Property Tax Appeals - Using the Income Approach

Posted by Daniel Jones on Dec 18, 2012 7:12:00 PM

Property Tax AppealsThe Income Approach uses capitalization to convert the anticipated benefits of the ownership of property into an estimate of present value.

This approach is rarely (I’m guessing never) used by taxing jurisdictions to appraise single family residential property. Larger metropolitan counties with a lot of market data use this approach to value commercial properties. Essentially the income approach takes the potential rental income of your property, deducts for anticipated operating expenses, and applies a capitalization rate to the left-over net operating income (NOI). The capitalization rate is derived from market data showing what multiple of NOI investors are paying for similar properties.

Most CAMA systems have an income approach built in for the valuation of commercial properties. The three arguable variables in the income approach are income, expenses, and capitalization rate.

In order to estimate fair market value the assessor should use fair market rents. Today asking and recently contracted rents are lower than they were several years ago. The county is going to want to see your profit and loss information and if your rents are high they may balk at your assessment reduction request. If you have long term tenants, whose rents were established near the top of the market you need to make a case that you aren’t getting market rents. You need to prove that market rents are lower than what you are currently getting. Contract rent that is above market rent is a non-realty asset. If you aren’t a real estate professional, you will have to do some digging. You can find rent listings online at sites like and

Operating expenses may be tougher to argue. The county may have, for example, all warehouse properties appraised with a fifteen percent operating expense ratio (fifteen percent of effective gross income). They may be unwilling to change this ratio for individual properties. But if you have a property with a special situation that results in consistently higher than typical operating expenses then by all means bring it to their attention. I see many commercial property owner's income and expense statements (I&E) and two expense items that should be included but often are not are management and replacement reserves.

Many commercial property owners manage their properties themselves and do not show a management expense item on their I&E. This should be estimated from the market for management services and deducted from the effective gross income. Replacement reserves for building components that need to be replaced while the building is economically viable is also a valid operating expense. You need to take the cost of wasting components (like roofs) and divide by the estimated useful life and deduct that amount from effective gross income every time you appeal your property tax. County appraisers consider these two items operating expenses. So should you.

Unless you are willing to spend some money capitalization rate information will not be easy to acquire. Ideally, these rates are derived from sold properties, where the net operating income and sale price are known. Appraisers and research firms spend a lot of time verifying the information on commercial sales and trying to ascertain the capitalization rate. One thing to keep in mind is the higher the “cap rate” the lower the property value. The lower the cap rate, the higher the property value. So, if you can get the assessors property record cards (CAMA generated property information) for your property and your competition, you can find out whether they are using different cap rates on your property and your competitors.

When possible, you should go through the income approach on the assessor's property record card for your property and your competition. Check to see if your rental rate is reasonable compared to the competition. Your expense ratio and capitalization rate should be similar also. Loopnet has sales data that often has capitalization rate information. A better source is CoStar but this service is much more expensive than LoopNet.

For additional information contact Fair Assessments the property tax appeal company.

Topics: real property tax advisors, property tax professionals, real estate tax consultant, appealing property tax assessment, Georgia property tax appeals, Atlanta Tax Appeals, real estate tax service, Property tax appeals, tax assessment

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