Property Taxes in the Income Approach

[bradellis]

Doug,

I, too, and in CA.

Do not load the cap rate; however, because the definition of market value assumes a transfer at market price, you do have to use the assumed value as a basis for the taxes. Yeah, I know it sounds nuts- first figure out value via the income approach using the current tax amount, and then change it to reflect the "new" value (translated- selling price, even if it is not a sale).

This would not be the case in other states where taxes are based upon triennial or quadrennial reassessments.

Not much of a problem out here as the rate is easy to calculate. By the way, this comes from an MAI whom I very much respect- a very smart guy.

Have fun,

Brad Ellis, IFA,RAA

 

[bradellis]

Doug,

A follow up. When I said do not load the cap rate, I meant with the full point. It is perfectly OK to take the taxes out and then load the cap rate to compensate for the effective tax rate. I checked with my guy for you- he confirms that adding a point on to the cap rate is absolutely wrong.

If that is what they are requiring you to do, perhaps it would be a great idea to turn them into the AI for using techniques that are not recognized. Maybe even get OREA involved- but make sure you are getting it all right. It would be a pity of you charged them and they simply responded that they did not say "that".

Brad Ellis, IFA,RAA