All Cards (Basic, PP, RE) - Updated Flashcards
Trade level
The value of inventory increases at each stage of production. Also used to analyze the costs of self-constructed machinery & equipment items. These items may be booked at costs that do not reflect the level of expenditure that would have been incurred if purchased.
Abatement
An incentive used by local taxing jurisdictions to entice companies to expand operations or relocate to their jurisdictions by offering to reduce the full amount of property taxes paid over a period of years by an agreed-upon percentage, provided minimum spending thresholds are met. (1st yr – 100% abatement, 2nd yr – 90% abatement, etc.)
Actual Age
The number of years that have passed since the asset was acquired or constructed. (aka historical age &/or
chronological age)
Age-life method
A method to estimate total depreciation using the cost approach, but does not allocate depreciation among its components (i.e., physical deterioration, functional obsolescence, and external obsolescence).
To estimate total depreciation, appraisers use economic life and effective age. This is the simplest method for developing depreciation estimates.
- Effective Age / Economic Life = Depreciation %
- Cost New ($) x Depreciation (%) = Depreciation ($)
Agricultural Use Value
This tax saving device involves land that the facility owns and uses for agricultural purposes. Some states, such as Ohio and Texas, have a provision that agricultural land is to be valued at less than market value. These savings can be significant.
Be cautioned, however, that if the land is subsequently sold, in many cases, payment of the tax savings enjoyed over the past five years must be repaid to the taxing jurisdiction at the time of sale.
Capitalization Rate
Any rate used to convert income into value. A ratio that expresses a relationship between income and value. The rate includes annual capital recovery in addition to interest components. Can also contain the effective tax rate.
The rate of return on capital an investor will demand from the investment property, or the rate of return that the property will actually produce.
Appraisal
Logical process for gathering, classifying and analyzing facts about a property to estimate value. Impersonal opinion of value based on analysis of the market supported by education, experience, and integrity.
- Documented opinion of value
- Of a specific property
- On a specified due date
- Specific Purpose
- Is usually written
Research problem of interpreting the market
Appraisal Process
- Investigation - Identify property, Date of Appraisal/Inspection, Legal Interest (Fee Simple, Tenants in Common, Joint Tenants)
- Compilation - Collect all relevant facts, Analyze, Quality Data
- Computation - Three Approaches to value, concept of substitution in all approaches
Assessment Level
The percentage of the property’s market value that is subject to taxation.
For example, in CA the assessment level is 100% and in GA it is 40%. An assessment level that is less than 100% of market value is known as a fractional assessment.
Average Daily Rate (ADR)
The rental rate on a per-room basis for a hotel or other short-term hostelry
Band of Investment Technique
A technique in which the capitalization rates attributable to components of a capital investment are weighted and combined to derive a weighted average rate attributable to the total investment.
Loan-to-Value Ratio*Mortgage Constant \+Equity Ratio*Equity Capitalization Rate then divide by Overall Capitalization Rate
If the effective tax rate is also provided, we need to add this to the overall Cap. Rate as well.
Breakdown Method
The breakdown method estimates total depreciation, and it does allocate depreciation among its components (i.e., physical deterioration, functional obsolescence, and external obsolescence). This is the most comprehensive and detailed method for developing depreciation estimates.
Building Residual Technique
A valuation technique where the land value is known, along with the building & land capitalization rate & NOI. We would estimate the income attributable to the land. Once the income to the land is calculated, we determine the income attributable to the building and calculate the value of the building.
Capital Asset Pricing Model
A model of the relationship between expected risk and expected return. The model is grounded in the theory that investors demand higher returns for greater risks. It says that the return on an asset or a security is equal to the risk free return, such as the return on a short-term treasury security, plus a risk premium.
Cash Equivalency
The conversion of a non-cash consideration or non-market financial term into a value that is stated in dollars
Favorable Financing (cash equivalence adjustments for favorable financing – Adjust for the difference between “Normal” financing and “Special” financing) Financing is different from Market financing at the date of sale; Cash Equivalence Sample
(Favorable = better than the market)
This is an adjustment for individual differences between this sale financing and the ‘market’ conditions.
Cash Flows
The periodic or total income attributable to a business activity or property rental. Cash flows are used to calculate an indicated value via the DCF method.
The remaining positive or negative amount of income an investment produces after subtracting all operating expenses & debt service from gross income.
Classified/Non-Classified States
The description of property based on its class for assessment purposes. As a result, it may result in different tax rates and assessment ratios for different types of property.
There are two kinds: Classified State & Non-Classified State
-Classified State – Different property types can have different assessment ratios. For example, TPP may be assessed at 30% and different types of real property may have different rates (Commercial – 40%, Industrial – 40% and Agricultural 15%)
-Non-Classified State – All Property is assessed at the same ratio.
In some states that are classified, commercial & industrial properties have a higher assessment ratio, thus putting more of the tax burden on these properties.
In addition, can also refer to the classification of buildings by class as determined by Marshall & Swift.
Coefficient of Dispersion
A statistical measure that examines the level of uniformity with the individual assessments of real property. It measures the percentage deviation from the median ratio. The smaller the coefficient of dispersion, the closer the individual ratios are to the median ratio and are indicative of a more consistent level of assessment, whereas a larger coefficient of dispersion indicates a less consistent level of assessment. For residential property, 15 percent or less is good and for commercial property, 20 percent or less is good.
- Subtract the median ratio from each ratio in the study
- Take the absolute value of the calculated differences
- Sum the absolute differences
- Divide by the number of ratios to obtain “average absolute deviation”
- Divide by the median ratio
- Multiply times 100
Comparable Sales
A shortened term for similar property sales, rentals or operating expenses used for comparison in the valuation process. (aka: comps)
Comparative Unit Method
A method used to estimate the value of real property in terms of dollars per unit of area or volume based on known costs of similar structures that are adjusted for time and physical differences usually applied to total building area.
This method provides the least amount of detail of the 3 methods of using the cost approach and is most commonly used in the property tax field. Easier to use, because data is more readily available.
a. Cost per unit
b. All direct & indirect costs
c. Cost services
d. Adjust for location & time
Components of Asset Costs
The individual components that comprise the total cost for a piece of equipment or property. The components can be taxable or non-taxable.
Personal Property – Components include the cost of the equipment, freight, installation, sales tax, the special foundation needed, engineering, warranties, etc.
Real Property – Components include land, construction costs, legal fees, architect fees, site preparation costs, financing costs, commission fees, etc.
Cosigned Goods
Merchandise that is for sale that is not owned by the seller. Upon the sale, the seller will remit an agreed-upon percentage of the sales price to the owner.
For example, a craftsperson might have produced 100 ornate wood items. In order to sell the items, the person asks a local merchant to take five of the items on consignment. This means that the merchant has possession of the five items and will attempt to sell them for a commission, but the merchant does not own the items. Those five items are consigned goods. (When the merchant sells one of the items, the merchant might be required to remit 80% of the selling price to the craftspersons and can keep 20% as a commission.) The merchant is the consignee and the craftsperson is the consignor.
Cost Approach
One of 3 approaches to value TPP & RP. Assumes that a buyer would pay no more than the cost of constructing an acceptable substitute. Relies on the principle of substitution. The majority of taxing jurisdictions concentrate on the cost approach & some use only the cost approach. The cost approach is calculated as follows:
Cost of New Improvements
+ Soft Costs
+ Entrepreneurial Profit
- Depreciation and Obsolescence
+ Land Value
= Total Value
Cost to Capacity (External Obsolescence)
Measures the loss in value due to reduced utilization of an asset.
[ 1 - (Capacity B / Capacity A)^n ] x 100
Capacity A = Rated/Design Capacity
Capacity B = actual production
n = scale factor
Curable
The deterioration is economically feasible to cure through repair or replacement since the value added by the cure exceeds the cost of the cure
Debt Coverage Ratio (DCR)
The ratio of net operating income to annual debt service.
Measures the ability of a property to pay its debt service out of the net operation income, how many times can you “cover” your debt.
DCR = NOI (Io) / Debt Service (Im)
Debt Coverage Ratio Technique (Ro)
Indirectly calculated from debt coverage ratios (DCR) of comparable sales
- Comparable for NOI not needed
- Derives a market-based capitalization rate
Ro = DCR x Rm x M
Debt Service (Im)
The periodic payment that covers interest on and retirement of the outstanding principal of the mortgage loan. The monthly or annual payment on borrowed funds. (aka: mortgage debt service)
Debt Service (Im) = Mortgage Amount (Vm) x Mortgage Constant (Rm)
Depreciation
Depreciation is the difference between the market value of an improvement and its reproduction or replacement cost (cost new). It refers generally to loss in value.
The various methods of depreciation are: Straight-Line, Declining Balance, Sum of the Year’s Digits, Service Hours & Units of Output
Depreciation can be curable or incurable. It is considered curable if it is economically feasible to cure (i.e., when the cost to cure increases total property value by an amount equal to or greater than the expenditure). Furthermore, it is considered incurable when it cannot be practically or economically corrected.
Physical – Refers to wear & tear from regular use and the impact of the elements (peeling paint, carpet stains, leaks in roof, etc.). Curable & Incurable
Functional is caused by a flaw in the structure, materials, or design that diminishes the function, utility & value of the improvement (poor building layout, bottlenecks, multiple building sections). Curable & Incurable
External is a loss in value caused by factors external to the property (zoning changes, proximity to nuisances, new highway construction). Usually incurable
Curable – A defect caused by physical deterioration that can be practically and economically corrected. (Physical & Functional)
Incurable (Physical) – A defect caused by a physical deterioration that cannot be practically or economically corrected.
Incurable (Functional) – A defect caused by a deficiency or super adequacy in the structure, materials, or design, which cannot be practically or economically corrected.
Obsolescence is also the difference between the reproduction cost and replacement cost of an asset.
Depth Factor
A factor or percentage that represents the relative value of a lot of a given depth as compared to the value of a lot of standard depth.
Depth Table
A table of depth factors shows the estimated percentage relationship between the front foot value of a lot of a given depth and the front foot value of a lot of standard depth.
Direct Capitalization
A method used to convert an estimate of a single year’s income expectancy into an indication of value in one direct step, either by dividing the income estimate by an appropriate rate or by multiplying the income by an appropriate factor. Suited when an income stream is fairly constant year over year.
(Requires only ONE year of income)
I = Annual NOI, R = Cap. Rate, V = Market Value
I/R = V
NOI/Ro = MV
Direct Costs
These are costs directly related to the production of products &/or constructing real property.
Examples of direct costs include: labor, materials, equipment, construction rental equipment, subcontractor’s fees
Income Approach
One of 3 approaches to value TPP & RP. Assumes that a buyer would pay no more than the amount equal to obtain an equivalent income stream.
I=R*V, where I = Net Operating Income, R = Capitalization Rate & V = Value PGI – V&C = EGI – Op. Expenses = NOI
Establishes value by converting future benefits into present value (PV) through the capitalization process.
Reflects motivations and considerations of investors
- Time Value of Money (TVM)
- Income Potential and holding period
- Risk
Discount Rate or Present Worth Factor
A rate of return commensurate with the perceived risk used to convert future payments or receipts to a present value.
Rate an investor desires/anticipates on an investment. Used to value future cash flows.
Discounted Cash Flow Method (Income Approach)
A method used in valuing a property using the income approach where a property owner has an irregular but predictable income stream.
A financial analysis to identify the discounted value of the cash flow of an investment over a given number of years. An investor will pay more for an asset that has a long remaining lease life compared to an asset that is near the end of its useful life period.
Ex. Vehicle has greater value during the first year of its lease vs. the 5th year of the lease.
Economic Life
The period over which personal property and improvements to real property contribute to property value. Relates to market extraction & age life method of estimating depreciation.
Economic Rent
The rent amount that a new tenant would pay based on market conditions. (aka: market rent)
Effective Age
The age of an asset that is indicated by its condition and utility. The effective age of an asset can be greater or less than the actual age of the asset. If the effective age is greater than the actual age, the asset is being used more than its original intent and possibly will not last as long. If the effective age is less than the actual age, the asset is being used less than its original intent and possibly will last longer than intended.
Effective Gross Income (EGI)
In the income approach, this is the income amount that is remaining once the vacancy & collection loss has been deducted from the potential gross income.
Effective Gross Income Multiplier (EGIM) Technique
Comparables’ NOI not needed
Derives a market-based capitalization rate
Requires:
- Gross Income Data
- Operating Expense Ratio (OER)
- Ro = (1-OER) / EGIM
EGIM: The ratio between the sale price (value) of a property and its effective gross income (EGI). For a single or annual average of several years’ EGI
EGIM = Sale Price (Value) / EGI
Additional on Slide 67
Effective Rent
The total amount of rent that is paid over the life of the lease to account for free months of rent.
For example, in a 12-month lease, you may have 2 months of free rent, so one would spread the remaining 10 months of rent over the 12-month period
Effective Tax Rate
The ratio between the annual property tax and its market value
Estimated in TWO ways:
- directly: comparable sales
- indirectly: assessment ratios and official tax rates
ETR = Total Tax/Total Value ETR = Assessment Ratio x Official Tax Rate
Efficiency Ratio
The ratio between the net leasable area to gross leaseable area. This is a measure that identifies how much space in a leased property can be leased to a tenant. A higher efficiency ratio indicates that the property is designed in such a way that there is not a lot of wasted space and that the majority of the space is leaseable to tenants.
A lower efficiency ratio indicates that the property is designed in such a way that it has a lot of common space or other space that is not leaseable (Lower ratios are more prevalent in Corporate HQ)
Entrepreneurial Incentive/Profit
The amount an entrepreneur expects to receive as profit for their investment. This is measured from the market:
market value
- land value
- total depreciated cost
= entrepreneurial profit
If we have a positive remainder, this could signal the presence of an intangible influence (goodwill, trade name, etc.) on value as a normal entrepreneurial profit. A negative remainder could signal external obsolescence.
Environmental Problems
Onsite or offsite contamination or other physical detrimental factors that may affect property value
Equalization
The process in which a governmental body attempts to ensure that all property under its jurisdiction is assessed at the same assessment ratio or at the ratio or ratios provided by law.
An averaging of assessed valuations in an area to compensate for ad valorem inequities.
Equity Dividend
A rate that reflects the relationship between the equity dividend and the equity investment (i.e. a single year’s net income before recapture less the debt service divided by the equity investment. Also, a rate used to convert the equity dividend into an indicator of equity value (aka: equity dividend rate)
Equity Yield
A rate of return on equity capital as distinguished from the rate of return on debt capital (the interest rate); the equity investor’s rate of return. The equity yield rate considers the effect of debt financing on the cash flow to the equity investor. The ratio of equity dividend to equity value.
Potential Gross Income (PGI)
The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted.
Usually Annual Income
Reflects 100% Occupancy
Can Include:
- Market Rent
- % Rent
- Overage Rent
- Other Income
- Expenses Recoveries
- Concessions
Excess Costs
Costs legitimately included in the capital costs that do not add FMV in exchange and should not be included when valuing personal property
- excessive labor, installation, shipping, etc.
- expediting costs
- changes in scope or layout
- excess debugging
- unscheduled delays
- rearrangement of equipment
Excess Rent
A situation where the contract rent (rent specified in the lease) is greater than the market rent (a rental rate that is currently available in the open market). This is created by a favorable lease to the landlord and may reflect a locational advantage, unusual management, unknowledgeable parties, or a lease execution in an earlier, stronger rental market. Due to the higher risk inherent in the receipt of excess rent, it may be calculated separately and capitalized at a higher rate in the income approach.
Expense Stop
The maximum amount of expenses in dollars or percentage that a tenant will reimburse a landlord for actual out-of-pocket expenses.
Exposure to Elements (Physical Depr.)
Effects of mother nature or effects of hostile environment
External Obsolescence
Obsolescence that is measured by the loss in value caused by factors external to the property (zoning changes, proximity to nuisances, new highway construction). Can impact a specific asset, a group of assets, or an entire facility. Usually incurable, but can be temporary.
Fee Simple
Type of property where there are no encumbrances on the property. The owner is free to do whatever they choose to the property within the limit of the law. One of 3 kinds of property interests. The highest form of legal ownership of real property.
Fixture
A fixture is an item of tangible property, the nature of which was originally personalty, but which is classified as realty for property tax purposes because it is physically or constructively attached to the realty with the intent that it remain attached indefinitely. Fixtures are segregated into 2 classes:
- Structural Fixture – These are valued as part of the realty, because the item if removed, will cause substantial damage to the structure.
- Trade Fixture – These are valued as part of personal property because the item can be removed without causing damage to the structure.
Foreign Trade Zones
An area designated by the United States government to provide property tax exemptions for American manufactured goods that are intended to be exported. Used to help American companies compete with low-cost goods manufactured overseas, by offering incentives to American companies in the hope that it will keep costs lower.
Freeport Exemption
The Freeport exemption excuses certain inventory from ad valorem taxes. Normally, the availability of this exemption depends both, on whether the inventory has established situs within the jurisdiction and on the owner’s intent. The time factor varies from a few months to less than one year or an assessment cycle. The intent factor creates complexities. Freeport exemptions require that the owner intends to ship the inventory out of the jurisdiction. Some states require shipment out of state. Some states require that the inventory must have been brought into the state to qualify; also, it may have to be held in a public warehouse. Additionally, it is generally required that the inventory must not change physical status (i.e. liquid to solid or vice-versa) or be used as a raw material in a manufacturing process. Most states allow repackaging of inventory into smaller or larger packages, without affecting the exemptions.
Freeport Exemption State: GA, MS, OK, TX, WV
Freight On Board (FOB) types and Transfer of Title
It can’t be overstated how important it is to know when and where transfer of inventory ownership takes place. This is important for determination of reporting responsibility, tax liability, and for exemption purposes.
FOB Origin - buyer assumes title when carrier signs bill of lading
FOB Destination - buyer assumes title upon delivery at destination
Frequency of Operating Use (Physical Depr.)
If property is heavily used it may wear quicker than a property in normal use.
- Ex. Equipment used 24 hours a day will wear quicker than equipment only used 5 days a week for 8 hours
Front Foot
Standard measurement of land, applied at the frontage of its street line or water. It is used for lots of generally uniform depth in downtown areas.
The Front Foot is the width (in ft.) of the parcel that adjoins the street or water line.
Functional obsolescence
Obsolescence is caused by a flaw in the structure, materials, or design that diminishes the function, utility, and value of the improvement.
- Superadequacy – more space or production capability than needed
- Inadequacy – lack of utility
a. Curable – A defect caused by a deterioration that can be practically and economically corrected.
b. Incurable – A defect caused by a deficiency or super adequacy in the structure, materials, or design, which cannot be practically or economically corrected
Examples: Poor Building Layout, Multiple building sections, outdated construction materials, bottlenecks, excessive material handling, excess operating costs, necessary capital expenditures, technology innovations, design changes, production improvements.
Ghost Assets
These are assets that are still listed on the fixed asset list but have been permanently removed from service and no longer located on the premises as of a specific date in question.
Going Concern Value
The value created by a proven property operation or business. It includes the value of the real property, personal property, labor, marketing operation, and the intangible assets & rights. It is considered as a separate entity to be valued with an established business.
Goodwill is the difference between a company’s liquidation value and going-concern value. Goodwill is made up of a intangible assets, such as customer loyalty, trademarks and brand name to mention but a few. All things being equal, the going-concern value will always be greater than the liquidation value because the purchase value of a company is added to the going-concern value of that company.
Example: Assume the liquidation value of a Widget corporation is 10 million USD (includes the value of the company’s building, the current value of the company and other important value assuming the company is totally liquidated). The going-concern value of the Widget corporation company could be 60 million USD because the company’s overall value depends on it patent and associated rights, and is ability to make money through future cash flows.
Goods in Transit
Merchandise for sale that is in transit from one location to another, either from manufacturer to retailer or manufacturer to manufacturer. It also relates to tangible personal property items in transit from one plant to another, etc.
