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What is the Trial Court's Responsibility in Assessment Appeals?

Posted on May 13th, 2020

Real Estate LawyerWhat is the Trial Court’s responsibility when determining the market value of a property in a Tax Assessment Appeal case?

In certain states like Pennsylvania, the Trial Court’s obligation regarding its function in a tax assessment appeal is as follows: 

The function of the trial judge in a tax assessment case is not to independently value the property itself, but to weigh the conflicting testimony and values expressed by the competing experts and arrive at a valuation based on the credibility of their opinions.

At the time of trial, the Trial Court undertakes a de novo review. In each case the Trial Court is the ultimate finder of fact. 

The finding of value by the Trial Court must be supported by competent evidence.  This does not mean that the Trial Court becomes an assessor, or an appraiser.  Rather, in assessment cases, as in others, the Trial Court must make its determination on the basis of the evidence put before it.  

Ultimately, in determining the true market value of a property Trial Courts often rely on the opinions of expert appraisers. Because the method of valuation in a tax assessment is an inexact science, the factfinder’s valuation must be tied firmly to the evidence of record.  

The Trial Court typically considers three methods of valuation of property when determining the correct valuation of a property.

Three valuation approaches assist the fact finder in determining the correct value: (1) the Sales Comparison Approach; (2) the Income Approach; and (3) the Replacement Cost Approach.  

In setting a valuation for a property, the three methods are used to verify one another.  Reconciliation is necessary because the methods of valuation lead to different value conclusions, as each addresses a specific set of forces within the market.  To reconcile the three methods of valuation, an appraiser exercises judgment based on appropriateness, accuracy, and quantity of evidence collected.   

One of the Methods of Valuation includes the Sales Comparison Approach

The Sales Comparison Approach estimates value by comparing the subject property to similar properties that have been sold.  The Sales Comparison Approach is based on the “Principle of Substitution,” that an informed buyer would pay no more for improved real estate than the price at which a similar property possessing equal utility could be acquired.  The Sales Comparison Approach involves consideration of several factors, including: location, time of sale, size, lot characteristics, age and condition of the improvements, functional, physical and economic characteristics, financing, and availability of competing properties.  Location is a particularly important factor in selecting comparable properties for this approach.  

Another Method of Valuation includes the Income Approach 

The Income Approach to value involves an analysis of the present worth of the property’s expected future income.   The Income Approach relies on an estimate of the amount that a decision-maker would be justified in paying to acquire the right to receive an income stream of a specified amount.  In conducting the Income Approach, a net operating income is obtained by estimating a stabilized income stream based upon past performance and deducting expenses.  A capitalization rate is then developed and applied to net operating income to conclude a final value.  

The final Method of Valuation includes the Replacement Cost Approach

The Replacement Cost Approach is a method of valuation that relies on the cost of the land itself, adds the costs that would be involved in reconstructing the building(s), minus accrued depreciation for the building(s), plus entrepreneurial profit.  This approach is based on the “Principle of Substitution,” or the premise that an informed buyer would pay no more for improved real estate than the costs of reproducing a substitute property of equal utility. 

The price for land is a key input for the Replacement Cost Approach.  To set a value for the land component of the Replacement Cost Approach, comparison sites are selected based upon comparability to the appraised property.  For an accurate valuation, recent land sales are considered on the basis of real estate rights conveyed, financing terms, conditions of sale, location, physical characteristics and target market.   

Thanks to our friends from Hoegen & Associates, P.C., for their insight into real estate transactions.

 

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