iteration

By loading the tax rate, do you mean to add the tax rate to the capitalization rate used in the IA?

Not sure what Iteration is, care to elaborate?

The other method, accepted by my bank reviewers and peers, is to estimate the projected taxes of the subject based on the fair market value that is indicated in the Sales Comparison Approach.

 

[GregoryK]

I often load the cap rate for taxes when I feel a property is not assessed fairly. For instance, Illinois assesses property at one third market value. A typical tax rate may be $9.00/ $100 assessed value so omit taxes from the expenses, and add .03 to the cap rate. Then you can go back, and calculate the taxes based on the value estimate using the loaded cap rate, if you want to include taxes in your expenses.

I do review work for a commercial AMC that requires property tax comps in every appraisal. Don't necessarily agree with this approach, but it is defensible.

 

[hastalavista]

By loading the tax rate, do you mean to add the tax rate to the capitalization rate used in the IA?

Exactly.

Not sure what Iteration is, care to elaborate?

Sure.
Let's assume the tax rate is 1.1% and special assessments are $3,000.
Complete the IA (direct cap) approach using all the forecasted expenses; leave the estimated tax expense blank. Multiply NOI by Cap and we have an indicated value. Now...
A. Multiply that indicated NOI by the 1.1%, and then add $3k to that result; this is the estimated tax expense based on the calculated NOI. Insert this amount back into the NOI calculation as the tax expense. Recalculate NOI.
B. A new result is obtained; repeat step A.
C. Repeat step B.
D. After 5-8 times of repeating step B, the tax estimate will not change (or, change by less than a $1).
E. Use the final result as the tax expense.
It is called "iteration" because the tax calculation step is repeated (iterated) until the result no longer changes.
By doing it this way, the tax expense used in the IA is based on the data (NOI & Cap Rate) used to estimate the value within the IA rather than based on the value used in another approach.

Iteration is the way I do it. Takes less than 2-minutes in excel. I can probably automate the calculation but I'm not sure how to do that: right now, my formula is something like:
(NOI x (Tax Rate)) + Special Assessment)= Est. Taxes
I plug in the result of the "Est.Taxes" into the expense table and repeat the step until the result doesn't change.

:new_smile-l:

I do review work for a commercial AMC that requires property tax comps in every appraisal. Don't necessarily agree with this approach, but it is defensible.

Because of California's Proposition 13, many properties are taxed at a rate that is below the current fair market value; that rate will be reset upon a sale. So in California we have to recalculate the taxes for the IA with every assignment (or, nearly every assignment; there are always some exceptions!).

:new_smile-l:

 

[gregb]

Thank you Dennis for sharing the Iteration idea.

One question, with a relatively smaller 5-15 unit res income property, where the IA is less relied on by market participants than the Sales Comparison Approach, would the tax expense be better derived by the SCA than by the IA? :new_smile-l: