Focus on Ad Valorem Tax Valuation InsightsEditors for This Issue: Pamela J. Garland and Daniel J. Roche
Unit Valuation InsightsFeature Article:
Conducting the Unit
Valuation of Taxpayer Corporation Operating Assets
Daniel J. Roche and Pamela J. Garland
Conducting a unit valuation of an industrial and commercial property for ad valorem tax purposes involves the application of generally accepted unit valuation approaches and methods. In addition, there are a number of analytical procedures that a valuation analyst will typically perform to verify the existence of the taxpayer corporation operating assets, collect relevant data related to these operating assets, perform the valuation analysis, and reconcile the various value indications to reach a final value conclusion related to the subject taxpayer corporation unit of operating assets.
Estimating a Company-
Specific Risk Premium in the Cost of Capital for Ad Valorem Tax Valuation Purposes
Timothy J. Meinhart
The company-specific risk premium should be considered in all unit valuation analyses performed for ad valorem tax purposes. This is because an investment in the subject taxpayer corporation operating assets is typically more risky than an investment in a diversified portfolio of marketable securities—that is, the benchmark that is typically used to estimate the taxpayer corporation cost of equity capital. While the estimation of a company-specific risk premium is ultimately based on the valuation analyst’s professional judgment, this discussion presents(1) various factors that may be considered by the valuation analyst and (2) several procedures that may be used by the valuation analyst to estimate the company-specific risk premium in an ad valorem tax unit valuation.
Unit Valuation Discount
and Premium Adjustments
Craig A. Jacobson
Valuation discount and premium adjustments are often applicable in ad valorem tax unit valuations, much as these adjustments are often applied in business enterprise valuations. There are two types of valuation discount and premium adjustments: (1) systematic (or level-of-value) adjustments and (2) unsystematic adjustments. This discussion focuses on both systematic and unsystematic adjustments. More importantly, this discussion presents a framework for estimating valuation discount and premium adjustments for ad valorem tax unit valuation purposes.
CAPM and Capitalization Rate Issues in Ad Valorem Tax Unit Valuations
Kevin M. Zanni
In many industries, taxpayer corporation real estate and tangible personal property are assessed in aggregate using the unit valuation method. In such unit valuations, the taxing authority assessor often uses an income approach valuation method. The property tax assessor may use either the direct capitalization method or the yield capitalization method of the income approach to collectively value all of the taxpayer corporation operating assets. The capital asset pricing model (CAPM) is often used to estimate the present value discount rate (or yield capitalization rate) in an income approach unit valuation of taxpayer operating assets. However, the CAPM was developed to estimate the appropriate discount rate for the valuation of publicly traded equity securities as part of a diversified investment portfolio of equity securities. Therefore, CAPM is often misapplied to estimate the appropriate discount rate for the unit valuation of taxpayer corporation operating assets for ad valorem tax purposes.
Intangible Asset Valuation Insights
Trademark Valuation Approaches and Methods for Ad Valorem Tax Purposes
S. Scott Cobb
All qualified plans (including employee stock ownership plans, or ESOPs) are affected by legislative changes (Congress), regulatory changes (IRS and Department of Labor regulations and interpretative guidance), and judicial decisions (case law) on an ongoing basis. This discussion summarizes the key events that have occurred during 2006 and early 2007.
The Valuation of Patents and Proprietary Technology for Ad Valorem Tax Purposes
Taxpayer corporation patents and related proprietary technology intangible assets may be exempt from ad valorem taxation in certain taxing jurisdictions. For a taxpayer corporation that is assessed using the unit valuation method, the value of such intangible assets should be identified and excluded from the taxpayer corporation overall unit valuation. This discussion describes the process a valuation analyst may apply to estimate the taxpayer corporation proprietary technology intangible asset value. That intangible asset value should be removed from the taxpayer corporation overall unit value in order to estimate the residual value of the taxpayer corporation tangible operating assets.
Tangible Asset Valuation Insights
Functional Obsolescence Considerations in the Cost Approach Valuation of Industrial
and Commercial Property
C. Ryan Stewart
When estimating the value of industrial and commercial property (and, particularly, special purpose property), the valuation analyst should consider the effect of functional obsolescence. In the cost approach to property valuation, functional obsolescence is typically quantified directly. In the income approach and the sales comparison approach to property valuation, functional obsolescence is typically quantified indirectly. This discussion presents illustrative examples of functional obsolescence and provides guidance related to the quantification of functional obsolescence. While the consideration of functional obsolescence is an important procedure in any valuation analysis, this discussion will focus on a cost approach valuation analysis for ad valorem tax purposes.
Real Estate Appraisal Issues for Ad Valorem Tax Purposes
Robert P. Schweihs
In the valuation of industrial or commercial real estate for ad valorem tax purposes, the valuation analyst should be careful to include only the taxable real estate in the value conclusion. The value of any exempt intangible assets should be excluded, as well as the value of any property that does not physically exist as of the tax assessment date. This discussion describes the valuation approaches and methods that are commonly used to estimate the value of industrial or commercial real estate for ad valorem tax purposes. In particular, this discussion describes the proper application of the income approach in the ad valorem tax valuation of a complex industrial property.
Tangible Personal Property Appraisal Issues for Ad Valorem Tax Purposes
James G. Rabe
This discussion provides an overview of the generally accepted tangible personal property valuation methods within the three generally accepted tangible personal property valuation approaches. In addition, this discussion provides an overview of the individual generally accepted tangible personal property valuation procedures within each valuation method.