Assessor's limitation on operating expenses requires supporting data to ensure current and correct assessed value of property.
On July 8, 2014, immediately prior to the hearing before the Protest Board, the county's assessor reduced its valuation to $900,200. The appraiser employed by the assessor's office conceded during the hearing that properties considered as part of a commercial sales comparison were not sufficiently similar to support a valuation of the property. Due to the lack of comparable properties, the county's appraiser stated that the assessor used the income method of valuation to determine the value of the property.
San Pedro argued at the Protest Board hearing that the county's assessor should have used San Pedro's actual operating expenses rather than limiting its expenses to forty-five percent of the effective gross income since an "expense limit is not a generally accepted appraisal technique." San Pedro provided an alternative calculation of its total operating expenses, amounting to sixty-two percent of gross operating income.
The assessor's appraiser then testified that the county assessor has a policy, based upon its market research, that places a forty-five percent limitation on operating expenses when applying the income approach to valuation. The Protest Board entered a decision adopting the assessor's value of $900,200. San Pedro appealed to the district court. The district court subsequently ruled "substantial evidence supports the use of market data to determine the amount of ordinary and necessary expenses when valuing property for taxation purposes using the income method." The district court affirmed the Protest Board's valuation. San Pedro then filed an appeal with the court of appeals.
The court of appeals noted that the Property Tax Code governs the valuation of real property for property tax purposes. The value for taxation purposes is the market value "as determined by application of the sales of comparable property, income or cost methods of valuation or any combination of these methods." In applying any of these approved methods, "the valuation authority ... shall apply generally accepted appraisal techniques."
The court said the income method of valuation is appropriate "when the market value method cannot be used due to lack of data on sales of comparable properties." "Expenses," for purposes of applying the income method of valuation, are defined as "the outlay or average annual allocation of money or money's worth that can fairly be charged against the revenue or receipts from the property" and are "limited to those which are ordinary and necessary in the production of the revenue and receipts from the property."
San Pedro proposed a market value based upon its own application of the income method of valuation. This application used actual operating expenses. The assessor did not offer expert testimony disputing the use of actual expenses.
The income method of real estate valuation derives market value from a formula that multiplies a given capitalization rate by the net operating income for the subject property.
The assessor's appraiser testified that the assessor derived its forty-five percent limitation on operating expenses from market research from sources including Business Weekly, CoStar, and "everybody else that has brought us any kind of information." This testimony, however, in no way indicated that the forty-five percent limitation on operating expenses was properly applied (1) to San Pedro's office building or (2) during the time period at issue. The court stated that taxpayers are entitled to a "current and correct value of property." The court noted that commercial real estate markets, however, fluctuate. Therefore, absent data supporting the assessor's claim that forty-five percent is an appropriate limitation on operating expenses in this market, for this property type, and during this time period, the court was unable to draw a conclusion that the county's appraisal was performed with generally accepted appraisal techniques. The court of appeals further found that it lacked a sufficient basis to say that San Pedro's valuation resulted from the application of generally accepted appraisal techniques. The court of appeals remanded this matter to the Protest Board for additional proceedings.
2727 San Pedro, LLC v.
Bernalillo County Assessor
Court of Appeals of New Mexico
September 13, 2016
389 P.3d 287
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|Title Annotation:||Recent Court Decisions on Real Estate and Valuation|
|Date:||Jun 22, 2017|
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