Each year property owners receive real estate assessment notices that show the assessor’s opinion of value for tax purposes. Property owners, including small business owners, should know that assessments are subjective to some degree, and they have the right to contest the assessed value if they deem it too high. In Kansas, taxpayers generally have through March 31 while Missouri taxpayers must appeal values prior to April 15.

Understanding how the property value was arrived at in the first place is key to successfully appealing the value.

Most income producing properties including office buildings, warehouses and distribution centers are valued by the income approach. In the income approach the assessor divides the projected income attributable to the building by a market rate of return [the cap rate] to arrive at an overall value.

Net Operating Income Approach
Property owners or tenants can challenge the assessor’s rents and expenses applied per square foot used in arriving at an overall net operating income for the building. Here are the questions that can be asked:

•Has the assessor used the market rents or actual rents generated for the building?

•Has the assessor used the market expenses or actual expenses generated for the building? =

•Has the assessor noted the level of occupancy of the building and allowed for the correct level of vacancy in the income calculation?

The Cap Rate
Once you know the appropriate net operating income for the building, property owners also can challenge the cap rate used by the assessor. The higher the cap rate, the lower the value and vice versa. Given the fall in real estate values over the course of the past two years, cap rates have generally increased at least one basis point since the last assessment cycle. You can ask the following questions:

•How has the assessor determined the correct capitalization rate for the building?

•What other comparable buildings have received the same rate?

Cost Approach
Industrial properties and other special use properties are valued by the cost approach. In the cost approach, the assessor determines the cost to construct the property new, in today’s dollars, and deducts from this value all forms of depreciation including physical depreciation, functional and economic obsolescence. Industrial and special use property owners or tenants should determine the total amount of depreciation and obsolescence adjustments that have been used by the assessor in the cost approach to value. A few key questions to ask about using the cost approach are:

•Does the building experience more wear and tear that mandates additional physical deprecation to be applied?

•Has the overall economy lessoned the demand for the use of this building and therefore mandates an economic obsolescence adjustment?

•Is the functionality of the building no longer appropriate for the process it was initially designed and therefore mandates a functional obsolescence adjustment?

Physical depreciation can be increased in the valuation formula given that the property receives extraordinary wear and tear. Functional obsolescence should be applied given that the building is no longer functional for what is was originally designed. Economic obsolescence should be applied given that the demand for the use of the building is diminished due to outside forces such as the economy, which has a detrimental impact on the overall usability of the building.

Sales Comparison Approach
In some instances, commercial properties are valued by the sales comparison approach. In the sales comparison approach, the assessor is primarily interested in what other properties within proximity to the given property have sold. Once such comparable properties are identified, adjustments to reflect differences in the property must be taking into consideration. Here are the questions that must be asked:

•What comparables have been used?

•What adjustments have been made to reflect differences between the comparables.

County assessment professionals want to arrive at fair and equitable values and are open to discussing how values were created for your property. Asking thoughtful questions can help you carry on a meaningful conversation with the county assessors. And through the process, the assessor may realize that a mistake has been made and that the property value should be lower.

David Belpedio is a partner with Marks Nelson Vohland Campell Radetic, LLC, Kansas City’s largest locally owned public accounting firm. This e-mail address is being protected from spambots. You need JavaScript enabled to view it // www.marksnelsoncpa.com