Special Problems in the Valuation of Business Property
Joan M. Youngman
The assessment of business property for purposes of local taxation proceeds under the same legal rules governing the assessment of real property generally, utilizing evidence such as comparable sales, expected rental income, and construction costs to reach an estimate of fair market value. However, special problems arise with regard to each of the three approaches to value in the case of business property. In part this is because specialized property, particularly large industrial buildings, may have value only to a very limited number of buyers, or in some cases only to the current owner. This presents difficulty in identifying the relevant "market" and in calculating "market value" in the standard sense. The assessment of business property also may require a separation of the value of real property that is subject to tax from the value of an enterprise utilizing that property. Uncertainty on such points can result in extremely wide variations in estimates of value for costly property that may constitute a major portion of the local tax base of its jurisdiction. It is not surprising that such situations frequently give rise to highly charged political debate and media scrutiny of a type not often encountered in routine property tax disputes.
A major problem in utilizing the cost approach in the valuation of industrial or manufacturing structures concerns estimation of functional obsolescence. Where the current structure suffers from outmoded, inefficient, or inappropriate design, these factors will affect market value and should result in a deduction from construction cost, in the same manner as physical depreciation.