Summer 2017

Thought Leadership in Property Tax Planning, Compliance, and Controversy

Thought Leadership:
Extracting Relevant Pricing Data from Market-Based Evidence
John C. Ramirez and Casey D. Karlsen
Both property tax assessors and property owners often rely on market-based evidence (“market evidence”) to estimate the value of an industrial or commercial taxpayer’s taxable property for ad valorem property tax purposes. This market evidence may include (1) valuation pricing multiples extracted from either comparable property sales data or guideline publicly traded company transactional data, (2) yield capitalization rates or direct capitalization rates extracted from comparable property or capital market data, or (3) various indicators of the subject property economic obsolescence. These market-derived data are often used to perform the three generally accepted approaches to industrial or commercial property valuation. However, such market evidence may not be appropriate for the property tax valuation assignment. This is because the market evidence may not be sufficiently comparable to the subject taxable property so as to provide credible valuation results. This discussion describes common uses of market evidence in each of the three generally accepted property valuation approaches. And, this discussion examines relevant comparability factors for valuation analysts to consider when extracting pricing data from market-based evidence.

Distressed Properties, Vacancy Shortfall, and Entrepreneurial Incentive
Michelle DeLappe, Esq., and Andrew T. Robinson, MAI
A commercial property that suffers from below-market occupancy typically will not sell for as much as an identical commercial property with stabilized occupancy. Where property tax laws require a fee simple valuation of commercial property based on market rents, the assessed property value should reflect a valuation adjustment for any below-market occupancy. Estimating the effect of below-market occupancy on the value of commercial property requires an additional procedure in the real estate appraisal analysis: after first valuing the subject property at stabilized market occupancy, the real estate appraiser should then analyze the subject property at its below-market occupancy. The difference between market occupancy and below-market occupancy is referred to as “vacancy shortfall.” This discussion explains the vacancy shortfall analysis, including consideration of a valuation adjustment for the entrepreneurial incentive that a typical investor would require to bring a destabilized occupancy property up to stabilized occupancy.

Flotation Cost Adjustments to the Cost of Capital in Unit Principle Valuations
Casey D. Karlsen
Valuation analysts are often called on to perform flotation cost studies used in the estimation of the cost of capital for property tax valuation purposes. Flotation costs are the security issuer’s cost associated with the public sale—or the private placement—of either debt capital or equity capital. Adjusting the cost of capital for flotation costs may have a material effect on the subject property value conclusion, particularly with regard to unit principle valuations. This discussion (1) summarizes the factors that influence the level of flotation costs and (2) explains the potential effect that a flotation cost adjustment can have on both the cost of capital and the property value conclusion in a unit principle valuation.

The Continuing Conundrum of How to Exclude Goodwill in Unitary Property Taxation—and a Proposed Solution
Richard G. Smith, Esq.
The exclusion of tax-exempt goodwill from the assessed value of taxable property is a vexing problem for tax administrators and for the taxpayer companies that seek such exemptions. This is particularly the case for taxpayer companies that (1) report goodwill on their financial statements and (2) are subject to property taxation by state taxing authorities based on the value of the “unit” of property used in a business operation conducted within the taxing state. This discussion analyzes the issues involved in the identification and valuation of goodwill, considers alternatives for implementing the exemption of goodwill in a unit principle valuation, and recommends a practice for excluding goodwill that is based on a method recognized and endorsed by the appraisal guidance used by tax administrators.

Implications of Wind Energy Decommissioning and Repowering on Ad Valorem Taxation
Thomas Russell
Many wind energy projects in the United States are reaching an age where the property owner must decide whether (1) the project will be extended through a repowering investment or (2) the project will be decommissioned and removed at the end of the project’s useful life. These wind project investment decisions are affected by tax incentives, rapidly changing technology, and an evolving marketplace. However, the assumed investment decision at the end of the project’s initial useful life affects the value of the wind project at any age. This discussion analyzes the current context of repowering versus decommissioning wind farms in the three generally accepted property valuation approaches. And, this discussion explains why the standard valuation assumption should be to decommission the wind project at the end of that project’s useful life.

Undeveloped Mineral Interests and the Assessment Conundrum—Jordan v. Jensen
Steven P. Young, Esq., and Pamela B. Hunsaker, Esq.
A recent appeal to the Utah Supreme Court involved the issue of whether a local property tax assessment included the severed, undeveloped mineral reserves. Several amicus briefs were filed addressing that issue. This discussion addresses (1) the constitutional and practical hurdles to assessing undeveloped mineral reserves and (2) the reasons why local assessments of surface interests cannot be deemed to include an assessment or valuation of severed, undeveloped mineral reserves.

Analytical Differences between Business Valuations, Unit Valuations, and Summation Valuations
Robert F. Reilly, CPA
Taxing authorities and property owners (and even some inexperienced valuation analysts) do not understand the differences between business enterprise valuations, unit principle valuations, and summation principle valuations. The differences between these three types of valuation analyses are both conceptual and practical. There are somewhat similar—but subtly different—generally accepted valuation approaches and methods within these three different types of valuation analyses. However, more importantly, these three different types of valuations analyze fundamentally different bundles of ownership interests. Business valuations value the taxpayer company’s debt and equity securities (and their associated investment attributes). Unit valuations value all of the taxpayer company’s operating assets in place as of the valuation date. Summation valuations value only specified bundles of taxpayer property in place as of the valuation date. Accordingly, since they value different ownership interests, these three different types of analyses will quantify three different value conclusions for the same taxpayer property owner. This discussion describes at least 14 analytical differences between business valuations, unit valuations, and summation valuations. These differences are particularly relevant for industrial and commercial property valuations prepared for ad valorem property tax purposes.

Best Practices
The Application of a Guideline Publicly Traded Company Risk Adjustment
Kevin M. Zanni
Depending on the valuation assignment facts and circumstances, the valuation analyst (“analyst”) may encounter a unique valuation problem: a problem that is well outside the ordinary scope of typical valuation issues. Unique problems provide the analyst an opportunity to develop thought leadership solutions in a manner that (1) provides value to the client and (2) assists the reader of the valuation report. These thought leadership solutions (1) can provide context to the identified problems and (2) can help to measure the effect of the problem on the subject investment interest.

Valuation Considerations for Premarital Agreements
Michael G. Cumming, Esq., and John A. Abbo, Esq.
Premarital, or “antenuptial,” agreements are often developed in a marital setting to establish financial terms regarding the division of assets upon divorce. Such agreements often arise in circumstances when a couple (1) brings children from a prior marriage, (2) has inheritance considerations, or (3) is dealing with a family-owned business. Required financial disclosure obligations of parties considering a premarital agreement vary by jurisdiction. The potentially complex nature of such obligations, and the complexity involved in developing such agreements, requires experienced legal counsel, and often the services of qualified valuation analysts, in order to produce a legally enforceable document.

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