In the cost approach to value all forms of depreciation are deducted from the replacement cost new to arrive at a value estimate. The cost approach to value is relatively easy to automate and as a result most taxing jurisdictions use this approach to value real estate for tax purposes. Unfortunately, not all assessment personnel have an adequate understanding of external or economic obsolescence, which is a negative influence from outside of the property boundaries.
If the major employer in a small town shuts its doors because of competition from China, all of the real estate in the town may suffer from external obsolescence. A recently constructed office building may be worth less than the cost to construct due to a recession that lowers the demand for office space. During the great recession auto dealerships were suffering from economic obsolescence due to the oversupply of dealerships and low demand for new automobiles.
When assessment personnel think of external obsolescence they think of houses located near industrial districts with all of the traffic and noise. Or perhaps they think about residential units near a dump, with truck traffic and noise. There is also the classic example of single family dwellings in close proximity to a major airport. These are the influences that most assessors think of when they hear the words external or economic obsolescence.
The economy can cause external obsolescence. Assessors often overlook this fact when establishing their tax values. When the economy slows and there isn't enough demand to absorb all of the warehouse space that was constructed in the years before the recession, warehouse space is negatively impacted by external obsolescence. The lack of demand may cause new warehouse space to be worth less than the cost to construct it. Assessors will often turn a blind eye toward this problem.
If you verify that the assessment personnel are using a cost approach to value then you need to attack them on depreciation. I can almost guarantee that they won't be using an external depreciation factor due to an oversupply of office space or an oversupply of foreclosed homes. You need to tell the assessor or review board that is hearing your case that if the assessor is using a cost approach to value that they need to address all types of depreciation.
Fair assessments for all!
If the major employer in a small town shuts its doors because of competition from China, all of the real estate in the town may suffer from external obsolescence. A recently constructed office building may be worth less than the cost to construct due to a recession that lowers the demand for office space. During the great recession auto dealerships were suffering from economic obsolescence due to the oversupply of dealerships and low demand for new automobiles.
When assessment personnel think of external obsolescence they think of houses located near industrial districts with all of the traffic and noise. Or perhaps they think about residential units near a dump, with truck traffic and noise. There is also the classic example of single family dwellings in close proximity to a major airport. These are the influences that most assessors think of when they hear the words external or economic obsolescence.
The economy can cause external obsolescence. Assessors often overlook this fact when establishing their tax values. When the economy slows and there isn't enough demand to absorb all of the warehouse space that was constructed in the years before the recession, warehouse space is negatively impacted by external obsolescence. The lack of demand may cause new warehouse space to be worth less than the cost to construct it. Assessors will often turn a blind eye toward this problem.
If you verify that the assessment personnel are using a cost approach to value then you need to attack them on depreciation. I can almost guarantee that they won't be using an external depreciation factor due to an oversupply of office space or an oversupply of foreclosed homes. You need to tell the assessor or review board that is hearing your case that if the assessor is using a cost approach to value that they need to address all types of depreciation.
Fair assessments for all!
About the Author:
Daniel T. Jones is a real estate valuation professional and manages the Atlanta based property tax reduction firm Fair Assessments LLC. Dan has been appealing property values since 2004 and you can read more about his property tax appeal experience on LinkedIn.