Understanding both economic and functional obsolescence is essential to properly evaluate tax assessments for accuracy.
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Determining functional obsolescence requires an analysis of the property's layout and technologies in use. This exercise attempts to quantify any adjustment in value that amplifies or outpaces downward trends occurring in the market, or accelerates depreciation beyond a straight-line basis.
This may include external trends having a unique negative effect on the property's functionality. Likewise, economic obsolescence can affect a property's value. Such an analysis involves external factors not necessarily specific to the property that may compromise its value on the open market. Declining trends in markets within an industry can signify reasons for impaired values both nationally and regionally. Moreover, international competition may underscore weaknesses within an industry that explain a reduction in a particular property's value.
In ascertaining the decline in a property's value due to economic obsolescence, the analysis must attempt to quantify that decline and offer reasons explaining it. These reasons need to be identified and reasonable, a rationale correlating values assigned to those reasons.
For example, a facility may have a decline in excess of industry averages, such as changes in transportation costs and infrastructure in comparison to other supplying markets. It could become much less expensive to ship product from South America than to ship by rail in parts of the United States. In an uncertain economic climate or a declining or stagnant real estate market, the need to evaluate obsolescence in property assessments is obvious. But even in times of growth and rising real estate prices, taxpayers should consider functionality in reviewing an assessment.
In Georgia, for example, regulations governing property assessments require local taxing authorities to take obsolescence into account. The statute lacks any description of the precise mechanics involved in measuring obsolescence, however, and assessors often forego such an evaluation.
A given jurisdiction's tax return may apply depreciation schedules, but those may not incorporate the concept of functionality. If unaddressed in depreciation schedules, then functional obsolescence needs to be captured as an adjunct to depreciation. Poor economic times or deterioration in a property's utility will exacerbate normal depreciation. The degree of functional obsolescence is reflected in the utilization of the property. A comparison between full versus actual property usage can indicate the degree of functional obsolescence. Look for evidence of the gap between full and actual historical changes in operating income and production.
Given that the discrepancy between full and actual property utilization is unique to the facility and not industry-wide, it is functional. This could be explained by technological differences between competing facilities and the subject property. At the same time, external economic factors may contribute to the property's comparative decline.
For example, a printer may use antiquated equipment and technology that require it to keep large facilities for both production and warehousing. Comparisons will identify a gap in functionality between the property and those of more modern competitors using smaller facilities and newer technology.
Faster production at newer printing operations may also require less warehousing, because projects are completed more quickly for shipping. The impact of this obsolescence on value is unique to the subject property, reflecting reduced functionality. On the other hand, great changes are transforming the printing industry. These external factors may be detected in exactly the same way as functional change, but on an industry-wide basis.
NEW FULTON COUNTY, GA HOMESTEAD EXEMPTIONS INTRODUCED FOR 12222
Declining demand for an industry overall can impair a particular property's value. Such a sea change can exist within a robust economy, too: In our example, a digital culture has rejected the traditional model for printing to a significant degree, as the widespread use of electronic records and communication has reduced demand for paper printing. A mine provides another example. Over time, miners extract the most accessible minerals using the least costly means.
The layout and operation would have been originally set up to facilitate this process. As mining continues, the remaining minerals may become more expensive to extract per unit of raw material. This added cost reduces operating income. The mine may require new infrastructure to continue operations.
These periodic expansions may be inefficient, again increasing processing costs. It may be true that, were the mine to be redesigned from scratch, no one would duplicate the existing operation because of the production costs. This reflects deteriorating functionality. On the other hand, industrial demand for the mined product may evaporate due to innovations that make the material unnecessary in processes that once required it.
Changing market forces can impact value. Until recently, the United States was a net importer of natural gas, supporting demand for facilities that enabled the import of liquid natural gas. Now that the United States is a net exporter of natural gas, those same facilities that handled the import of natural gas are more obsolete and less valuable. Obsolescence is an important consideration in valuing property, regardless of economic conditions.
This is especially true for functional obsolescence, but can also be true for economic obsolescence. In valuing property, it is important to remember there is significant overlap between the two, and many factors and influences may explain overall obsolescence. General sales trends and perceptions provide insufficient basis for deciding whether or not to appeal the county assessment notice The year following a real estate acquisition is a critical tax year or the property's owner. An assessor will typically latch onto the recent sale price to support a reassessment of the property's taxable value to equal that transaction amount, effective in the following tax year.
When the new assessment arrives, some taxpayers will recognize the familiar sales price amount reflected in the property's assessed taxable value, breathe a sigh of resignation and plan to be taxed accordingly. Yet there is good reason to question the new assessment's accuracy, even if it equals the acquisition price.
Georgia law provides that the transaction amount a buyer pays for real estate in an arms-length, bona fide acquisition shall be the property's maximum allowable fair market value for property tax purposes for the following tax year. Accordingly, purchasers of property in one tax year should expect to receive ad valorem tax assessment notices for the subsequent tax year at a value no higher than the purchase price.
In other words, the taxable value may be lower than the acquisition amount. There are several analyses that a wise taxpayer should consider when reviewing the tax assessment received in the year following the property's purchase. Some county taxing authorities use the purchase price as the taxable value for the next tax year by default.
That price may not be an appropriate valuation, however. Often the assessor is unaware that the purchase price may reflect an analysis of factors other than the value of the real estate alone, and that the price, therefore, may exceed the true fair market value.
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In that event, the taxpayer should identify and explain those factors to the assessor. Intangibles may include an in-place work force, favorable contracts for property management or other non-taxable items. Another potential consideration is that the property's financial performance may have varied from the expectations the purchaser entertained at the time of the acquisition.
Perhaps physical changes to the property since the time of purchase have decreased its value; for example, the owner may have razed or demolished part of the improvements in preparation for remodeling or repair that did not occur before Jan. In short, the purchaser should not blindly accept a transaction value from the previous year as the real estate's de facto taxable value. Be on the lookout for sale-chasing assessors.
Fulton County, GA
Sale chasing occurs when a tax assessor changes assessments only on properties sold in a given year and leaves assessments unchanged on similar properties that did not change hands. Property owners should be diligent, comparing the assessment of newly purchased property relative to assessments of similar properties in the same market that have not sold, to determine if their own assessment is accurate. Compare assessments of similar properties on a per-square-foot basis, a per-key basis, or on a per-unit basis, depending on the property type, to determine if a question about fairness in valuation may exist, and whether further analysis is warranted.
In addition to comparing the assessment of the purchased property to the assessments of comparable properties that have not sold, the wise property owner should also compare the assessment to the assessments of com-parable properties in the same market that were sold in the preceding year. The taxpayer may need to calculate and compare a gross rent multiplier ratio.
To determine this ratio, divide the assessment of the real estate by its annual rental income before expenses such as taxes, insurance, utilities, etc. It may require a market survey or direct inquiry to acquire that data. While this method ignores differences in vacancy rates, if the gross rent multiplier for the taxpayer's real estate is much higher than the multiplier for similar properties that sold in the same market and calendar year as the subject property, then the taxpayer may have a legitimate cause for complaint.
The ratio of the county assessment divided by the rent potential results in a gross rent multiplier of This second property's gross rent multiplier is 6. After making these comparisons, the taxpayer in this example can make a good argument for a lower assessment. It is worth mentioning that taxpayers must adhere strictly to applicable appeal deadlines.
Clearly, sale price does not necessarily equal fair market value. Shrewd taxpayers in Georgia should carefully review, research and analyze their assessment notices to determine whether the county taxing authority has merely made a cursory assessment of the fair market value of their property based solely on the purchase price. If so, an appeal may be in order.
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