- The valuation process
- Definition of the problem
- Preliminary analysis: Data selection and analysis
- Approaches to values
- Reconciliation of value indications
- Report preparation
Valuation Standards provide the guidelines for valuing property in New York State for ad valorem real property taxation. While the primary purpose is to define and document the standards followed by the Office of Real Property Tax Services, they may also be useful in documenting the broad standards used by the assessment community in New York State. They are based on a compilation of requirements from legal, the Uniform Standards of Professional Appraisal Practice, statistical and professional appraisal perspectives. The legal perspectives are based on federal and state laws, precedent setting case law, rules and regulations, and opinions of counsel from the Office of Real Property Tax Services. The Uniform Standards of Professional Appraisal Practice (USPAP) are the established requirements for professional appraisal practice, which include the minimum foundation on which both the development of an appraisal and a reporting of the results must be based. Statistical perspectives are critical to the accurate interpretation of data and the development of assumptions made to reach a value conclusion.
Since the specific focus of these standards is the valuation of real property for ad valorem real property taxation in New York State, the primary emphasis is on mass appraisal, as set forth in USPAP Standard 6 Mass Appraisal, Development and Reporting. However, since all real property must be valued to ascertain its share of the tax levy, including unique properties, individual property appraisal standards are also necessary. Mass appraisal and individual property appraisal standards should complement each other. Appraisers often use both or a hybrid of individual and mass appraisal processes to value real property for ad valorem taxation to optimize the efficiency and effectiveness of their valuation process. The use of mass appraisal is contingent upon the homogeneity and frequency of similar property occurrences, not solely the property type. For example, an architecturally unique single family residence may require an individual property valuation while a industrial warehouse may be valued effectively using mass appraisal standards.
Ethical standards for valuation as described by the Uniform Standards of Professional Appraisal Practice (USPAP) are divided into four categories: Conduct, Management, Confidentiality, and Record Keeping. (1)
Conduct: Acting as a disinterested third party, the assignments should be performed with unbiased impartiality, objectivity and independence. Any action should be avoided which may be considered misleading or fraudulent or to knowingly permit an employee to communicate a misleading or fraudulent report. Unsupported conclusion relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance, handicap or other such characteristics must not be made.
Management: Acceptance of compensation that is contingent on reporting a predetermined value or direction in value, attainment of a stipulated result, or the occurrence of a subsequent event is unethical. [Note: Administrative override of value estimates is a management prerogative and doesn't violate the appraiser's responsibilities unless the appraiser is asked to take responsibility for the value override.]
Confidentiality: An appraiser must protect the confidential nature of the appraisal assignment.(2)
Record keeping: An appraiser must prepare written records (data and information to support the findings and conclusions) ...and retain such records for a period of at least five years after preparation or at least two years after final disposition of any judicial proceeding involving those records, whichever expires last. Other requirements may be specified under the records and information management policies of New York State.
The Office of Real Property Tax Services, in order to maintain a high level of professional practice, observes the USPAP Standards unless there are jurisdictional exceptions.
USPAP 's Standard 1 states: "In developing a real property appraisal, an appraiser must identify the problem to be solved and the scope of the work necessary to solve the problem, and correctly complete research and analysis necessary to produce credible appraisal."
This standard follows the appraisal process, which is a systematic method of collecting, analyzing, and processing data into well-reasoned value estimates.
The valuation process indicates a pattern to be followed in gathering, analyzing and applying pertinent information to establish a property value. The first step in the valuation process clarifies the problem. To accomplish this, one must identify: the real estate, the property rights to be valued, the intended use of the appraisal, the date of value estimate (and inventory), the definition of value, and any assumptions or other limiting conditions.
It is most critical for real property taxation purposes that the real property being valued is identified through a cross reference to the assessment roll known as a parcel identification number (PIN). The most common property identification number is the unique tax map land parcel number corresponding with the section-block-lot (SBL) from tax maps that must be maintained annually.(5) Oil and gas rights or mineral rights are often linked to the physical site of withdrawal. The minimum parcel identification required on all real property for valuation purposes is the parcel identification number (usually the tax map section-block-lot (and suffix where required)).
The property interests and rights to be appraised are also a critical part of the problem definition.(6) In most cases, the real property is valued assuming fee simple estate, unencumbered, with all property rights included. On specific property, however, lesser ownership must be valued with a manual override or modification of mass appraisal indications of value (e.g., severed oil and gas rights, mineral rights, easements or conservation easements, contracts, covenants, declarations or ordinances).(7) In a value estimate for a partial interest, direct market evidence is sought to reflect market attitudes toward that partial interest because the sum of the partial interests may not be equal to the fee simple value.(8) Unless otherwise stated or specifically identified, all real property is assumed to be valued as fee simple ownership in a mass appraisal process with partial rights handled on an exception basis where necessary.
In appraisals for assessment roll purposes, the date of a value estimate is clearly defined by the New York State Real Property Tax Law (RPTL). "All real property subject to taxation ... shall be valued as of the preceding first day of July."(9) However, exceptions should be noted for special franchise (10) or cities and towns subject to special tax acts. For ORPTS appraisals required for full value measurement surveys the inventory and date of appraisal are specified in the survey procedures.
For real property tax purposes in New York State, the date of value is intertwined with the taxable status date. This presents a special valuation problem that must be clearly identified. "The taxable status of real property in cities and towns shall be determined annually according to its condition and ownership as of the first day of March and the valuation thereof determined as of the applicable valuation date."(11) This has been interpreted to mean that "...the valuation of property is determined by its state as of the taxable status date, and may not be assessed on the basis of some future contemplated use."(12) Thus, the courts are requiring "current use" valuation, which for certain properties may differ from market value based on highest and best use.(13)
Court decisions on ad valorem taxation valuation issues often relied on precedents set in Eminent Domain proceedings. However, courts contrasted Eminent Domain taking where the owner had only one chance to be compensated for value and potential future uses should be considered from value for assessment purposes where the value is evaluated annually.(14) "The valuation of property is determined by its state as of taxable status date, and may not be assessed on the basis of some future contemplated use"(15) Anticipated public and private improvements, located on or off site should only affect the value if general market actions reflect such anticipation as of the date of the appraisal.(16)
The one exception to "current use" valuation is vacant land that has "...no current existing use beyond that of its potential sale for a future use, there is nothing improper in establishing its value by considering its market value as enhanced by potential uses."(17) In that case, the definition of value would be consistent with the definition of market value. Analysis of the highest and best use must be the basis for determining such land value. In the more recent cases, agricultural land is distinguished from the vacant land that has no current existing use. The agricultural land must be valued according to its use for agricultural purposes, irrespective of whether farming is the highest and best use of such property.(18) Therefore value, for ad valorem real property tax purposes in New York State, property must be valued based on its current use, not its highest and best use (although in a vast majority of cases they are one and the same), except in the case of vacant land which is idle and put to no use whatsoever. In that case, the value must be based on its highest and best use.
While valuing property at its "current use", exceptions to the date of valuation for special franchise should be noted. "Except as otherwise provided ... (19), the taxable status of a special franchise shall be determined on the basis of its value as of the rate valuation date and its ownership as of the thirty-first day of December of the year preceding the year in which the assessment roll on which such property is to be assessed is completed... on the basis of ownership as of the thirty-first day of December of the second year preceding the date required by law for the filing of the final assessment roll for purposes of city assessment rolls required to be filed between January first and June first inclusive and for all village assessment rolls."(20)
Following the data collection and preliminary analysis the valuation process normally requires a highest and best use analysis. As previously mentioned, courts have held that a distinction exists between condemnation proceedings where property owners are only allowed one chance to be compensated for the value of their property and real property taxation in which values are established annually and generally impact tax allocation or other value related decisions until the follow year when new values are determined. State courts require that the value to be determined should be the value in its "current use".(21) However, in most cases, the current use of the property that must be valued for ad valorem taxation is also its highest and best use. The distinction is only important in sub-optimal use situations. For example, it would be inappropriate to use land sales bought for other than farm use in the direct sales comparison approach to value farmlands since the sale do not reflect the farm use.
While New York State does not have a personal property tax and does not assess property, it is important to consider any personal property, trade fixtures or tangible items that are not real property when analyzing sale prices.(22) Specific verification of sales information reported on the 5217 Property Transfer Reporting Form where personal property is indicated is essential to accurately qualifying sales data. It is preferable to verify such information with both the buyer and seller, if possible. Many specific pieces of equipment, which may be considered as personal property in other states, are defined as real property under the NYS Real Property Tax Law (RPTL). (23)
Any special limiting conditions that could affect the valuation process must be identified.(24)
Valuation of specialties
Specialty property must be valued at reproduction cost new less depreciation (RCNLD) specialty property must meet four criteria:(25)
- The improvement must be unique and must be specially built for the specific purpose for which it is designed;
- There must be a special use for which the improvement is designed and the improvement must be so specially used;
- There must be no market for the type of property... and no sales of property for such use; and
- The improvement must be an appropriate improvement ... and its use must be economically feasible and reasonably expected to be replaced.
A specialty may be best defined as a structure, which is uniquely adapted to the business conducted upon it or use made of it and cannot be converted to other uses without the expenditure of substantial sums of money.(26) Special use in itself is not enough. Nor is the fact that the structure has unusual features. There are special valuation rules required by case law for certain specific types of property, which are worth discussing.
Court order assessments
Where a trial occurred and the judge rendered a decision "on the merits of the evidence", the full value of the property determination by the court should be accepted as binding by ORPTS.
- The value would be accepted by ORPTS once litigation was final and no "notice of appeal" was filed.
- ORPTS full value would be fixed for the legal duration of the court's order which pursuant to RPTL 727 is "frozen" for three years, in all assessing units except New York City and Nassau County, (subject to specific exceptions such as physical changes in the property ...), and
- ORPTS would be free to change the full value when the order expired.
Note: Values resulting from settlements of any other type or assessments effectively sustained due to dismissals on procedural technicalities would not be binding on ORPTS.
However, where parties to a settlement exchanged appraisals, the data and analyses presented therein may provide more information upon which valuation conclusions may be based. We encourage the sharing of the court-ready appraisals with ORPTS for their review and consideration of the contents of these appraisals in their valuation work to minimize the chances of vastly divergent conclusions of value based on fundamental differences in valuation information or methodology.
Once the valuation problem has been defined, the next step involves the preliminary analysis, data collection and analysis. The appraisal standards set forth by USPAP imply that each person charged with the valuation of real property should be adequately trained and use the correct methods and techniques.(29) If the appraiser finds that they do not have the experience and knowledge to complete the assignment, they should take the necessary steps to obtain the knowledge, work with or have their work closely reviewed by experienced staff so that the assignment is completed competently.(30)
Inventory records for residential, farm and vacant sample and sale parcels shall be provided by city, town or county assessing units to the Office of Real Property Tax Services in an Real Property System (RPS) format or other computerized format agreed to by the Office of Real Property tax Services. Assessing units not providing computerized inventory records shall provide inventories for sample parcels and sales on property record cards (Forms RP 3100 and RP 3105) in accordance with procedures outlined in the Assessor's Manual or on property record cards maintained by the assessing unit, accompanied by an explanation enabling ORPTS staff to use the data in RPS.
Care must be taken not to commit either errors of omission or commission that significantly affects the appraisal.(31) The valuation process should include numerous checks throughout the process to prevent errors that could significantly affect the value conclusion. Decisions must be made on procedures that might cause significant errors of omission such as site inspection.(32) It is important to consider the need for and extent of any physical inspection. The decision on whether or not site inspections (or interior inspections) are required may differ from property to property. If current, accurate data from other reliable sources can be obtained and the value can be accurately ascertained without such inspections, then an error of omission has not been committed. However, on complex properties where equipment (that is defined as real property by the RPTL) comprises a substantial portion of the value or where value components as of the date of valuation have changed since the last known reliable inventory, on-site and interior inspections are critical to a substantial portion of the property value and should be required.
Quoting from Advisory Opinion 2 of the Appraisal Standards Board of the Appraisal Foundation:
"The elements of USPAP relating to inspection of real estate for the purposes of developing an appraisal requires that the appraiser adequately identify the real estate, consider the purpose and intended use of the appraisal, consider the extent of the data collection process, identify any special limiting conditions, and identify the effective date of the appraisal.... The extent and depth of the inspection process varies with the type of property appraised and the conditions of the appraisal.... It is the appraiser's responsibility to determine if adequate information is available about the subject real estate to develop a real property appraisal that conforms to USPAP. An appraiser cannot rationally develop an appraisal if adequate information on the subject real estate is not available. Consequently, where physical characteristics information is not available through an opportunity for a complete inspection or from reliable third party sources, an appraiser has the duty to obtain the necessary information to develop the appraisal before continuing or to withdraw from the assignment.... An appraiser's inspection should, at a minimum, be thorough enough to (a) adequately describe the real estate in the appraisal report, (b) develop an opinion of the highest and best use, when such an opinion is necessary and appropriate, and (c) make meaningful comparisons in the valuation of the property. There are situations where interior and complete exterior inspections are not possible as of the effective date of the appraisal.... where improvements have been destroyed, removed... the appraiser is denied access by the property owner .... Where an interior and complete exterior inspection is not possible for any valid reason, physical characteristic information about the real estate should be obtained from reliable third party sources.... When an inspection was limited, it should be disclosed,(34) but the disclosure does not relieve the appraiser from the responsibility to determine whether ... adequate information is available to develop an appraisal that is not meaningless or misleading".
It is also critical that work should be reviewed for consistency and accuracy to prevent errors of commission. A perfect appraisal model using the appropriate techniques cannot accurately determine the value on a property represented incorrectly by the inventory data. In a mass appraisal process, computer encoded data should be programmatically screened. Extensive use of missing data edits to assure comprehensive collection, range edits on continuous variables and discrete value edits on categorical variables to minimize the possibility of erroneous data, and logical inter-field edits to cross check data for rational relationships are all recommended.
Information used for valuation modeling should be accurate, appropriate and representative. Sales and income data should be verified with a direct party to the transaction where possible. Errors on a subject property will cause one incorrect value, however, errors on sales, income or cost data used to draw valuation conclusions may affect the valuation conclusion on many properties. Data must also be appropriate and representative of the properties being valued. For example, conclusions drawn from single-family market information should not be used to develop conclusions for multi-family housing. More precisely, conclusions drawn from the analysis of average quality single family homes that range from 960 to 2800 square feet are not appropriate for the valuation of an architecturally designed, custom built, single-family residence of 4000 square foot. Conclusions, drawn as a result of statistical analysis and mass appraisal modeling, are inappropriate if the data analyzed does not reflect the population of subject properties to which the valuation results are to be applied. Representativeness is a fundamental requirement of any modeling process.
Negligent or careless work is not permissible.(35) Review and oversight of valuation work by supervisory staff is appropriate and necessary.
The application of appraisal techniques using the three approaches to value (i.e., cost approach, direct sales comparison approach, and income capitalization approach) will develop separate indications of value for the property.
All three approaches to value, for which adequate, reliable data is available, should be considered.(36) Therefore, where appropriate, the valuation process must collect, verify, analyze, and reconcile the information necessary to estimate; the land value, replacement (or reproduction) cost of the improvements, the accrued depreciation, the value by the sales of comparable properties and the rentals, expenses, interest rates, capitalization rates and vacancy rates necessary to value the property by the income capitalization approach including terms and conditions of available leases.(37) The valuation process must consider existing land use regulations, neighborhood trends, physical adaptability of the property and probable supply and demand as evidenced by current market conditions.(38) It is also important to consider and analyze the effect on value, if any, of the assemblage of various parcels, divided interests, or partial interests. The value of the parcel or economic unit should not be estimated by adding together the individual values of the parcels, divided interests, or component parts.(39)
The ultimate goal of the valuation process is a sound conclusion of value. This requires a reconciliation of the value indications derived from the approaches to value. Consideration should be given to the relevance of the approach and the reliability of the value indication based on the quantity and quality of data available and analyzed within the approaches used.(40) A single market transaction (i.e., sale price), or actual construction cost, or capitalized income stream for a specific property cannot be assumed to be market value. When many sales prices, construction costs or capitalized income streams of similar use properties are analyzed, a conclusion can be drawn as to the market value of a property. Therefore, the quantity of data and the dispersion in value indications is critically important.
Use of multiple independent approaches to value that result in closely clustered value conclusions is usually a sign of sound value conclusions. When value indications are substantially different, careful analysis of the valuation data used and the assumptions made is needed to determine which value indicator is the most reliable. An explanation of the reasoning applied in the selection of the preferred value indicator should be available in the valuation procedures for mass appraisal or in the file documentation for that property. When using mass appraisal, generally accepted testing procedures and techniques should be used to ensure standards of accuracy are maintained.(41)
Report requirements for real property taxation purposes may differ. However, it is important to realize that the credibility of the ad valorem real property tax system depends on reports that clearly communicate the elements, results, opinions and value conclusions accurately and consistently. Documentation for a mass appraisal for ad valorem taxation should include property inventory records, valuation reports, data collection and valuation procedure manuals, statutes, rules and regulations and other references including valuation standards.(42) Information should be readily available to the property owner or for purposes of administrative and judicial review that clearly communicates the derivation of value and relates the value of the subject property to other properties in a comparative way that is understandable and meaningful.
While not required by USPAP, ad valorem mass appraisal documentation should summarize other significant elements of the valuation process. For example, defined procedures should include any assumptions and limiting conditions that result in deviation from generally accepted methods and techniques or that affect analyses. If specific properties require such deviation they should also be identified. Procedures for collecting, validating, and recording data should be well documented. An extensive description of the valuation modeling process is important. The ultimate users of the valuation results should be given: a description and justification of the model specification(s) considered, data requirements, and the models chosen for mass appraisal. Furthermore, valuation reports should include a description of the calibration methods considered and chosen including the mathematical form of the final models; identify appraisal performance tests used and set forth the performance measures attained; and explain any permitted departures employed.(43)