2010 High-Rise Apartment Assessment Brief Page 1 MASS APPRAISAL Mass appraisal is a methodology for valuing individual properties which involves the following process: properties are stratified into groups of comparable properties common property attributes are identified for the properties in each group a uniform valuation model is calibrated for each group using market information incorporating the property attributes Mass Appraisal and Single Property Appraisal The appraisal process recommended by the Appraisal Institute of Canada is essentially the same for mass appraisals and single-property appraisals. Such differences that do exist are the results of differences of scale. The following two quotations indicate how the International Association of Assessing Officers distinguishes between mass appraisal and single-property appraisal. … “single-property appraisal is the valuation of a particular property as of a given date: mass appraisal is the valuation of many properties as of a given date, using standard procedures and statistical testing.” … “Also, mass appraisal requires standardized procedures across many properties. Thus, valuation models developed for mass appraisal purposes must represent supply and demand patterns for groups of properties rather than a single property.” The International Association of Assessing Officers, Property Appraisal and Assessment Administration, Chicago, Illinois, 1990, pg.88-89. 2010 High-Rise Apartment Assessment Brief Page 2 The appraisal process, as followed for both mass appraisal and single-property appraisal, consists of the following stages: Definition of the Problem Data Collection Market Analysis Valuation Validation PROCESS MASS APPRAISAL SINGLE APPRAISAL Definition and Mass appraisal is used to determine The client specifies the nature of the value purpose the assessment base for property to be estimated, including rights to be taxation in accordance with valued, effective date of valuation, and legislative requirements. any limiting conditions. Data Collection Mass appraisal requires a The extent of data collection is specific to continuing program to maintain a each assignment and depends on the current database of property nature of the client’s requirements. attributes and market information. Market Analysis Mass appraisal is predicated on Market analysis includes the analysis of highest and best use. highest and best use. Valuation Valuation procedures are predicated The subject property is the central focus on groups of comparable properties. of the valuation procedures. The analysis Valuation models are specified and of comparable properties is restricted to a calibrated for property groups. few properties – generally six or less. Validation The testing of acceptable analysis The reliability of the value estimate is and objective criteria. more subjective. Acceptability can be judged by the depth of research and analysis of comparable sales. 2010 High-Rise Apartment Assessment Brief Page 3 Mass Appraisal Approaches The cost approach, sales comparison approach, and income approach were explored. Cost Approach: The Cost Approach involves adding the depreciated replacement cost of improvements to the estimated value of land (derived from sales). The cost approach was only employed to derive market estimates for properties whose market values were not accurately predicted by other approaches. Sales Comparison Approach: The sales comparison approach was not employed to derive market estimates for any properties considered within the multi-residential inventory. Income Approach: For the purpose of the 2010 Annual Assessment, High-Rise apartments were valued based on the income approach using typical potential gross income (PGI), typical vacancy, and typical gross rent multiplier (GIM). The income approach is the approach of choice as it best reflects the typical actions of buyers and sellers when purchasing income-producing properties. The use of the GIM to value multi-residential housing is widely used in the assessment field. All sales and listings within the City of Edmonton were reviewed and analyzed as of the date of sale. Sales reflect the condition of a property as of the sale date and thus may not always be equivalent to their assessed value. The International Association of Assessing Officers (IAAO) Standard on Mass Appraisal of Real Property, Chicago Illinois, 2002, sets out the recommended uses of the three approaches. Section 4.6.3 of the IAAO standard states: The income approach is the most appropriate method to apply when valuing commercial and industrial property if sufficient income data are available. Sales comparison models can be equally effective in large jurisdictions with sufficient sales. When a sufficient supply of sales data and income data is not available, the cost approach should be applied. However, values generated should be periodically checked against available sales data. Cost factors, land values, and depreciation schedules must be kept current through periodic review. 2010 High-Rise Apartment Assessment Brief Page 4 Definitions To provide a clear understanding of the terms and applicable definitions used throughout the valuation process, the following definitions are supplied for ease of review for the reader. High-Rise Apartment: A building that has more than four levels of living area and five or more self contained suites. Time-Adjusted Sale Price: The price at which a property sold, adjusted for the effects of price changes reflected in the market between the date of sale and the legislated valuation date of July 1, 2009. The City reviews the impact that time has on the market by utilizing three techniques: sales ratio trend analysis, multiple regression analysis, and re-sale analysis. Unit of Comparison: A property as a whole or some measure of the size of the property (for example, number of suites, number of rooms, or gross building area) used to determine a price per unit. Standardize: To adjust, for appraisal purposes, reported data such as income and expenses, so as to remove the effects of non-real-estate factors, such as abnormally good or bad management. Another common term for this adjustment process is normalization. Typical Market Rent / Economic Rent: The rent currently prevailing in the market for properties comparable to the subject property is the typical market rent, otherwise known as the current economic rent. Current economic or market rents are used to form the basis of the valuation as opposed to actual rents, because in many cases actual rents reflect historical revenues derived from leases negotiated before the valuation date. In determining gross potential rent, the valuator is not bound by the contractual rent between the landlord and tenant, but must determine rental income on the basis of what is typically paid in the market at the time of valuation. This rent is known as “market” or “economic” rent. Potential Gross Income (PGI): Potential gross income is the current market rent which would be collected if the property were fully occupied at the date of valuation. Parking and Laundry Income were added to the model predicted PGI. The High- rise parking income was based on Surface, Covered and Under/Above Ground 2010 High-Rise Apartment Assessment Brief Page 5 Parkade rents. Laundry income was calculated at a rate of $12 per suite per month. The rates were established through an analysis of the market survey rent returns and financial statements from property owners. Stabilized Vacancy: Stabilized vacancy is the percentage allowance for vacant space in the subject property, on the basis of a careful study of unoccupied units of comparable properties in the area for a year. Stabilized/typical vacancy assumes current market conditions and typical management. Gross Income Multiplier (GIM): A GIM is defined as the factor by which rent is multiplied in order to obtain an estimate of value. Simply stated, the GIM expresses the relationship between property value and potential gross rent. They are derived from market analysis of sales. Theoretically, a GIM is a product of the factors that determine how much an investor will pay now for future income. An investor will consider the degree of risk involved; the estimated/potential income stream; the expected time the investment will be profitable; and the percentage attributable to operating expenses. These factors are directly related to the type, location, condition, and other attributes of the property. A GIM is predicted by a model developed from the analysis of validated sales. The model is then applied to the entire High-Rise apartment inventory to produce an estimated typical GIM for each property as of July 1, 2009. Multi-Residential Assessment Income Model: The assessment model is an equation that explains the relationship between value or estimated sale price and the variables that influence real-estate value, (i.e., location, age and size). MARKET VALUE ASSESSMENT= (Potential Gross Income less Vacancy) X Gross Income Multiplier MVA = (PGI less VAC) x GIM The multi-residential income model is applied to the entire High-Rise inventory to arrive at the assessed value for each High-Rise apartment parcel. The assessed value is an estimate of typical market value for the property on the legislated valuation date of July 1, 2009. 2010 High-Rise Apartment Assessment Brief Page 6 Capitalization Approach Theory The Appraisal Institute of Canada’s publication The Appraisal of Real Estate Second Canadian Edition discusses derivation of capitalization rate from comparable sales on page 22.3 and 22.4. “Deriving capitalization rates from comparable sales is the preferred technique when sufficient data on sales of similar, competitive properties is available. Data on each property’s sale price, income, expenses, financing terms, and market conditions at the time of sale is needed. In addition, the appraiser must make certain that the net operating income of each comparable property is calculated and estimated in the same way that the net operating income of the subject property is estimated: …the appraiser may have to explain (or adjust for) the time difference. Both the income and expense and the structure of expenses in terms of replacement allowances and other components should be similar to those of the subject… If the objective of the appraisal is to value the fee simple interest, incomes for the comparables analyzed must be at or around the level of market rent or adjustments will be necessary. …The overall level of risk associated with each comparable should be similar to that of the subject property. Risk can be analyzed by investigating the credit rating of the property’s tenants, market condition for the particular property, the stability of the property’s income stream, and the property’s upside or downside potential. …The final rate concluded depends on the appraiser’s judgment as to how comparable each sale is to the subject property. …Appraisal judgement is also needed to determine whether the rate selected for the subject should fall within the range established by the sales or, as in certain cases, be set above or below the range. …When rates derived from comparable sales… the overall capitalization rate is applied to the subject property in a manner consistent with its derivation ….It is imperative that the appraiser analyze comparable sales and derive their capitalization rates in the same manner used to analyze the subject property and capitalize its income.” Emphasis added. 2010 High-Rise Apartment Assessment Brief Page 7 The American Institute of Real Estate Appraisers’ publication The Appraisal of Real Estate, Eighth Edition discusses derivation of capitalization rate from comparable sales in chapter 16, page 387. “The income rates and factors express the relationship of income and value and are derived from market data. It is essential that the market comparables reflect risk, income, expenses, and physical and location characteristics similar to those of the property being appraised. Property Assessment Valuation, Second Edition, International Association of Assessing Officers, Chicago Illinois, 1996, Pages 247, 277-278: “Direct capitalization is very reliable when overall rates are selected from comparable sale properties. …The overall rate, however, must be developed from sales of improved properties that are highly comparable to the subject property. An important point to remember is that in all cases, the subject property must be comparable in all respects to the sale properties; if it is not, the overall rate will be affected.” The Use of Outside Sources One must be cautious when relying on outside sources. The Network has a disclaimer on their reports stating, “All opinions, estimates, data and statistics furnished by other sources is believed to be reliable; however, we cannot guarantee its validity or accuracy”. The manner in which the rates are derived is how they need to be applied to the subject property. One cannot simply pick and choose various components of rates from varying sources to derive reliable values. The City of Edmonton does due diligence in analyzing all components of value (rents, vacancies, expenses, capitalization rates and modifiers) and applies the results in a consistent manner. 2010 High-Rise Apartment Assessment Brief Page 8 Multi-Residential Market Areas Market Area: The City of Edmonton has established 16 market areas to describe and evaluate the High-Rise apartment location characteristics. 2010 High-Rise Apartment Assessment Brief Page 9 Valuation Specifications for Multi-Residential Properties The property attributes considered in valuation that are common to the multi-residential properties include: Market Area Building Type Effective Year Built Property Condition Gross Building Area Average Suite Size Suite Total Suite Type Elevator Stories Balcony Pool Fireplace Commercial Component Parking Accessory Building Additional Structures Laundry Facility Amenities Lot Size Site Coverage Traffic Influence View (# River Suites) Quality of Construction / Design /Workmanship Model Significant Variables Market Area geographic area defined for purposes of market analysis Average Suite Size the total gross building area divided by the number of suites in the building Effective Year Built the effective year built of the building as of valuation year Condition the overall property condition has been rated using the following categories: Fair below average maintenance; discernible deterioration of building components more rapidly than expected for building era; deferred maintenance requiring rehabilitation, replacement, or major repairs; reduced utility with signs of structural decay. Average normal deterioration for property era; moderate maintenance; minor repairs or rehabilitation of some components required; established norm for the era; somewhat less attractive. 2010 High-Rise Apartment Assessment Brief Page 10 Good above average maintenance; well maintained with high desirability; may have slight evidence of deterioration in minor components; often components are new or as good as new; attractive, high utility, and superior condition. Suite Total the total number of suites in the building Elevator the presence of an elevator Balcony the presence of balconies Suite Mix the number of Bachelor/Studio units, 1 bedroom, 2 bedroom, 3 bedroom, 4 bedroom and Penthouse (top floor) units Number of Stories number of floor levels Building Type Low-Rise, High-Rise, Row-Housing, Four-Plex River Suites the number of units having a view of the river valley Potential Gross Rent Model Significant Variables Market Area Suite Total Building Type Average Suite Size Elevator Suite Mix Effective Age Balcony Number of Stories Condition River Suites Stabilized Vacancy: Typical vacancy was determined for High-Rise properties, by analyzing vacancies from property owners’ income and expense statements and all third party sources that were available. The analysis determined a City-wide typical vacancy of 4.0% for all High-Rise properties. Gross Income Multiplier Model Significant Variables Market Area Building Type Effective Age 2010 High-Rise Apartment Assessment Brief Page 11 High-Rise Apartment Information Market surveys were mailed to owners of multi-residential properties requesting the February 2009 rent roll and the year ending 2008 income, expense and vacancy. These survey results were analyzed to determine the typical potential gross rent and typical vacancy for each High-Rise apartment. The City reviews its findings with actual values submitted by owners on the survey and values in publications from reporting agencies. Sales occurring from July 2007 through June 2009 were used in model development and testing. Through the review of sales, the collective actions of buyers and sellers in the market place are analyzed to determine the contributory value of specific property characteristics that drive market value. Once these values have been determined through the mass appraisal process, they are applied to the inventory to derive an estimate of market value. Value estimates were calculated using multiple regression analysis, which replicates the forces of supply and demand in the market place. Sales were validated by conducting site inspections and interviews, and by reviewing title transfers (change of ownership), sales validation questionnaires, and secondary data collection sources (Alberta Data Services, The Network and Bourgeois & Company). The multi-residential model does distinguish different values for the various types of multi-residential properties. Rates established are market based due to the analysis of sales and income/expense data. The model accounts for the various building types by making adjustments for building type and significant variables attributable to that building type (for example, elevator in Low-Rise apartments). Models are developed from available data and used to estimate typical figures for other parcels. The use of models incorporating different types of multi-residential properties is taught in IAAO and UBC curriculum, and is a common practice for income-producing properties. 2010 High-Rise Apartment Assessment Brief Page 12 SUMMARY High-Rise apartment properties are assessed using the multi-residential model, which adjusts for attributes that impact market value, in order to arrive at a typical market value for properties in this class. The resulting assessments were tested. The results indicated that our model predictions of value meet Provincial Quality Standards as set out in the Matters Relating to Assessment and Taxation Regulation, AR 220/04. The assessment model, the process utilized and the results are submitted annually to the Assessment Services Branch of the Department of Municipal Affairs for audit purposes. The audit is used to determine the accuracy of our predictions relative to the market place and is a direct reflection on the accuracy of our model. The City of Edmonton has met all governing legislation, regulations and quality standards.
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