Loading the Cap Rate

[Vernon Martin]

The only reason I've seen to use a loaded capitalization rate is when the real estate tax expense is unknown, but the effective tax rate is known. The effective tax rate is then added to the cap rate instead of deducting property taxes, and the NOI that is capitalized at the loaded rate is higher than otherwise because property taxes have not been deducted.

 

[Dennis J. Black ASA IFAS]

Vernon is right. I will restate my position as "If the taxes are know the answer is never" I still want to know the reason for the question by the OP

 

[PropertyEconomics]

The only reason I've seen to use a loaded capitalization rate is when the real estate tax expense is unknown, but the effective tax rate is known. The effective tax rate is then added to the cap rate instead of deducting property taxes, and the NOI that is capitalized at the loaded rate is higher than otherwise because property taxes have not been deducted.

Vernon ... Im curious as to why you wouldnt simply estimate the taxes to the property if the tax rate is known. Perhaps it hasnt been assessed? I would think that an estimate of taxes based upon other similar properties would get the analysis very close rather than "loading" the cap rate.
I am typically not a fan of adjustment of the cap rate because it is such a pure market indication.

 

[Dennis J. Black ASA IFAS]

PE,

By putting the effective tax rate into the cap rate you eliminate the problem of incorrect assessments.

 

[Vernon Martin]

Vernon ... Im curious as to why you wouldnt simply estimate the taxes to the property if the tax rate is known. Perhaps it hasnt been assessed? I would think that an estimate of taxes based upon other similar properties would get the analysis very close rather than "loading" the cap rate.
I am typically not a fan of adjustment of the cap rate because it is such a pure market indication.

PE, I've never loaded a cap rate myself, for that very reason. In California, you can pretty much determine what the property taxes will be. In other states, an appraiser can use "tax comps" to estimate the tax expense.

Loading the cap rate seems to be an artifice that accomplishes the same thing but in another way. The appraisers I've seen doing it are the appraisers who want to be seen as clever. These are the same people who would do a DCF analysis on a stabilized apartment property.

 

[C. Kevin Bokoske MAI]

The only time the typical general appraiser will face "loading cap rates" is for ad valorem tax work involving income-producing properties. The real estate taxes are left out of the operating expenses, producing a higher (than ordinary) NOI. To offset this, and to leave taxes out of the equation because you are not certain (or have not agreed on) the value of the property, the effective tax rate is added to the NOI. This is the accepted practice, and is done by those on both sides of the table, the tax payer and the assessor.

The kicker is, with net leased properties, the tenant, not the owner, is liable for the taxes. In this case, the ETR would not need to be loaded to the cap rate, because there is no tax expense to be accounted for.

Kevin
Ft Lauderdale

 

[Dennis J. Black ASA IFAS]

Kevin,

I see you are in Florida. I disagree with your statement on Net Leased properties not having the ETR loaded. Florida Statute is clear that the Just Value is of the Fee Simple Interest, not the property owner's (per records) interest. The fact that an owner has a net lease is a matter of payment, not valuation.

 

[PropertyEconomics]

Kevin,

I see you are in Florida. I disagree with your statement on Net Leased properties not having the ETR loaded. Florida Statute is clear that the Just Value is of the Fee Simple Interest, not the property owner's (per records) interest. The fact that an owner has a net lease is a matter of payment, not valuation.

Mr Black .. I have a few questions if you dont mind:

1) What is Just Value?
2) Are there no leased fee values allowed in Florida?

PE

 

[Dennis J. Black ASA IFAS]

PE,

Just Value is Market value minus "the 8th criteria" (cost of sale usually held to be 15%). This is different than "Assessed Value" because of the fact that homesteaded properties are treated differently.

Regarding Leased Fee in Florida, in property tax assessment, only the Fee Simple interest is considered. If a property owner leases is property (even a below market rates) the assessment is based on market rents and the property owner is billed. The owner is then obligated to collect from the tenant if it is a net lease.

 

[PropertyEconomics]

PE,

Just Value is Market value minus "the 8th criteria" (cost of sale usually held to be 15%). This is different than "Assessed Value" because of the fact that homesteaded properties are treated differently.

Regarding Leased Fee in Florida, in property tax assessment, only the Fee Simple interest is considered. If a property owner leases is property (even a below market rates) the assessment is based on market rents and the property owner is billed. The owner is then obligated to collect from the tenant if it is a net lease.

Somewhere I got lost then .. I didnt know this was for tax assessment purposes. Am I to assume then the appraisal is being conducted to protest taxes?