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Does “Use Value” Define My Property Tax Assessment?

by Tyler Alderman, MAI, CPA, CCIM, Property Tax Services

Earlier this year, I contacted a local legislative representative in Utah to discuss my concerns regarding the inconsistent use of how state assessors apply the concept of “value in use” and “fair market value” when assessing the values of commercial properties. That discussion led to an invitation to present before the Interim Revenue and Tax Committee for the state of Utah. This Committee is the governing body that proposes bills and amendments to existing laws relating to revenue sources in the state. The laws proposed by the committee (and subsequently passed by the legislature), then govern the State Tax Commission. So as one of the largest revenue generators in Utah, what this Committee has to say about property taxes creates a significant impact.

During my presentation, I cited the differences between how the Appraisal Institute defines “Use Value” and how the Uniform Standards of Professional Appraisal Practice (USPAP) defines “Fair Market Value.”

The Appraisal Institute defines “Use Value” as the “value a specific property has for a specific use. In estimating use value, the appraiser focuses on the value the real estate contributes to the enterprise of which it is a part, without regard to the highest and best use of the property or the monetary amount that might be realized from its sale.”  On the other hand the Uniform Standards of Professional Appraisal Practice (USPAP) defines Fair Market Value as “the amount at which property would change hands (1) between a willing buyer and willing seller; (2) neither being under any compulsion to buy or sell; and (3) both having reasonable knowledge of the relevant facts.”

For special use properties like big box retailers, high tech facilities, manufacturing or any property where costly improvements have been put in place for a specific use, this distinction can have a huge impact on assessed value. For example, if a big-box retailer spent $10M to build a space in a given jurisdiction, that taxing agency may want to enroll the full $10M, arguing that in its current use, the value is justifiably $10M. The conflict arises in the definition of Fair Market Value which requires the valuation of properties on a Fee Simple ownership basis. The Fee Simple ownership interest includes all rights of ownership, including occupancy, which implies that the property is vacant and available for occupancy. Recalling the example above, vacant big-box buildings typically trade at significant discounts from “Value In Use” valuations. Hence, the Fair Market Value (“Value in Exchange”) is quite different than the “Value in Use.”

Interchangeable use by taxing authorities of “Value in Use” and “Fair Market Value” is not unique to Utah. Where state law is ambiguous, open-ended or improperly applied, it lends itself to inconsistent valuation methodology. In those instances, the best way to ensure that all property owners are treated equally and fairly, is by enacting legislation that clarifies existing valuation methodology and application.

In Utah, the Interim Revenue and Tax Committee pulled together professionals from the industry, including myself, to discuss legislative action and identify potential ramifications of those actions. Other states may require legislative reform or judicial action to ensure similar guidelines are followed. There is currently no resolution in Utah at this time, but discussions are on-going regarding this topic with local professionals.

What is your state or jurisdiction doing to ensure uniform valuation methodology is being applied by those responsible for assessing property? Property tax consulting is a nuanced field of expertise that requires professionals who are specialists, not just in valuation, but also in local jurisdiction procedures and protocols. Learn more about Cushman & Wakefield’s Property Tax Services.

alderman_tyler_amer_nov2014Tyler Alderman, MAI, CPA, CCIM, is a Senior Director in our Property Tax Services group. Mr. Alderman has a broad range of experience in counseling and valuation for a full array of property types including retail centers, industrial facilities, office buildings, resort and hospitality properties, residential subdivision development, automobile dealerships and special use properties.

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