Real Property Assessment Process Overview

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Real Property Assessment Process Overview
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Tax Property Article (Annotated Code of Maryland)

• Value means the full cash value of the
  property.
• This is synonymous with the concept of market
  value.

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Market value - estimate of the dollar transfer
value of the property, as a certain date (January
1, 2007), under specific conditions

• Willing buyer and seller, both knowledgeable and
  motivated, and without duress.
• Cash or cash equivalent payment.
• Reasonable exposure to competitive market, for a
  reasonable period of time.

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There are three general approaches used to
estimate the market value of the property Cost,
Income and Market. The assessor has latitude in
determining the most appropriate method of
valuation.
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All property is reviewed once every three years.
Any increase in value is phased-in over the three
year period.
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Homestead Tax Credit (Caps)State Cap 10
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County Caps - apply only to owner occupied
residential property

• Allegany 7
• Anne Arundel 2
• Baltimore City 4
• Baltimore County 4
• Calvert 10
• Caroline 5
• Carroll 7
• Cecil 8
• Charles 7
• Dorchester 5
• Frederick 5
• Garrett 5

• Harford 9
• Howard 5
• Kent 5
• Montgomery 10
• Prince Georges 5
• Queen Anne 5
• Somerset 10
• St. Marys 5
• Talbot 0
• Washington 5
• Wicomico 10
• Worcester 3

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Caps are not portable and they are not
transferable. If the property sells, the taxable
assessment becomes the basis for the new buyers
property tax calculation.
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Out of cycle review for

• new construction
• change in use or character
• change in zoning
• erroneous assessment

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Constant yield tax rate

• Every year, each county must advertise the
  constant yield tax rate, and hold a public
  meeting in advance of setting the property tax
  rate.
• The constant yield tax rate would produce the
  same level of property tax revenue as last year,
  when calculated on the increased base resulting
  from assessment increases.

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Assessment methodology for residential property

• Estimate of construction cost.
• Estimate of land value.
• Application of Market Value Indicator.
• Statistical validation with sale properties.

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Assessment methodology for commercial property

• Marshall Valuation Cost method.
• Land value estimate.
• Sales comparison check.
• Application of the income approach when
  appropriate.

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Types of properties usually valued by the income
approach

• apartments (especially 10 units or more)
• offices
• warehouses
• self-storage facilities
• hotels and motels
• shopping centers and retail stores
• marinas

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Units of measure

• Per unit
• Per square foot net leaseable area
• Per room
• Per slip

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Introduction to the Income Approach

• Present worth of future income
• Income divided by rate Value
• The lower the capitalization rate, the higher the
  estimated value

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PW of one per period (per year) at various rates
of return
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Consumer Price Index results from Federal Reserve
Bank of Minneapolis
Average CPI 3.06
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Income Quality major consideration for the
income approach

• Size - How much cash is being produced? Net
  leases vs. gross leases. Total income generated,
  and what is left after expenses will be important
  to the prospective buyer.
• Shape -Is the income increasing, decreasing, or
  stable (stagnant)? If the income stream is going
  up consistently over time, it will produce more
  in the future. (Anticipation)
• Durability -What has happened over the last
  several years? When do leases expire? What is
  anticipated for the future? What do I have to do
  to maintain the income level?

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Investment Objectives

• Cash Flow
• Tax Shelter
• Appreciation
• Hedge against inflation

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IRV and Market derived cap rates

• Income ? Rate Value
• Value X rate Income
• Income ? Value Rate

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Income ? Value Rate

• Purchase Price 2,500,000
• Income for prior 12 months 195,000
• Current rent roll would indicate rent potential
  of 215,000

• 195,000 ? 2,500,000 Rate
• Rate 0.078
• Or
• 215,000 ? 2,500,000 Rate
• Rate 0.086

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Simple CapitalizationThe higher the rate, the
lower the value

• Income 25,000
• Rate 6
• Value 25,000 ? .06 416,667
• Rate 8
• Value 25,000 ? .08 312,500
• Rate 10
• Value 25,000 ? .10 250,000

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• Market Derived Cap Rates usually include property
  tax payments as an expense.
• RERC, Korpacz, Real Capital Analytics will each
  offer a useful basis for estimating the market
  cap rate for various types of properties, but
  their reports will have property taxes taken as
  an expense.
• The norm for real estate tax payments in Maryland
  is usually around 1 of the value of the
  property. This can be seen from the actual Tax
  Rates imposed in various Maryland Jurisdictions.
• The assessors objective is to approximate the
  level of property taxes based upon the income
  value of the property. This is accomplished by
  adding the effective tax rate as an additional
  factor to the capitalization rate.

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Effective Tax Rates 2008 per 100 Assessed
Allegany .9829 Anne Arundel
.8880 Baltimore City 2.268 Baltimore Co.
1.110 Calvert .892 Caroline
.870 Carroll 1.048 Cecil
.960 Charles
1.028 Dorchester .896 Frederick
.936 Garrett 1.00
Harford 1.082 Howard
1.014 Kent .972 Montgomery
.661 Prince Georges .960 Queen Anne
.770 Somerset .940 St. Marys
.857 Talbot .449 Washington
.948 Wicomico .814 Worcester
.070
State of Maryland Rate .112
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The Assessors Calculation

• Gross Potential Income
• Minus Normalized Vacancy and Collection Loss
• Effective Gross Income
• Less Stabilized Operating Expenses
• Add Back Property Taxes Paid
• Net Income (before depreciation, amortization,
  income tax and property tax expense)
• Less Reserves (if appropriate)
• Adjusted Net Income
• ? Capitalization Rate Effective Tax Rate (Total
  OAR)

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Simple Capitalization with effective tax rate

• Income 25,000 2,800 27,800
• Rate 6 (ETR) 1.12
• Value 27,800 ? 7.12 390,449
• New Taxes 390,449 x 1.12 4,373

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Mortgage - Equity Calculation Yield Capitalization

• 30 year Mortgage 6.5 Rate Equity yield 12
• Annual constant .076577
• Loan Amount 800,000 .80 x.076577 .0613
• Equity Amount 200,000 .20 x .12 .0240
• Overall Rate .0853
• Effective Tax Rate .0112
• Tax Weighted Overall Rate .0965
• See also Instant Mortgage Equity by Irv.
  Johnson, and
• Ellwood Tables for Real Estate Appraising and
  Financing by L.W. Ellwood, MAI
• Additional adjustment can be made for
• Equity Credit Build-Up
• Percent of Loan Paid Off
• Appreciation

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Adjustments to cap rate

• These variables are programmable. Over a ten
  year holding period, cap rate adjustments can be
  seen as follows
• 10 appreciation 8.17
• 20 appreciation 7.60
• 30 appreciation 7.03
• 40 appreciation 6.46

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Other programs

• Agricultural use assessment
• Woodland management program
• Homeowners Tax Credit
• Renters Tax Credit
• Golf and Country club use
• Low Income Tax Credit (IRS Section 42) property
• Exemptions
• Enterprise Zone properties
• BRAC Revitalization and Incentive Zones
• Brownfields properties
• Utility valuation

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Web site information www.dat.state.md.us

• Office listing
• Tax rates
• Procedures
• Property search
• Sales search
• Property classification (BPRUC)
• Income Questionnaires and other forms