External Obsolescence in Property Tax Leveraging Market Conditions - - PowerPoint PPT Presentation

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External Obsolescence in Property Tax Leveraging Market Conditions - - PowerPoint PPT Presentation

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External Obsolescence in Property Tax Leveraging Market Conditions to Reduce Real and Business Personal Property Valuations Personal Property Valuations presents presents A Live 110-Minute Teleconference/Webinar with Interactive Q&A

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SLIDE 1

External Obsolescence in Property Tax

Leveraging Market Conditions to Reduce Real and Business Personal Property Valuations

presents

Personal Property Valuations

presents

Today's panel features: Ki J i P t Si l Si l J h & J i Cl l d Ohi

A Live 110-Minute Teleconference/Webinar with Interactive Q&A

Kieran Jennings, Partner, Siegel Siegel Johnson & Jennings, Cleveland, Ohio Kevin Reilly, Senior Manager, Real Estate and Related Assets Group, American Appraisal Associates, Milwaukee, Wis. Tony Barna, Principal, Kelly-Rielly-Nell-Barna Associates Inc., Pittsburgh John Dyslin, Member, Property Tax Services Group, Ernst & Young, Houston Jason Chao, Senior Manager, Ernst & Young, Los Angeles

Thursday, February 18, 2010 The conference begins at: 1 pm Eastern p 12 pm Central 11 am Mountain 10 am Pacific

CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS. You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations. If no column is present: click Bookmarks

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If no icons are present: Click View, select Navigational Panels, and chose either Bookmarks or Pages. If you need assistance or to register for the audio portion, please call Strafford customer service at 800-926-7926 ext. 10

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SLIDE 2

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SLIDE 3

E t l Ob l i P t External Obsolescence in Property Tax Webinar

  • Feb. 18, 2010

Kevin Reilly Tony Barna American Appraisal Assoc. Kelly-Rielly-Nell-Barna Assoc. kreilly@american-appraisal.com acbarna@hotmail.com John Dyslin Jason Chao Ernst & Young Ernst & Young john.dyslin@ey.com jason.chao@ey.com Kieran Jennings Siegel Siegel Johnson & Jennings kjennings.siegeltax.com

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SLIDE 4

Today’s Program

  • Factors Leading To Economic Obsolescence, slides 3 through 16

(Kevin Reilly)

  • General Principles Of Economic Obsolescence, slides 17 through 31

General Principles Of Economic Obsolescence, slides 17 through 31 (Tony Barna)

  • Relevant Accounting Guidance, slides 32 and 33 (John Dyslin and

Jason Chao) Jason Chao)

  • Picking Your Battleground, slides 34 through 38 (John Dyslin and

Jason Chao)

  • Effectively Selling Your Company’s EO Analysis slides 39 through
  • Effectively Selling Your Company s EO Analysis, slides 39 through

48 (Kieran Jennings)

2

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SLIDE 5

Factors Leading To External Obsolescence Obsolescence

3

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SLIDE 6

What Is External Obsolescence? A What Is External Obsolescence? A Quick Refresher

I h l i l f d b f l h Is the loss in value of a property caused by factors external to the property?

  • Economics of the industry
  • Availability of financing
  • Loss of material and/or labor sources
  • Passage of new legislation

g g

  • Changes in ordinances
  • Increased cost of raw materials, labor or utilities
  • Reduced demand for the product
  • Reduced demand for the product
  • Increased competition

S V l i M hi d E i t Th F d t l f A i i M hi d T h i l A t

4

Source: Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets

4

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SLIDE 7

External Obsolescence: Start To External Obsolescence: Start To Finish

  • Identifying
  • Is EO present, and why?
  • Quantifying
  • What is causing EO helps dictate methods to quantify
  • Explaining – “Telling a story”
  • Why is your property’s or asset’s value reduced

5

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SLIDE 8

The Current Economic Downturn The Current Economic Downturn And Its Effect On EO

  • Given the current economic environment, EO has become a BIG issue
  • Conservative cash: Reductions in corporate spending
  • Consistent or increasing capacity vs reduced demand
  • Consistent or increasing capacity vs. reduced demand
  • Obvious examples of EO:
  • Auto industry – Lack of demand
  • Real estate – Credit issues
  • Petrochemicals and refining – Overcapacity, competition
  • Power generation – Gross margin (lack of profitability)
  • Many industries have been affected

6

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SLIDE 9

Manufacturing Industrial Production And Capacity

S F d l R St ti l R l G 17 (419) 2009 A l R i i

7

Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision Note: Manufacturing depicted in the chart above consists of those industries in the North American Industry Classification System (“NAICS”) definition of manufacturing.

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SLIDE 10

Manufacturing Industrial Production And Capacity (Cont.)

S F d l R St ti l R l G 17 (419) 2009 A l R i i

8

Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision Note: Manufacturing depicted in the chart above consists of those industries in the North American Industry Classification System (“NAICS”) definition of manufacturing.

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SLIDE 11

Manufacturing Industrial Production And Capacity (Cont.)

S F d l R St ti l R l G 17 (419) 2009 A l R i i

9

Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision Note: Manufacturing depicted in the chart above consists of those industries in the North American Industry Classification System (“NAICS”) definition of manufacturing.

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SLIDE 12

M f t i I d t i l Utili ti Manufacturing Industrial Utilization

S F d l R St ti l R l G 17 (419) 2009 A l R i i

10 10

Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision

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SLIDE 13

M f t i I d t i l Utili ti (C t ) Manufacturing Industrial Utilization (Cont.)

S F d l R St ti l R l G 17 (419) 2009 A l R i i

11 11

Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision

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SLIDE 14

M f t i I d t i l Utili ti (C t ) Manufacturing Industrial Utilization (Cont.)

S F d l R St ti l R l G 17 (419) 2009 A l R i i

12 12

Source: Federal Reserve Stastical Release – G.17 (419) 2009 Annual Revision

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SLIDE 15

General Trend In Commercial Real Estate Values

Current (Jan 2010) values Values in 2003 and 48% of 1/07 peak Current (Jan. 2010) values = Values in 2003 and 48% of 1/07 peak

350.00

Dow Jones Real Estate Investment Trust Index

250.00 300.00 350.00 EIT Index 150.00 200.00 S Composite All RE 50.00 100.00 Dow Jones US 0.00 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/30/2005 12/29/2006 1/31/2007 2/28/2007 3/30/2007 4/30/2007 5/31/2007 6/29/2007 7/31/2007 8/31/2007 9/28/2007 10/31/2007 11/30/2007 12/31/2007 1/31/2008 2/29/2008 3/31/2008 4/30/2008 5/30/2008 6/30/2008 7/31/2008 8/29/2008 9/30/2008 10/31/2008 11/28/2008 12/31/2008 1/30/2009 2/27/2009 3/31/2009 4/30/2009 5/29/2009 6/30/2009 7/31/2009 8/31/2009 9/30/2009 10/30/2009 11/30/2009 Source: Dow Jones Composite All REIT Index Base Date December 1991

13 13

Source: Dow Jones Composite All REIT Index Base Date December 1991

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SLIDE 16

General Trend In Commercial Real Estate Values Cont.)

Current (Jan 2010) values = Values in 2003 and 48% of 1/07 peak Current (Jan 2010) values = Values in 2003 and 48% of 1/07 peak

350 00

Dow Jones Real Estate Investment Trust Index

250.00 300.00 350.00 IT Index 150.00 200.00 250.00 Composite All REI 50.00 100.00 Dow Jones US C 0.00 2/31/2000 2/31/2001 2/31/2002 2/31/2003 2/31/2004 2/30/2005 2/29/2006 1/31/2007 2/28/2007 3/30/2007 4/30/2007 5/31/2007 6/29/2007 7/31/2007 8/31/2007 9/28/2007 0/31/2007 1/30/2007 2/31/2007 1/31/2008 2/29/2008 3/31/2008 4/30/2008 5/30/2008 6/30/2008 7/31/2008 8/29/2008 9/30/2008 0/31/2008 1/28/2008 2/31/2008 1/30/2009 2/27/2009 3/31/2009 4/30/2009 5/29/2009 6/30/2009 7/31/2009 8/31/2009 9/30/2009 0/30/2009 1/30/2009

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12 12 12 12 12 12 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 Source: Dow Jones Composite All REIT Index Base Date December 1991

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SLIDE 17

Impact Of Governmental Mandates Impact Of Governmental Mandates, Legislation

EO driven by special conditions in particular industry sectors EO driven by special conditions in particular industry sectors

  • Refining - Sulfur and emissions reduction
  • Power generation - Deregulation
  • Carbon cap and trade – Go or no go
  • The cost of “going green”
  • Increased cost of doing business

g

  • Increased cost of electricity
  • More equipment, more people, more maintenance = More expense
  • Foreign competition in a global economy
  • Foreign competition in a global economy
  • Do other countries require similar emission standards (China,

rest of Asia, etc.)?

15 15

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SLIDE 18

Techniques To Increase Your Success Techniques To Increase Your Success

Explaining EO To The Other Side

  • Use documented methods/methodology to quantify EO
  • Use documented methods/methodology to quantify EO
  • Legal precedents
  • ASA Textbook: “Valuing Machinery and Equipment: The

F d t l f A i i M hi d T h i l A t ” Fundamentals of Appraising Machinery and Technical Assets”

  • Independent outside sources (papers, articles, texts, etc.)
  • Be able to support your results
  • Things NOT to do

Things NOT to do

  • Make assumptions
  • Use techniques and methods that aren’t proven or that push the

envelope

16

envelope

16

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SLIDE 19

General Principles Of External Obsolescence Obsolescence

17

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SLIDE 20

Overview: 3 Forms of Depreciation

  • Depreciation = Obsolescence
  • 1 Physical: Wear and tear
  • 1. Physical: Wear and tear
  • 2. Functional: Deficiencies or super-adequacies in the structure
  • 3. External: Outside of the property

18 18

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SLIDE 21

External Obsolescence

  • Temporary or permanent impairment of the utility of a property due to

negative influence(s) OUTSIDE the property

  • Utility = Value

T O li d k t

  • Temporary: Oversupplied market
  • Permanent: Proximity to an environmental disaster
  • May result from adverse market conditions

19 19

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SLIDE 22

Characteristics

  • It is NOT usually curable
  • Both land and building are typically affected
  • Both land and building are typically affected
  • Usually has a market-wide impact on an entire class of properties,

th th j t i l t rather than just on a single property

  • When location is cause (proximity to negative environmental factors),

it may affect only one property

20 20

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SLIDE 23

Estimating External Obsolescence

  • Sales comparison approach: Market data analysis
  • Income approach: Capitalization of income loss
  • Cost approach: Allocation of market-extracted depreciation

21 21

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SLIDE 24

Market Data Analysis

  • Paired sales
  • Comparable A (no external obsolescence) $100/SF sale price
  • Comparable A (no external obsolescence) $100/SF sale price
  • Comparable B (external obsolescence) $ 60/SF sale price
  • $40/SF loss in value from external obsolescence

22 22

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SLIDE 25

Capitalization Of Income Loss

  • Comparable A rent = $15/SF (no external obsolescence)
  • Comparable B rent = $10/SF (external obsolescence)
  • $5/SF rent loss/10% capitalization rate = $50/SF loss in value

23 23

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SLIDE 26

Using Feasibility Rent

40,000 SF Office Building Replacement Cost-Land & Building $125.00/SF $5,000,000 Market Capitalization Rate x 9.0% Required Net Income 450,000 Expenses $6.00/SF + 240,000 p , Effective Gross Income 690,000 Market Vacancy (5%) / 0.95 Required Gross Income 726 316 Required Gross Income 726,316 Building Area (SF) / 40,000 Required Rent/SF $18.16 Market Rent/SF $15.00 Rent Shortfall/SF -$3.16 External Depreciation -17.4%

24

p

24

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SLIDE 27

Allocation Method

Sale Price $3,000,000 Site Value (2,000,000) Improvements Value 1,000,000 Replacement Cost $3,250,000 p , , Improvements Value (1,000,000) Total Depreciation $2,250,000 = 69% Cost Age of Improvements 9 Years Physical Depreciation 6% (Marshall Valuation Service) Functional Depreciation 0% External Depreciation 63% (Allocation)

25

p ( )

25

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SLIDE 28

Depreciation Extractions

  • Analyzed the sales of nine “big box” retail properties
  • All are situated in my market area
  • Determined land value using comparable sales
  • Determined land value using comparable sales
  • Calculated replacement cost using actual or cost service data
  • Measured total depreciation as a % of replacement cost
  • Know the age of the property
  • Determined physical depreciation from Marshall Valuation tables
  • Assumed no functional obsolescence
  • Allocated external obsolescence from total

26 26

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SLIDE 29

Market Extraction Data

90% %

Big Box Retail Depreciation Extractions

85% 90% 84.2% 84.0% 86.0% 82.1% 86.2% 87.9% T

  • t

a 80% 80.3% a l D e p r e 70% 75% 70.9% 68.1% c i a t i

  • n

65% 8 9 12 12 21 23 24 36 43 Age (Years)

27 27

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SLIDE 30

Allocation

Depreciation Extraction Allocation

80% 90% 100%

75% 70.9% 68.1% 84.2% 80.3% 84.0% 86.0% 82.1% 86.2% 87.9%

20% 30% 40% 50% 60% 70%

55% 70% 65% 62% 75% 71% 63% 61% 55%

epreciation 0% 10% 20% 8 9 12 12 21 23

6% 6% 9% 9% 22% 25% 27% 32% 18%

De 23 24 36 43 Age (Years)

Physical External Total

28 28

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SLIDE 31

External Vs. Physical External Vs. Physical

100%

Depreciation Trends

External Physical

75% 70% 80% 90% 100% 65% 62% 71% 63% 61% 55% 55% 50% 60% 70% preciation 32% 18% 22% 25% 27% 20% 30% 40% Dep 6% 6% 9% 9% 0% 10% 5 10 15 20 25 30 35 40 45 50 Age (Years)

29 29

g ( )

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SLIDE 32

Improvement Value p

35% 8 9 30% 35% t Cost 12 21 24 20% 25% as % Replacement 12 23 36 43 10% 15% provement Value a 0% 5% 5 10 15 20 25 30 35 40 45 Imp Age (Years)

30 30

Age (Years)

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SLIDE 33

Big Finish

  • External obsolescence is an impairment of value from influence(s)
  • utside the property
  • Can be temporary or permanent

C b ti t d b

  • Can be estimated by:

– Market data analysis – Capitalization of income loss – Allocation of market extracted depreciation

31 31

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SLIDE 34

Relevant Accounting Guidance Relevant Accounting Guidance

32

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SLIDE 35

ASC 360/FAS 144 Considerations

  • Potential accounting issues
  • Potential accounting issues
  • Proactive planning
  • Reasons for no impairment

33

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SLIDE 36

Picking Your Battleground

34

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SLIDE 37

Assessor

  • Current assessor mindset
  • Key obstacles
  • How to be successful

– Proactive vs. traditional – Documentation wins

35

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SLIDE 38

Board Of Appeals

  • Who is the BOA?
  • Who is the BOA?
  • Current BOA position
  • How to be successful

36

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SLIDE 39

Litigation

  • When to consider this option
  • When to consider this option
  • What states require legal counsel
  • Current litigation environment

37

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SLIDE 40

Litigation (Cont.)

  • How successful is this approach?

– Cost/benefit analysis

38

slide-41
SLIDE 41

Effectively Selling Your Company’s EO A l i EO Analysis

39

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SLIDE 42

To Tell The Truth

  • When establishing an argument for obsolescence it is always best to
  • When establishing an argument for obsolescence, it is always best to

not force the reality to conform with definitions – Measuring obsolescence is not the end it is the means to the end E i b l h i l f ti l b l I it – Economic obsolescence, physical, functional obsolescence: Is it important to know where the obsolescence is found?

40 40

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SLIDE 43

Written And Oral Arguments

  • Be concise
  • Use examples

p

  • Back up your

arguments with market data

  • There is no substitute

for preparation

41 41

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SLIDE 44

Using Precedent To Win

  • Walgreen’s v City of Madison
  • Walgreen s v. City of Madison

– This case, billed as a fee simple v. leased fee argument, is a case which proves economic obsolescence. Not only does it proscribe that market rent must be used it also shows the logical step for that market rent must be used, it also shows the logical step for

  • bsolescence is found by comparing rents in a given area and

determining whether a property is economically feasible under market rents market rents

42 42

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SLIDE 45

Design Changes

  • Manufacturers restaurateurs elderly housing retailers and other
  • Manufacturers, restaurateurs, elderly housing, retailers and other
  • wners of real estate whose business drives design are particularly

susceptible to changes in design. Those design changes can and should b d t h l b l be used to help prove obsolescence

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SLIDE 46

It All Comes Back To Money

  • Whether the obsolescence is physical functional or economic it all
  • Whether the obsolescence is physical, functional or economic, it all

comes back to the dollar value of the impairment R t t f t ti li i ti f f t th t

  • Rents, cost of construction, elimination of square footage on paper that

is useless, costs to cure, and sales studies of second generation sales all help to prove obsolescence

44 44

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SLIDE 47

Renditions And Board Submissions

  • Premature arguments

– Complex arguments Showing your hand – Showing your hand

  • Waiving an argument

– In certain jurisdictions, an argument can be waived if it is not timely addressed

  • Winning by default

45 45

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SLIDE 48

Know Your Opposition, Know Your Opposition, Know The Counter-Arguments

  • To whom are you presenting?
  • Informal v. formal meeting
  • Hearings
  • Are there third parties?
  • Boards
  • Press
  • Local presence

46 46

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SLIDE 49

Visual Aids

  • Graphs and charts
  • Pictures
  • Too much of a good thing
  • Most people do not have a long attention span; if your argument is

too complex, you will need to break it down into “bite-sized pieces”

47 47

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SLIDE 50

Technical Analysis Vs. Brevity

  • K.I.S.S.
  • External obsolescence arguments typically are prepared after
  • External obsolescence arguments typically are prepared after

hours of painstaking data collection, well-thought-out analysis and thoughtful preparation. The person negotiating must remember he/she is there to convince the assessor or judge that a reduction in he/she is there to convince the assessor or judge that a reduction in assessment is appropriate, not to prove the brilliance of the attorney/tax manager

48 48