NYS Office of Real Property Tax Services - Level of Assessment Determination: An Owner's Manual
Level of Assessment Determination:
6. Time Trend Analysis
7. Obtaining Resources and Help
Level of Assessment Determination: An Owner's Manual for Maintaining Uniformity
Each assessment represents a percentage of market value, whether it is 100 percent or otherwise. The overall percentage of market value at which properties are assessed within each community is the LOA. For example, an LOA of 50% would indicate that assessments are at half of market value; whereas an LOA of 100% represents a community that is assessing at full value.
By maintaining assessments at market value or at a uniform percentage each year, your LOA will remain the same from one year to the next. Alternatively, you could adjust assessments each year to reflect a decreasing LOA if the market is appreciating or an increasing LOA if the market is depreciating. In either case, state law requires assessments to be uniform each year.
The Owner's Manual details:
2. Assessment Principles and Overview
Property taxation begins with the determination of assessed values. You determine the value of each parcel in your assessing unit, decide the LOA, and apply it to each parcel to produce the assessment roll. Once your roll is produced, other local officials responsible for budgets and expenditures can divide their levy requirements by the taxable value of your assessment roll to determine tax rates.
Tax Rate = Levy / Taxable Assessed Value
The amount of taxes owed by any individual taxpayer is simply the sum of the applicable tax rates on his or her property multiplied by his or her assessed value.
Taxes Owed = (Tax Rates) x (Taxable Assessed Value)
The two most important principles in property assessment are the level of assessment and the uniformity of assessments. Level of Assessment (LOA) relates to the overall or average relationship between assessed values and market values. If you assess properties at market value, property owners can evaluate the accuracy and fairness of their assessments in a straightforward manner. If assessments differ significantly from market values, property owners will have difficulty comprehending and determining the fairness of their assessments.
Uniformity of Assessments relates to the consistency or equity of individual assessments. Consider two taxpayers with identical homes in the same neighborhood. If their assessments are equal, they will pay equal property taxes. If not, one will pay too much and one will pay too little. Similarly, if the value of one home in the neighborhood is twice that of another, its assessment should be twice as much. Uniformity measures the extent to which properties are assessed uniformly or at the same percentage of market value. Good uniformity is associated with equitable assessments. Poor uniformity implies inequitable assessments.
Except for New York, all states have legal standards for the level of assessment. The most common standard is 100 percent of market value. Other states have fractional percentages, e.g., 50% or 70%. In still others, stipulated fractional percentages vary by class of property. New York is alone in having no stipulated assessment level. Instead, New York's Real Property Tax Laws (RPTL 305) calls for you to determine your LOA and for the State to study whether you have done so accurately and, if not, to restate your LOA.
The importance of accurately determining the LOA cannot be overstated. LOAs are crucial for the fair and accurate apportionment of school and other state aid payments tied to local property values. Without LOAs, state aid would have no common basis and quickly collapse. Payments would favor municipalities with out-of-date, low assessments and punish those with accurate assessments.
You can accurately determine your LOA by studying the relationship between assessments and sales prices. This puts you "on top of the market," in a position to apply trends and adjustments so that assessments reflect current market values (or a target percentage thereof). This process promotes accurate and uniform assessments, the ideal state in an equitable property tax system.
3. Systematic Analysis to Determine the LOA
There are four steps to follow when studying the marketplace to determine the LOA: (1) obtain current, accurate property inventory and market data, (2) group the data, (3) analyze the data and take actions to achieve the desired level, and (4) validate the results.
Some of these items are objective (they are measured or counted) and others are subjective, requiring knowledge and judgment. Two of the most important subjective characteristics are building grade and condition. It is particularly important that these items be current and consistent. An error or inconsistency can easily impact the calculated value for a property by 15 to 25 percent.
Although aerial photos and GIS can help, verifying and updating property data requires field inspections. Field personnel must be adequately trained, knowledgeable, and conscientious. Building permits must be regularly reviewed and property records updated to reflect new construction. The International Association of Assessing Officers (IAAO) guidelines require that all properties be field inspected at least every 6 years to ensure that data are current and consistent (as mentioned, physical inspection at least once every six years is also required to qualify for Annual Aid).
Because of the importance of location in real estate values, assessors must assign properties to market areas and neighborhoods. Market areas are broad geographic areas in which properties are subject to the same economic influences and change in value at similar rates. All properties of a given type in a given market area are valued together using the same valuation schedules and formulas. Neighborhoods are specific geographic areas within a market area and are used to make adjustments for differences in location desirability. You can improve valuation accuracy by drawing neighborhood boundaries to capture such differences. Take care, however, to ensure that there will be adequate sales in each neighborhood for reliable analysis. Because location impacts values differently, create separate market area and neighborhood boundaries for residential and commercial properties.
In addition to property characteristics, valuation accuracy hinges on the adequacy and reliability of valuation data, namely sales, cost, and income data. Sales must be examined to identify valid, open market transfers from other transfers. This involves an examination of the Real Property Transfer Report (RP-5217) and often requires follow-up with a party to the transfer to verify the price and circumstances of the sale. Because construction costs change continually and vary greatly, cost data used in valuation schedules must be kept current and adjusted for local market conditions. Commercial property values can often be improved by obtaining income and expense data to allow for the use of the income approach, generally considered the most accurate valuation method for such properties.
Stratify or Group the Data
As mentioned, it is also important to stratify properties by market areas and neighborhoods to capture location differences. Often a market area can extend beyond the boundaries of a municipality, permitting the use of market data across several municipalities with the same economic base. Because market data are more limited and investors are more mobile, commercial market areas are typically larger than residential areas.
Diagnostic stage - the assessor determines the current level of assessment for each property strata by using time trend analysis and sales ratio analysis as described below.
Time trend analysis involves a study of market trends over the time frame covered by the data and the adjustment of sales prices to the assessment date (or as close thereto as practical) based on the observed rate of change. For example, an assessor may use three years of sales prior to the valuation date in the systematic analysis (to obtain adequate market data) and determine that values have increased an average of 0.5 percent per month over the period. All sales would then be adjusted to the target date at this rate. If a sale occurred 16 months prior to the target date, it would be adjusted upward by 8 percent.
When market values are changing, time adjustments are essential in order to convert selling prices to a common denominator; otherwise they will not reflect the target date of the analysis and will lead to misleading results. By developing and applying time adjustments, systematic analysis can span a larger time frame and accommodate larger sample sizes, making possible a more reliable and detailed analysis. Under IAAO guidelines, up to five years of data can be analyzed in order to obtain adequate samples. Section 6 below outlines time trend techniques available to assessors.
Sales ratio study is a study of the relationship between assessed values and market values as of a specific point in time (usually the assessment date). There are two primary components to a sales ratio study: level and uniformity. Ideally, the assessment level should be near the LOA used by the municipality and assessments should be uniform. Section 5 below describes how to perform a ratio study and explains the various measures of level and uniformity calculated in such studies.
Prescriptive stage involves acting on the results of the ratio study. This involves reviewing the level and uniformity indicators from the sales ratio study and determining what course of action to take. Possible scenarios include:
No action. If your municipality has recently reappraised and the market has been stable, it is possible that the level of assessment has not changed and that uniformity is still good or at least acceptable. In this case no action is required.
Apply market adjustments. If your municipality has recently reappraised and achieved good uniformity, the most likely scenario is that values can be trended to maintain the desired LOA. Trend factors should be based on ratio study results for the value groups created during the stratification phase of systematic analysis. A stratum in which the market has been comparatively strong will require a greater trend factor than a stratum for which the market has been comparatively weak.
Reappraise some or all properties. If a revaluation has not been conducted for several years (or if a recent revaluation failed to produce good uniformity), you should plan a new revaluation. Sometimes certain strata may exhibit good equity while others do not. In this case, you may choose to reappraise the former group and trend values in the latter group. The IAAO recommends reappraisal of properties at least once every six years.
Remember, all properties are required by law to be assessed at the same uniform percentage of value each year. The prescriptive stage is the appropriate stage to apply the results of your analysis in order to keep assessment uniform, even if they are not at 100 percent.
4. Importance of Current and Accurate Data
As discussed in section 7, ORPTS maintains a data warehouse of market data and property characteristics taken from the final assessment rolls that are filed electronically by assessors and contractors on an annual basis. ORPTS relies on this data in conducting systematic analyses and determining equalization rates. It is incumbent on assessors and their contractors, however, to keep this data current and accurate.
The single most important piece of market information is the sale price of a property. It is critical that someone knowledgeable of the local market reviews each sale to ensure that the price is representative and to determine whether the sale is an arm's-length, open market transfer usable for market analysis. Since commercial sales are fewer in number and more complex, they require special attention. You should try to maximize the number of commercial sales available for analysis while ensuring that invalid sales are excluded.
Research has shown that the most important property characteristics are property class, neighborhood, square foot of living area, grade, age and condition, design, lot size, and site amenities, particularly water frontage, where applicable. Pay special attention to the accuracy of these features and, in particular, to ensuring the accuracy and consistency across of subjective features, such as grade and condition.
If you maintain a current, accurate database, you will be in a good position, not only to determine your LOA accurately, but also to achieve highly accurate and uniform assessments. All aspects of systematic analysis will also be substantially enhanced.
5. How to Conduct a Ratio Study
The three primary facets of a ratio study are (1) overall assessment level, (2) equity among property groups or strata, and (3) equity within groups.
Median = (.934 + 1.000) ÷ 2 = .967
Equity Among Property Groups
By calculating and comparing measures of the assessment level among property classes, neighborhoods, size groups, age groups, and other strata assessors can effectively ensure that all property groups are appraised uniformly. Where a group is out of line, an adjustment or trend factor can be applied (prescriptive phase of diagnostic analysis).
Equity Within Groups
A second important measure of uniformity is the price-related differential (PRD), which is a measure of equity between low-value and high-value properties. The PRD is computed by dividing the mean (.950 in exhibit 1), which is not dollar weighted, by the weighted mean (.960), which is dollar weighted. When these two measures differ by more than a small margin, it indicates inconsistency in the level of appraisal between low-value and high-value properties. Note that in exhibit 1 the PRD is .990, a good result.
Analyzing and Acting Upon Results
When COD and PRD standards are met, professional practice considers it acceptable to update property values through market adjustment or trend factors. When the standards are not met, "recalibration" of valuation tables and equations is required to address underlying problems and bring properties into proper alignment. Of course, if the problem involves outdated property data (or if it has been more than six years since the last data collection effort), a field review is also required.
Ratio Study Software
Regardless of software used, ratios studies are a valuable tool. They provide assessors with the means to monitor performance against professional standards and identify both areas of strength and opportunities for improvement. Often they will suggest that appraisal performance for some properties is just fine or can be easily corrected through application of an adjustment factor, while other properties require greater attention. These analyses can help assessors identify priorities and maximize the use of available resources.
6. Time Trend Analysis
All methods of time trend analysis rely on sales data. Because time is only one factor affecting sales prices, determining time trends with reasonable reliability requires a considerable volume of sales, more so than sales ratio analyses. Since there are often insufficient sales in individual municipalities for this purpose, ORPTS in collaboration with assessors and county directors has constructed market areas that are generally large enough for the purpose. Of course, separate market areas have been defined for residential and commercial properties.
Assessors have available at least four methods of determining time trends. Each of these is explained below. These methods are explained in more detail in the IAAO texts listed in the references at the end of section 7.
Value Per Unit Analysis
Although the time trend can be "eyeballed" reasonably well, simple linear regression (available in spreadsheet programs like Excel and all statistical programs) can be used to fit the trend precisely. This method also has the advantage of determining the "standard error" or statistical reliability of the trend.
Sales Ratio Trend Analysis
Exhibits 3 and 4 illustrate the method. Exhibit 3 shows a plot of 135 S/A ratios over a 24-month period. The regression trend line indicates that the S/A ratio increased from approximately 0.98 at the beginning of the period to approximately 1.18 by the end – an increase of 0.20 or 0.87% per month (.20 +23 = .0087).
Similarly, exhibit 4 shows a line graph of median S/A ratios over the same period. Again, one could eyeball the trend with reasonable accuracy, although regression analysis would enhance the analysis.
Since it only requires data on sale price, previous assessed value and sale date, sales ratio trend analysis can be effectively applied against any property type with adequate sales. Along with CAMA models (described next), it is one of two primary methods relied on by ORPTS to establish time trends.
CAMA models have the advantage of explicitly controlling for the effects of all variables tested in the model – neighborhood, lot size, building size, construction grade, year built, and all other features for which variables were included in the model. Many options are available for testing alternative model formats and time variables. As mentioned, it is one of two methods used extensively by ORPTS (along with the sales ratio trend method). Statistical software (such as SPSS is required for this method.
Applying Trend Factors
TASP = Sales Price * (1+.005*MOS)
For example, a sale of $100,000 in January 2002 would have an adjusted price of $105,750:
TASP = 100,000 * (1+.005*11.5) = 100,000 * 1.0575 = 105,750
If the sale occurred in January 2000, the adjusted price would be:
TASP = 100,000 * (1+.005*35.5) = 100,000 * 1.1775 = 117,750.
Note the difference between MOS and MONTHS. The latter is used to develop the time trend and begins at the earliest month and counts forward. The former is used to apply the time trend and begins at the target (assessment) date and count backward (it would be negative for sales after the assessment date).
A sales ratio study comparing assessments with TASP is used to determine the equalization rate. When prior year assessments are used, the results indicate the amount of adjustment that must be made to achieve 100% or whatever the target rate is (diagnostic phase). When new or current year assessments are used, the indicated rate should approximate the desired rate (testing phase of systematic analysis).
7. Obtaining Resources and Help
Many assessing units in New York are small and lack the immediate wherewithal to undertake systematic analysis and keep values current and equitable, particularly in dynamic markets. The first step to obtaining the necessary capacity is self-education. As the official in charge of maintaining assessments, you must understand the goals, tasks, and mechanics of the assessment process. You will then be in a position to know what must be done and how to acquire the necessary skills and resources.
This guide is intended to provide a starting point in this self-education process. In addition to the references listed below, there are three primary sources of support that you and your staff can turn to for information and specific help.
ORPTS strives to work closely with assessors and counties on systematic analysis projects. In a process known as pre-decisional collaboration, these parties work together in analyzing market data to establish the LOA and measures of valuation uniformity. Pre-decisional collaboration can take place at three different levels.
ORPTS has a number of publications and other materials that provide help with various aspects of systematic analysis and development of the LOA. Most of this information is available on the ORPTS web site (www.orps.state.ny.us). In particular, look for the following links:
In addition, the International Association of Assessing Officers (IAAO) has a wealth of publications, courses, and workshops for assessors that address all aspects of the assessment process. The following publications are particularly relevant: