How Property Valuation Differs for Corporate Headquarters
December 19th, 2018
Lack of data makes for more important conversations between advisors and property owners.
By Margaret Ford
Corporate headquarters present unique challenges and opportunities in property valuation discussions with tax assessors. Managing taxes on any real estate property requires an understanding of all three traditional approaches to value, but headquarters are unusual in that good data are hard to find.
This article highlights common sticking points in value discussions for this unique property set. A collaborative discussion between an advisor and property owner on these few areas can lead to a successful tax reduction.
A headquarters defines an enterprise, but many of its defining improvements lack value to potential buyers.
Especially with newly constructed or renovated projects, or when lacking comparable data, the assessor will often rely heavily on the cost approach to estimate market value. This can result in a high valuation with room for fruitful discussion about ways to support a value decrease.
Under the cost approach, an assessor using reproduction cost will frequently understate depreciation and obsolescence. It is important to also review treatment of the economic age-life method, which is often misapplied. The effective age, rather than the actual age, must be measured against the life expectancy of improvements.
Deferred maintenance also requires deductions. Good appraisal practice mandates that short-lived items should first be costed out by category — items such as windows, HVAC systems, carpet, roofs and restrooms — before determining their remaining useful life and cost of replacement based on capital plans.
If the appraiser resorted to a cost approach due to a lack of data for other approaches, in the case of an older headquarters with functional issues not designed to current standards, a replacement cost approach is preferred.
The replacement method projects the cost to reconstruct the buildings using modern materials, design and layout standards. This eliminates the need to estimate depreciation for superadequacies and poor design. It provides a better indication of the existing improvements’ contribution to market value.
With preparation, the taxpayer can tell a powerful story of how to build the functional equivalent of the headquarters.
Income and sales
The income approach to value is seldom helpful, in part because of the difficulty in finding market rents for a single-user property of considerable size. The assessing authority may want to use multi-tenant rent comparables, but an explanation of the costs of the conversion from single- to multi-tenant use will reveal a significantly lower value conclusion.
The sales comparison will be the most relevant approach to value in most cases. Appraisers often use gross building area as a measurement unit of comparison for single users, but comparing by net rentable area (NRA) will go far to account for the reduction in value a building experiences when needs and usage change.
The appraiser must also use NRA for comparable sales. Factors such as remote working, benching and collaborative space needs will make more traditional and formal spaces within the building less valuable. Changes in how the corporate workforce uses office space can render many areas obsolete and deductible from NRA, such as auditoriums or an oversupply of formal conference rooms.
Another argument that helps to manage value in the sales comparison approach is to point out that parcels surrounding improvements should not be valued as fully functional and available building sites. Separating land from a corporate campus can diminish the campus’ value.
Determining the economic impact to the comparables’ sale prices when excess land might be at issue requires a more thorough analysis than simply looking at a land-to-building ratio and using the ratio as an adjustment criterion. The land-to-building-ratio adjustment alone does not measure the economic productivity of any excess land on the comparables in relation to the economic productivity of the headquarters land. There may be difficulty in developing the site due to terrain, or a corporate user might lose the right to add square footage elsewhere on campus if land is partitioned and sold.
There are good arguments to be made surrounding value adjustments for any renovations in a corporate campus. Often a corporate headquarters is physically complicated and evolving. If renovations add space, there is often an imperfect fit to the existing space. The taxpayer may argue that the new space suffers a discount because of the imperfect efficiency inherent in the blending of new and old.
Discussing conditions of sales comparables with the assessor is useful for appropriate adjustments. Often, the assessor lacks access to detailed offering memoranda or insights into the motivations of the buyer or seller, such as instances where a developer would pay more to acquire an assemblage, or if there is a need for cash, or unusual tax considerations.
Set the stage for a productive discussion with the assessor by first initiating an informative dialogue with the building engineers and manager. Ask them about the changing nature of the campus and their predictions about future changes.
On meeting with the assessor, share capital replacement plans and how the building must be changed due to internal industry needs and external trends. A meeting of the minds with the taxing authority on the cost and market approaches discussed above can lead to a successful value reduction.
Margaret Ford is a member of Minneapolis-based Smith Gendler Shiell Sheff Ford & Maher, the Minnesota member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at firstname.lastname@example.org.
Reprinted with the permission of Heartland real estate Business REBusinessOnline.com