Corporate headquarters present unique challenges and opportunities in real estate appraisal discussions with tax appraisers. Managing taxes on any real estate property requires an understanding of the three traditional approaches to value, but head offices are unusual in that good data is hard to come by.
This article highlights common sticking points in discussions about the value of this unique set of properties. A collaborative discussion between an advisor and an owner on these few areas can lead to a successful tax cut.
A head office defines a business, but many of its defining improvements lack value to potential buyers.
Especially with newly constructed or renovated projects, or in the absence of comparable data, the appraiser will often rely heavily on the cost approach to estimate market value. This can lead to a high valuation and a fruitful discussion about how to support a decline in value.
Under the cost approach, an appraiser using reproduction cost will frequently underestimate depreciation and obsolescence. It is important to also review the treatment of the age-life economics method, which is often poorly applied. Effective age, rather than actual age, should be measured against the life expectancy of the improvements.
Deferred maintenance also requires deductions. Good appraisal practices require that short-lived items be first rated by category – items such as windows, HVAC systems, carpets, roofs and toilets – before determining their useful lifespan. remaining and replacement cost based on investment plans.
If the assessor used a cost approach due to a lack of data for other approaches, in the case of an older headquarters with functional issues not designed to current standards, a cost approach replacement is preferred.
The replacement method projects the cost of reconstructing buildings using modern materials, design standards and layouts. This eliminates the need to estimate the depreciation for super-matches and bad design. It provides a better indication of the contribution of existing improvements to market value.
With preparation, the taxpayer can tell a powerful story of how to build the functional equivalent of the corporate office.
Revenue and sales
The income-to-value approach is seldom useful, in part because of the difficulty in finding market rents for a single-use property of considerable size. The valuation authority may wish to use multi-tenant rent comparables, but an explanation of the costs of converting from single-use to multi-tenant use will reveal a significantly lower value conclusion.
Comparing sales will be the most relevant approach to assess value in most cases. Appraisers often use gross building area as the unit of measure of comparison for individual users, but the comparison by net rental area (NRA) will go a long way to account for the write-down of a building as needs and needs arise. usage change.
The appraiser should also use NRA for comparable sales. Factors such as remote working, benches, and collaborative space needs will make the more traditional and formal spaces within the building less valuable. Changes in the way the company’s workforce uses office space can make many areas obsolete and deductible from the NRA, such as auditoriums or an oversupply of formal conference rooms.
Another argument that helps manage value in the sales comparison approach is to stress that the plots surrounding the improvements should not be assessed as fully functional and available building land. Separating the land from a corporate campus can decrease the value of the campus.
Determining the economic impact on the selling prices of comparables where excess land might be involved requires more analysis than simply looking at a land-to-building ratio and using the ratio as an adjustment criterion. Adjusting the land-to-building ratio alone does not measure the economic productivity of excess land over comparables to the economic productivity of headquarters land. There may be difficulties in developing the site due to the land, or a corporate user may lose the right to add square footage elsewhere on campus if the land is divided and sold.
There are good arguments to be made around value adjustments for any renovation on a corporate campus. Often times, a company’s headquarters are physically complicated and scalable. If renovations add space, there is often an imperfect fit to the existing space. The taxpayer may argue that the new space suffers a discount because of the imperfect efficiency inherent in mixing the new and the old.
Discussing comparable sales conditions with the appraiser is helpful for appropriate adjustments. Often the appraiser does not have access to detailed offer memoranda or information about the motivations of the buyer or seller, such as in cases where a developer pays more to acquire an assembly, or if they needs money or unusual tax considerations.
Set the stage for a productive discussion with the assessor by first initiating an informative dialogue with the building engineers and the manager. Ask them about the changing nature of the campus and their predictions about future changes.
When meeting with the appraiser, plans for replacement of registered capital and how the building should be changed due to internal industry needs and external trends. A meeting of minds with the tax authority on the cost and market approaches discussed above can lead to successful write-down.
– By Margaret A. Ford, Smith Gendler Shiell Sheff Ford & Maher, Minnesota Fellow of the American Property Tax Counsel, the national affiliation of property tax lawyers. Ford can be reached at [emailÂ protected]