The Swartz Report: A Situation I Haven’t Seen In 30 Years
Post written by Donald Swartz, President and Principal at Swartz + Associates, Inc. | Lover of Chiefs, Royals and golf | Avid “Cruiser” | Poker Enthusiast
Earlier this year, the Superintendent of the Raytown School District (greater Kansas City area) filed suit against the Jackson County Board of Equalization claiming the county assessor’s office has under-valued commercial properties for property tax purposes.
In my 30 years of reviewing property tax valuations, I have rarely seen a situation where a superintendent has sued the county. There have been several situations where a taxpayer has appealed to the Board and the county has requested an increase as a result of the appeal or the Board has determined the value is too low and has increased the valuation. But this is a first, and really quite interesting.
The Superintendent reviewed several sales of properties located within the Raytown School District and determined the appraised values on these commercial properties were well below their actual sales price. This seems simple, right? If a homeowner sells his or her property to another willing buyer, isn’t that considered to be the best indication of market value or the worth of the property? The answer….. probably so; however, this may not necessarily be true as it relates to commercial property.
Suppose you have an opportunity to buy a commercial property with a single tenant in the facility, for example, Walgreens. As an investor, you’re attracted to the property because you’re familiar with the name of the tenant and you’re familiar with the type of business.
Walgreens has a lease to stay in the building for a period of time (say 10 or 20 years) and because you think the tenant is a good bet to stay in business (a credit worthy risk), the buyer may be willing to pay a higher price for that commercial property.
Now suppose the tenant in the building is Don’s Discount Pharmacy (DDP). DDP leases the property from the current owner and the terms are exactly the same as they would be for a Walgreens.
However, this is DDP’s only store, the business has been around for five years and the business is marginally profitable. If you have an opportunity to buy the property as an investor, what are you willing to pay? Is the value of the property the same as if Walgreens is the tenant? Is it worth more? Is it worth less?
It depends on the buyer’s risk tolerance and the rate of return the buyer expects in his/her investment. Not so easy, is it? The sales price is factoring many things, not just the “sticks and bricks”. A savvy investor must look at the lease terms, the tenant, the type of business and many other things when deciding what the final sales price will be to complete the transaction.
The county’s task is to value the property at its fair value. If the property has a tenant in place, how should the county determine the value of the property? What if the property is vacant? Is that a better indication of the value of the real estate?
I’m not advocating a position, but instead pointing out the issues facing county appraisers when determining the fair market value of a property. This is an interesting suit and we’ll be watching closely to see what transpires in the upcoming months. Additionally, I would be interested in your thoughts. Please respond if you feel inclined to offer an opinion as I will monitor responses and will post in future blogs.
As always, we appreciate your ongoing support. If you have any questions regarding property valuations and the appeals process, we welcome the opportunity to talk with you. Give us a call today at (913) 766-8777.
Leave a ReplyWant to join the discussion?
Feel free to contribute!