Summer 2016


Thought Leadership in Property Tax Valuation Issues

Editors for This Issue: Terry G. Whitehead and Aaron M. Rotkowski Property Tax Valuation Insights

Thought Leadership:
Issues Related to the Measurement of Economic Obsolescence
Aaron M. Rotkowski
The cost approach is often used in the unit valuation of industrial or commercial taxpayer properties. In a cost approach unit valuation, one common area of dispute is the identification and quantification of economic obsolescence. This discussion (1) summarizes several generally accepted methods to measure economic obsolescence, (2) provides guidance related to several economic obsolescence measurement controversies, and (3) includes several illustrative examples of economic obsolescence analyses.

Considerations Related to the Valuation of Wireless Spectrum
Matt C. Courtnage and Stephen P. Halligan
In the valuation of wireless communications radio spectrum licenses, the general lack of available transactional market data often precludes an analyst from using the cost approach and may cause uncertainty in applying the market approach and the income approach. This discussion focuses on the characteristics of wireless spectrum licenses and on the generally accepted methods to address and account for the challenges in the valuation process.

Considerations for Developing a Cost of Equity for Electric Cooperatives
Stephen P. Halligan and Terry G. Whitehead
One consideration in the analysis of an appropriate present value discount rate for an electric cooperative is the fundamental difference in operating structure of a not-for-profit corporation compared to the typical for-profit, shareholder-owned business.

Measuring the Discount for Lack of Marketability for a Closely Held Taxpayer Company
Robert F. Reilly, CPA
A valuation analyst (analyst) often has to value the total operating property of a closely held company for various property-taxation-related reasons. This type of valuation occurs when the taxpayer is assessed on a unit valuation basis. In a unit valuation, the value of all of the taxpayer’s income-producing property (real and personal; tangible and intangible) is valued collectively as a single integrated “unit” of operating assets. In such analyses, the analyst may initially conclude the value of the closely held taxpayer company on a marketable basis—that is, as if it was a publicly traded company. This value result occurs if the analyst relies on stock market data to extract pricing multiples, present value discount rates, and direct capitalization rates. If this is the case, the analyst may have to apply a valuation adjustment to this initial value indication in order to conclude the value of the taxpayer business entity on a nonmarketable (i.e., closely held) basis. This discussion considers the factors that the analyst typically considers to measure the discount for lack of marketability (DLOM) related to the unit valuation of the taxpayer closely held business entity.

Tangible Personal Property Summation Valuation Procedures
Robert F. Reilly, CPA
For ad valorem property taxation purposes, industrial and commercial taxpayer tangible personal property (TPP) can be valued using either the unit valuation principle or the summation valuation principle. In theory, the use of either valuation principle should reach about the same value conclusion for the same bundle of taxpayer TPP. In the unit valuation principle, all of the taxpayer TPP is valued collectively, in the aggregate, as a single “unit” of operating property. In the summation valuation principle, all of the taxpayer TPP assets are valued individually. The values of all of the individual TPP assets are “summed” to reach the total value conclusion. This discussion summarizes the generally accepted summation valuation approaches and methods related to taxpayer TPP.

Property Tax Dispute Resolution Insights

Property Tax Appeals and Valuation Principles
Daniel J. Finnegan, Esq., and Michael D. Roundy, Esq.
Many procedures and legal standards for the appeal of property taxes are similar in most jurisdictions. However, local variations in rules, procedures, or the law can lead to a series of potential traps for the unwary. This discussion will provide an overview of the property tax appeal process from a legal perspective, with a focus on jurisdictions in New England. This discussion (1) covers the basics of procedure and jurisdiction for commencing a tax appeal, or for further appeal of an unfavorable decision; (2) addresses the legal standards to be applied in evaluating such appeals or estimating value; and (3) summarizes specific potential traps in each jurisdiction with illustrations of the types of issues taxpayers may face that could require specialized knowledge of the local property tax laws.

Dark Store Theory—How to Stop It from Coming to a State Near You!
Judy S. Engel, Esq., and Lynn S. Linné, Esq.
Most ad valorem property tax systems value real property in the fee simple. This means that the property is valued by assuming absolute ownership, unencumbered by any other interest or estate. It also requires that the property be valued based on market value. In the case of big-box retail, however, many assessors are advocating for a new “Dark Store Theory” that would effectively value big-box retail in the leased fee rather than in the fee simple. In other words, proponents of the Dark Store Theory attempt to value big-box retail properties based on the value the property has to the current user (“value-in-use”) instead of the value the property has on the open market (“value-in-exchange”). This generally leads to increased assessed values and, in turn, increased tax revenue. The issue is whether assessing a property based on its value to the current user, as opposed to its value to the market, violates the uniformity of taxation requirement of most state constitutions.

Clean Energy—Implications from an Ad Valorem Tax Perspective
William T. Sullivan, Esq.
Ad valorem taxation valuation practice around the country relating to the assessment of clean energy projects ranges from complete exemption to conventional depreciated replacement cost. While clean energy valuation issues remain uncertain in many jurisdictions, what is certain is that the growth of clean energy is not going to slow down in the near future. The U.S. Energy Information Administration, or EIA, projects that 46 percent of new electricity consumption in the United States will come from clean energy by 2030.1 Until property owners, assessing officers, and legislators are able to agree upon consistent and uniform guidelines for the valuation and taxation of clean energy projects in each state, litigation in this area is expected to continue.

Intangible Asset Valuation Insights

Best Practices
The Valuation of Computer Software in the Health Care Industry
John E. Elmore, JD, CPA
Taxpayers are often unaware of the fact that in many tax jurisdictions a portion, if not all, of the software incorporated in medical equipment and health-care-related information technology (IT) systems may be exempt from ad valorem property taxation. Under those circumstances, the property tax assessment should reflect a deduction for the value of the nontaxable software. This discussion presents generally accepted methods that valuation analysts may use to value health care industry computer software for property tax purposes.

Valuing a Trained and Assembled Workforce
Michael A. Harter and Justin M. Nielsen
Understanding the process of valuing a taxpayer company trained and assembled workforce may be important for ad valorem property taxation. This is because many taxing jurisdictions exclude the value of intangible personal property from the taxpayer’s taxable property base. And, an assembled w