When appraising income producing real estate in a Connecticut real estate tax assessment appeal, there are unique considerations which an appraiser must consider. On the most basic level, the appraiser must:
• Know the retrospective date of value, which is ordinarily the October 1 revaluation date.
• Value the entire bundle of rights that constitutes fee ownership when estimating the subject property’s true and actual value, not the leased fee interest.
• Consider both the subject property’s actual income, vacancy and expenses as well as market rent, market vacancy levels and market-based expenses in any income analysis. The trial court may consider both contract and market conditions, so the appraiser must have a depth of knowledge with respect to both.
• Conduct detailed research. An experienced appraiser with litigation experience will know everything that a well-informed buyer, doing due diligence, would have known about the subject property as of the date of value.
• Remember that if the case is tried to conclusion, the trial court will arrive at its own conclusion as to value, after considering the opinions of the appraisers, the claims of the parties in light of the evidence presented, and the court’s own general knowledge of the elements related to value. However, even if the trial court does not adopt an appraiser’s analysis and conclusion as its own, the court may incorporate important parts of the appraiser’s analysis in reaching its value conclusion. Therefore, the appraiser should explain each component of the analysis in a clear, concise and persuasive fashion.
When appraising income-producing commercial properties, primary reliance is often placed upon the income capitalization approach. In recent years, appraisers in litigated tax appeals have done so primarily by using a direct capitalization analysis. In this analysis, the appraiser uses a single year’s net operating income and a capitalization rate to estimate the property’s value.
Unquestionably, appraisal work is a combination of art and science. Every valuation analysis necessarily includes some measure of subjectivity. Even the CT Supreme Court has recognized that, “the process of valuation at best is a matter of approximation.” In the direct capitalization analysis, significant judgment calls will be made when identifying a data set of comparable properties and underlying assumptions that will ultimately lead to a conclusion as to the appropriate capitalization rate to apply.
An alternative method by which to value income-producing property is the discounted cash flow analysis, a form of yield capitalization. In a discounted cash flow analysis, the appraiser applies a discount rate to a set of projected income streams and a reversion. Ultimately, the appraiser discounts future net income to its present value as of the retrospective date of value. Compared to the direct capitalization analysis, a discounted cash flow analysis requires different assumptions – assumptions regarding what will happen in the future, usually over a five or ten-year period. A recent CT Supreme Court decision sheds light on how some CT courts view the discounted cash flow analysis.
In Wheelabrator Bridgeport, L.P. v. City of Bridgeport (2016), the court included the following quote from the trial court’s opinion, which itself was quoting the Tax Court of N.J., saying, “the courts have not always discussed the discounted cash flow analysis … as a method for arriving at true market value for real estate in the most positive terms …. The [discounted cash flow] method, as applied to tax valuation proceedings, is an amalgam of independent, attenuated assumptions of limited probative value.” When deciding the case, the trial court, not surprisingly, rejected the discounted cash flow analysis. On appeal, the Supreme Court concluded that the trial court had rejected the utilization of the discounted cash flow analysis in a tax appeal as a matter of law, and to do so was improper, and remanded for a new trial.
Although CT’s highest court has sanctioned the use of the discounted cash flow analysis in tax appeals, an appraiser must conclude that it is both reliable and supportable in the context of a given assignment. Why? Because the Wheelabrator trial court is not alone in its view of the discounted cash flow analysis.
Ronald Kowalski II, Esq. is a partner with Cacace, Tusch & Santagata, Stamford, Conn.