WestMichiganCG
Member
- Joined
- Sep 4, 2014
- Professional Status
- Certified General Appraiser
- State
- Michigan
I recently took a class that discussed loaded capitalization rates for determining tax burden and as far as I can tell, it works poorly.
The example given included a capitalization rate of 8.5%, a vacancy rate of 5%, an assessment level of 50%, a millage rate of 51.0055, and an NOI of $148,362 (Note this NOI does not include tax).
The calculation to determine the effective tax load is to multiply the millage rate (51.0055) by the assessment level of 50% = 27.1854. Next you convert to mills = 27.1854/1000 = .0271854. Then you multiply by the vacancy rate of 5%. = .0271854 x .05 = .12751. This "0.12751" was called the "effective tax rate - tax load" by the presenter. All you need to do is add this number to your cap rate to get your loaded cap rate: 8.5% + .12751% = 8.628%.
Given the above information, I should be able to get a good estimate of my property's value by dividing the NOI by my loaded capitalization rate: $148,362/.08628 = $1,719,541 is what the assessor stated the property would be worth. This is supposed to save me the trouble of determining taxes before I know what they are going to be.
Here's the rub. Now that I'm assessed $1,719,541, I figured I would calculate my taxes and determine value from the income approach as I typically do. I have a $1,719,541 property so I'll multiply it by the 51.0055 millage rate and divide by 1000 and multiply by my assessment level of 50% as follows ($1,719,541)*(51.0055/1000)*50% = $43,853 worth of tax.
Now I take my tax out of the NOI given above $148,362-$43,853 = $104,509 which is my NOI that accounts for tax. Now I just divide by my unloaded cap rate of 8.5% = $104,509/.085 = $1,229,517.
Prior to this I would utilize Newton's method on my spreadsheet. I did it for the example above to determine that the property is worth $1,342,612 and a fair tax rate would be $32,240. This is how I was doing my calculations prior. Has anyone else run into this issue? I went to a class, got a shiny new toy and it doesn't work. This is also the second time I have seen this taught in a class.
The example given included a capitalization rate of 8.5%, a vacancy rate of 5%, an assessment level of 50%, a millage rate of 51.0055, and an NOI of $148,362 (Note this NOI does not include tax).
The calculation to determine the effective tax load is to multiply the millage rate (51.0055) by the assessment level of 50% = 27.1854. Next you convert to mills = 27.1854/1000 = .0271854. Then you multiply by the vacancy rate of 5%. = .0271854 x .05 = .12751. This "0.12751" was called the "effective tax rate - tax load" by the presenter. All you need to do is add this number to your cap rate to get your loaded cap rate: 8.5% + .12751% = 8.628%.
Given the above information, I should be able to get a good estimate of my property's value by dividing the NOI by my loaded capitalization rate: $148,362/.08628 = $1,719,541 is what the assessor stated the property would be worth. This is supposed to save me the trouble of determining taxes before I know what they are going to be.
Here's the rub. Now that I'm assessed $1,719,541, I figured I would calculate my taxes and determine value from the income approach as I typically do. I have a $1,719,541 property so I'll multiply it by the 51.0055 millage rate and divide by 1000 and multiply by my assessment level of 50% as follows ($1,719,541)*(51.0055/1000)*50% = $43,853 worth of tax.
Now I take my tax out of the NOI given above $148,362-$43,853 = $104,509 which is my NOI that accounts for tax. Now I just divide by my unloaded cap rate of 8.5% = $104,509/.085 = $1,229,517.
Prior to this I would utilize Newton's method on my spreadsheet. I did it for the example above to determine that the property is worth $1,342,612 and a fair tax rate would be $32,240. This is how I was doing my calculations prior. Has anyone else run into this issue? I went to a class, got a shiny new toy and it doesn't work. This is also the second time I have seen this taught in a class.
