In the modern marketplace, commercial buyers including insurance companies and real estate investment trusts are among the biggest buyers of commercial real estate in the State of Georgia. These property purchases have their benefits for the county and state economy but these are also contributing to increased property prices. In turn, county assessors like the Fulton County Tax Assessors can use the price data generated by these institutional purchases in inflating taxable value for commercial property owned by less-capitalized owners.
It must be emphasized that the county tax assessors will likely not admit to the practice but the evidence can be reflected in the Annual Notice of Assessment. Look at your own annual notice, compare it with the prior year’s assessment, and expect that the assessed value has increased regardless of the absence of changes in structure and income, among other factors.
Direct Capitalization Income Approach Used
In the United States, assessors will typically value commercial property by applying the direct capitalization income approach – and this is true of the Fulton County Tax Assessors. In the approach, the property’s annual net operating income is divided by an overall capitalization rate; the net operating income can either be based on the prior 12 months’ income or the projected income in the next 12 months.
But the determination of the proper overall capitalization can be challenging for assessors especially in the present economic environment. The overall capitalization rate should ideally reflect the relationship between the total property value and the net operating income expectancy – and this is where things get tricky.
Herein Lies the Rub
In determining capitalization rates, assessors use the sales of comparable commercial property within a certain period. But since the start of the real estate recovery (from the Great Recession), interest rates and rates of return have been very low, driving up the value of commercial real estate. The resulting transactions have forced assessors, including the Fulton County Tax Assessors, to extrapolate capitalization rates from the limited number of commercial property transactions that have low cap rates.
The result: Assessors derive the applied capitalization rates reflecting the purchasing power of the well-capitalized buyers and then apply these rates to all of the commercial property in their jurisdictions. Less-capitalized commercial property owners are at a disadvantage in this case.
Emphasis must be made that insurance providers and real estate investment trusts have greater access to low-cost capital resources than the average commercial property owner. The low-cost capital allows these well-capitalized investors with the opportunity to enjoy greater returns on investment even from the lower cap rates. In turn, assessors like the Fulton County Tax Assessors can use the market data in supporting lower cap rates.
Assessors must make the crucial decision of choosing between the cap rate generated by institutional purchases and adjusting the cap rate to reflect the purchases made by typical investors in the open market. The decision is important in determining the outcome of tax disputes especially in ad valorem cases.
Under current practices, the assessment values provided by the Fulton County Tax Assessors should reflect the purchasing power of the typical buyers in the open market instead of the well-capitalized institutional investors. You should perform a careful review of the methods by which the assessor determined both the assessed value and the underlying capitalization rate. You will have a better chance at getting a fair assessment when you do it.
