Property Tax Counsel Considerations When Choosing a Unit Principle Property Appraisal Analyst (Part II)

Property Tax Counsel Considerations When Choosing a Unit Principle Property Appraisal Analyst (Part II)

Connor J. Thurman, ASA, ABV

State and local property taxation legal counsel may become involved in matters related to a dispute surrounding certain taxable properties owned by their corporate clients.  Some of these disputes may involve property that is assessed centrally under the unit principle of property assessment.  In such matters, legal counsel may require the professional assistance of an appraisal analyst experienced in unit principle property appraisal.  In such instances, there are numerous considerations that legal counsel may make when choosing such an appraisal analyst.

This article is the second in a four-part series describing considerations that legal counsel may make when choosing an appraisal analyst in a unit principle property appraisal context.  This part of the series focuses on the significant issues in unit principle property appraisal.

Significant Appraisal Issues

There are certain issues that distinguish unit principle appraisals prepared for one engagement purpose from unit principle appraisals prepared for other engagement purposes. The selected firm—and the selected analyst—should be familiar with such issues.

For example, the following issues may be significant factors in the UPP appraisal prepared for property taxation purposes.

Elements of a UPP Appraisal

The UPP appraisal sometimes includes elements of a business valuation, a tangible personal property appraisal, a real property appraisal, and an intangible personal property appraisal. Accordingly, the analyst should be familiar with (a) generally accepted business valuation principles, (b) generally accepted tangible property appraisal principles, and (c) generally accepted intangible property appraisal principles.

Counsel should consult with the analyst to ensure that the analyst possesses all necessary competencies to perform the analyses required by the specific UPP appraisal assignment. Counsel may also consult with the analyst to help find and select any needed additional appraisers (e.g., a real property appraiser).

Professional Standards

The analyst should be familiar with the professional standards and the professional practices related to business valuations, tangible property appraisals, and intangible property appraisals. In part one of this article series, we discussed certain professional organizations, certifications, and standards that the analyst should be aware of (and comply with) when performing a UPP appraisal assignment.

Likewise, counsel should be aware of the professional standards applicable to the UPP appraisal assignment and should confirm with the analyst that those professional standards are followed in the UPP appraisal assignment. Moreover, counsel should discuss with the analyst if any such standards do not apply in the specific assignment (e.g., if a USPAP jurisdictional exception is applicable).

Property Subject to Taxation

Regardless of what property is included in the Total Unit (e.g., financial and working capital assets, tangible personal property, real property, or intangible personal property), only the property subject to taxation in the relevant property taxation jurisdiction(s) should be included in the assignment results identifying that so-called “Subject Property.” So, the analyst must be able to (a) identify and appraise the Total Unit, and then (b) identify and conclude a value for the Subject Property, only.

In connection with the issue above, the analyst should be aware (generally in consultation with counsel) of any special treatment of certain properties based on particular taxing jurisdiction or industry standards (e.g., the general property tax deductibility of pollution control equipment in the electric generation industry).

To the extent that an outside appraisal (or other) expert is required to value the property that should be excluded from the Subject Property, counsel should consult with the analyst to ensure that (a) such an outside expert is identified and (b) that the value the property that should be excluded from the Subject Property is accurately removed from the UPP appraisal analysis results.

Proper Standard and Premise of Value

The proper standard of value and the proper premise of value should be based on the purpose of the appraisal analysis; that is, the appraisal standard and the appraisal premise should be appropriate to the tax-related statutory authority, administrative rulings, and judicial precedent.  

The appraisal standard for most property tax appraisals is fair market value (or its jurisdiction-specific equivalent). Counsel should be aware (and ensure the analyst is aware) of any jurisdictional-related deviation from the fair market value standard of value.  

Treatment of Intangible Property

The identification and the value of any intangible personal property should be considered and, if appropriate, subtracted from the Total Unit value to conclude the value of the Subject Property, only. Intangible personal property is not typically subject to property taxation and, thus, should be excluded from the UPP appraisal analysis when estimating the value of the Subject Property.

However, certain jurisdictional exceptions related to the treatment of intangible personal property value may exist. Counsel (and the analyst) should be aware of such exceptions and ensure that they are accounted for accurately in the UPP appraisal analysis. 

Income Approach issues

In the income approach analysis, the analyst should consider and analyze the relevant factors affecting cash flow and risk related to the Total Unit and/or any discrete properties included within the Total Unit.

These considerations include (but are not limited to) any customer contracts (e.g., power purchase agreements in the energy industry) and cash flow items that should be excluded from the Subject Property analysis (e.g., expense items unrelated to the Subject Property). 

Moreover, these considerations include property-specific risk factors (e.g., location-dependent risk, lack of financial diversification, etc.) related to the development of an appropriate yield capitalization and direct capitalization rate.

Counsel should discuss both the cash flow-related and discount rate related issues in the UPP appraisal analysis with the analyst to ensure that the proper considerations have been made.

Market (sales comparison) Approach Issues

In the market (or sales comparison) approach analysis, the analyst should consider and analyze the relevant factors affecting potential market pricing multiples. 

These considerations may include adjustments to pricing multiples related to transaction purchase prices that include non-cash payments and/or cash paid for non-comparable property (e.g., trademarks included in a comparable transaction that are not comparable to the Subject Property).

Counsel should discuss potential market pricing multiple issues in the UPP appraisal analysis with the analyst to ensure that the proper considerations have been made.

Cost Approach Issues

In the cost approach analysis, the analyst should consider and analyze the appropriate cost metric for each property component analyzed.  

Further, the consideration and measurement of the various forms of depreciation and obsolescence including physical depreciation, functional obsolescence, and external obsolescence (in particular, the economic obsolescence component thereof) are necessary for the UPP appraisal analysis. 

Counsel should discuss potential cost metric and deprecation issues in the UPP appraisal analysis with the analyst to ensure that the proper considerations have been made.

Conclusion

This article is the second in a four-part series describing considerations that legal counsel may make when choosing an appraisal analyst in a UPP appraisal context. This part of the series focused on the significant issues in UPP appraisal.

Connor J. Thurman is a Manager with Vallit Advisors, LLC. Connor has over 6 years of experience in business valuation, tangible and intangible asset appraisal, and various other litigation services. He has written numerous articles in professional and peer-reviewed journals covering a variety of topics in his areas of expertise and has presented on these topics via webinars and conferences. He is an Accredited Senior Appraiser (ASA) with the American Society of Appraisers and is Accredited in Business Valuation (ABV) with the American Institute of Certified Public Accountants.

Connor can be reached at 443-482-9500 Ext 114 or cthurman@vallitadvisors.com

The preceding article was prepared by its author. The opinions expressed in the article represent the author’s and may not reflect the view and/or opinion of Vallit Advisors and its staff. Views/opinions are based on the specific facts and circumstances of each Matter.