Summer 2008
Focus on Ad Valorem Tax Valuation Insights
Editors for This Issue: Pamela J. Garland and Daniel J. RocheUnit Valuation Insights
Feature 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
Jin Wang
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.