KISS is only one acronym or abbreviation for the minimalist approach I’m referring to in this post. Another popular way to put it is “less is more”. Maybe my favorite is “simplicity is the ultimate sophistication”.
There are lots of definitions of value found in our various appraisal organizations. Not just value-in-use and value-in-exchange, but there are value definitions specific to whether the subject property will be removed or stay in place, whether it will have the same use or a different use, whether earnings of the business support continued use or not, and even ones which allow the appraiser to expand or redefine the value sought as dictated by the needs of the appraisal. Those definitions are not in our property tax statutes or case law.
Let’s talk about something more simple for a minute, the appraisal process. I’m glad it is the same process for both mass appraisers and fee appraisers. For example, consider a single-property appraisal assignment (not for property tax purposes) with the subject being a single location of a well-known retail chain. For some reason, the client may need to know the value of the personal property and equipment if it needed to be sold. The appraiser would probably recognize that assignment as one where there is a compulsion to sell. Therefore, in the first step of the appraisal process, the definition of the problem, the appraiser would identify the purpose and use of the appraisal and define the value sought, something like an orderly liquidation value. Orderly liquidation value assumes the property would be sold piecemeal. (Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets. (2011). Washington, D.C.: American Society of Appraisers, p.11) So in the next step of the appraisal process, the scope of work, the appraiser might determine they need to find out what similar property (same quality and condition) usually sells for on the secondary market, piecemeal. The client above needs to know a specific value, orderly liquidation, assuming perhaps something is different than reality. In other words, the question is what if the property needed to be sold.
Now let’s consider our assignment in mass appraisal for the same property. I believe that our requirements are more simple. The North Carolina Machinery Act and our case law direct and expect us to appraise what is actually present as of January 1. NCGS 105-283 clearly expects appraisers for this assignment to determine highest and best use, and assume there is no compulsion to buy or sell. If the equipment was purchased and installed for use, and the equipment’s highest and best use is in that exact market, then we should appraise the subject equipment as such. The NC Supreme Court in re Amp wrote that it was implicit in the language and in their interpretation of NCGS 105-283 to assume the property is part of an on-going entity. This means that if the owner doesn’t plan to sell the subject property as of January 1 as a commodity and is useful in an on-going entity, there is no reason for us to make things more complicated and appraise something else, such as disassembled or uninstalled or different equipment. My colleague, Chris McLaughlin tells me that there is nothing in recent personal property case law that should force us to modify the Supreme Court’s guidance in Amp.
Certainly there can be a value difference between installed personal property and uninstalled. Appraising equipment which is part of an ongoing entity does not imply “value in use”, but rather, I believe it is the value in exchange of personal property at it’s highest and best use. Regardless, we should just appraise the subject as it really is. If the subject is part of an on-going entity that plans to continue the use of the subject property as it exists, because that is the highest and best use, then we should appraise it that way.
We should also appraise the actual equipment, not just similar equipment. By this, I mean that we should all be able to agree there are varying quality levels in the same types of retail chains (restaurants, grocery stores, and clothing stores for examples), which may extend to their specific equipment.
Some retail chains focus on upscale markets and will only purchase new and specific types and brands of equipment, with manufacturer’s warranties, with self-imposed requirements for maintenance and condition. That type of equipment should not be confused with equipment that has been dismantled, carried piecemeal, out of service on a truck, moved from the truck into a used equipment storage facility, is not re-installed and verified to be function correctly, is not clean and maintained, and may not be covered by manufacturer’s warranty or meet the quality standards of retailers focusing on upscale markets. For example, if the owner of a grocery store focusing on an upscale market is using equipment comparable to one year old equipment being sold on a secondary market for nearly 50% original cost, then I have to ask, “Why any any such owner would ever purchase new equipment?” To rely heavily on the sales-comparison approach, many adjustments to the comparable sales prices would need to be made. I’m not sure how to reliably arrive at many of those adjustments. Because of that, I think the sales comparison approach would be less reliable than using the well-established cost approach. The NC Court of Appeals In re Westmoreland clearly supports the use of the cost approach and the NCDOR’s recommendation of using all costs necessary to put the subject equipment into operation.
Another point to note is that the practical use of our cost index and depreciation schedules for mass appraisal requires us to use actual age instead of effective age. [See item number 4 in this post] Effective age can be determined by observation of the remaining economic life subtracted from the total useful life. So if we’re all accepting a 10-year total life for equipment, and 6 years after installation we use the cost approach, in mass appraisal we estimate 60% depreciation or 6 years age / 10 years total. A more accurate, but less practical, method would be to estimate the equipment’s remaining economic life at 6 years actual age. At that time, most equipment that is still useful (still in use) and functioning properly and economically effective, would have more than a 4-year remaining life. In a grocery store, there would not be a plan to un-install and reinstall new freezers, dairy cases, and shelving within 4 years. The estimated remaining economic life is likely longer than 4 years, which means actual depreciation is less than 60%, leading to the conclusion that many times we grant more than enough depreciation using our mass appraisal methods. For items such as retail shelving, clothing, restaurant and grocery store equipment, these items have very little economic obsolescence (we haven’t found a replacement for food and clothes) and very little functional obsolescence (the equipment keeps things cold and holds things up very well).
It occurs to me that the argument some counties are receiving from business taxpayers and their representatives is that we should not appraise what is actually present on January 1, but instead consider a future time (incorrect appraisal date) when the equipment is no longer needed and needs to be sold (hypothetical condition). I argue that we need to appraise the property each January 1, and we should appraise the actual equipment in the real world. If it’s installed and operating, we should appraise it as such. Isn’t the big box appeal argument similar? The request being that we not appraise the actual subject property and actual market on January 1, but that instead we should use “comparable” properties that resemble a completely different market on some future appraisal date when the subject is no longer needed. Don’t miss IAAO’s publication on Big-Box Valuation.
I look forward to your comments.