Downtown Assessments - Are Businesses Being Punished?

Here’s what I don’t know. I don’t know how to calculate capitalization rates in order to be able to assess commercial properties for taxes. Here’s what I know. Our city’s assessing office can’t calculate capitalization rates either. Not because they don’t know how to or because they lack the experience or knowledge. But because they don’t have enough information from the businesses that occupy those buildings to come to an accurate and fair evaluation.

As our city assessor Kathy Temchack stated when testifying before the city council, using an income approach to determine the capitalization rate requires a lot of information. 

Here’s what the State’s Department of Revenue Administration (DRA) has to say regarding determining capitalization rates, in a reference manual for taxpayers, selectmen and assessors:

“For commercial property the Income Approach consists of dividing Net Operating Income (NOI) by a capitalization rate. NOI is the Gross Potential Income (GPI) of a property less normal operating expenses and adjustments for anticipated vacancy and bad debt. A capitalization rate can be obtained by dividing the actual NOI by the sales price of comparable properties. An alternative method of estimating a capitalization rate is a mortgage equity technique, which uses mortgage rates and expected rates of return on investor’s equity.” 

Without a business or landlord supplying this information (and there is no requirement that they do so) it seems it would be impossible to set a capitalization rate on which to base the tax rate that commercial properties pay. 

Kathy Temcheck has stated that only 25% of commercial properties have supplied the information necessary to set an accurate capitalization rate. So the question is why has the assessing department used a method that appears to be flawed. 

Commercial property owners I have spoken with have asked where the information for setting their buildings capitalization rates has come from. It seems to me that there can be such a large fluctuation in the data that is used to set  a capitalization rate, that assuming one business is similar to another is clearly a false assumption. And our city’s assessing office has to know that using 25% of the commercial properties in Concord to set a Capitalization rate for the other 75% is an inaccurate and unfair method to evaluate a property’s taxable value. 

There are three basic approaches to setting a property’s value as outlined in the DRA’s reference manual. 

The cost approach - what a potential buyer would pay for your property.

“The Cost Approach is most appropriate for new, or fairly new buildings where the improvements represent the highest and best use of the site. A significant use of the Cost Approach is in the valuation of public buildings or certain types of special-use properties for which rental or sales data is limited. The principal difficulties in this approach arise in estimating viable construction cost figures, and also in estimating accrued physical, functional, and economic depreciation or obsolescence, particularly in older properties.”

The income approach, which is used to determine a capitalization rate. 

And the sales comparison approach.

“The sales approach is defined as “one of the three approaches to value that estimates a property’s value by comparing the subject property to other similar properties that have sold.”

The Sales Approach is also based upon the principle of substitution that an informed purchaser would pay no more for a property than the cost to him/her of acquiring an existing property with the same utility.” 

Having taken a ‘few minutes’ to browse a number of articles and information on the BRA’s site regarding capitalization rates, it is understandable (to me) why so many of our commercial property owners are appealing their assessments. Unfortunately for the property owners the appeals process is both costly and time consuming, with a final outcome possibly years away.

I hope that our assessing department didn’t continue to use the income approach -when it was obvious they didn’t have enough information to use this method - as a punitive technique to force commercial property owners to divulge information they are not required to.

I feel the only fair action the assessor’s office can take to relieve the commercial property owners of the burden of having to prove a flawed assessment is a flawed assessment is to use one of the other 2 methods (or a combination of all 3) to reassess the commercial properties in Concord.

Remember it isn’t so much the mistake that gets people in trouble as much it is trying to deny it or cover it up. Let’s hope our assessing department is able to admit their error and is willing to move forward to correct it.

Here is a link to the Department of Revenue Administration's site:

http://www.revenue.nh.gov

And here is the link to the user manual on their site:

http://www.revenue.nh.gov/munc_prop/assessing-board/documents/asbmanualv1_2008.pdf