Iowa Administrative Code › Agency 701 - Revenue Department › Title II - Property Tax › Chapter 102 - Assessment Practices and Equalization › Rule 701-102.5 - Valuation of Commercial Real Estate

Current through Register Vol. 47, No. 3, July 24, 2024
Commercial real estate shall be assessed at its actual value
				  as defined in Iowa Code section
				  441.21. In determining the
				  actual value of commercial real estate, city and county assessors shall use the
				  appraisal manual issued by the department of revenue pursuant to Iowa Code
				  section 421.17(17)  as
				  well as a locally conducted assessment/sales ratio study, an analysis of sales
				  of comparable properties, and any other relevant data available. In cases
				  involving the valuation of owner-occupied commercial property, the data
				  relating to the financial performance of the owner or the owner's business,
				  including but not limited to its sales, revenue, expenses, or profits, shall
				  not be considered relevant in determining the property's actual value.
(1)
Property of long distance
				telephone companies.
The director of revenue shall assess the property
				of long distance telephone companies as defined in Iowa Code section 476.1D(10)
				which property is first assessed for taxation on or after January 1, 1996, in
				the same manner as commercial real estate.
(2)
Low-income housing subject to
				Section 42 of the Internal Revenue Code.
a.
Productive and earning
				capacity.
In assessing property that is rented or leased to low-income
				individuals and families as authorized by Section 42 of the Internal Revenue
				Code which limits the amount that the individual or family pays for the rental
				or lease of units in the property, the assessor shall use the productive and
				earning capacity from the actual rents received as a method of appraisal and
				shall take into account the extent to which that use and limitation reduces the
				market value of the property.
b.
Direct capitalization method.
The income approach to valuation
				shall be applied using the direct capitalization method. The assessor may use
				the discounted cash flow method as a test of the reasonableness of the results
				produced by the direct capitalization method. The direct capitalization method
				of the income approach involves dividing the Net Operating Income (NOI) on a
				cash basis by an overall capitalization rate to derive an indication of the
				value of the property for the assessment year.
In applying the direct capitalization method, the assessor
				  shall develop a normalized measure of annual NOI based on the productive and
				  earning capacity of the development utilizing (1) the actual rent schedule
				  applicable for each of the available units as of January 1 of the year of
				  assessment indicating the actual rent to be paid by the resident plus any
				  Section 8 rental assistance or other direct cash rental subsidy provided to the
				  resident by federal, state or local rent subsidy programs as limited pursuant
				  to Section 42 of the Internal Revenue Code, (2) a normal vacancy/collection
				  allowance, (3) the prior year's actual and current year's projected annual
				  operating expenses associated with the property, excluding noncash items such
				  as depreciation and amortization, but including property taxes and those actual
				  costs expected to be incurred and paid as required by Internal Revenue Code
				  Section 42 regulations, provisions, and restrictions as applicable to the
				  assessment year, and (4) an appropriate provision for replacement
				  reserves.
If no separate line item is included for reserves for
				  replacement in the historic income and expense data, then the maintenance and
				  repair categories of the historic expense data must be itemized. For properties
				  that have attained a normalized operating history, the NOI results of the prior
				  three years (as represented in the statements variously named as the Income and
				  Loss Statement, the Profit and Loss Statement, the Income Statement, the Actual
				  to Budget Comparison Statement, Balance Sheet, or some name variation of these)
				  may be used to provide the basis for determining the normalized NOI used for
				  purposes of applying the direct capitalization method for the year of
				  assessment, provided an appropriate replacement reserve is included in the NOI
				  determination and provided any additional costs required as a result of Section
				  42 regulation or compliance changes for the assessment year are included as an
				  operating expense in the NOI determination. In addition, the assessor may
				  utilize the current year operating budget to develop a measure of NOI for the
				  assessment year. The assessor, in developing the measure of annual NOI on a
				  cash basis, shall not consider as income any potential rental income
				  differential that could otherwise be received from the property if the rents
				  were not limited pursuant to Section 42 of the Internal Revenue Code, any tax
				  credit equity, any tax credit value, or other subsidized financing.
c.
Filing of
				reports.
It shall be the responsibility of the property owner to file
				income and expense data with the local assessor by March 1 of each year. The
				assessor may require the filing of additional information if deemed
				necessary.
d.
Capitalization rate.
The overall capitalization rate to be
				used in applying the direct capitalization method for a Section 42 property is
				developed through the band-of-investment technique. The capitalization rate
				will be calculated annually by the Iowa department of revenue and distributed
				to all Iowa assessors by March 1. The capitalization rate is a composite rate
				weighted by the proportions of total property investment represented by debt
				and equity. The capital structure weights equity at 80 percent and debt at 20
				percent unless actual market capital structure can be verified to the assessor.
				The yield, or market rate of return, for equity is calculated using the capital
				asset pricing model (CAPM). The yield for debt is equivalent to the average
				yield on 25-year Treasury bonds referred to as the Treasury long-term average
				rate. An example of the band-of-investment technique to be utilized is as
				follows:
% to Total
Yield
Composite
Equity
80%
11.05%
8.84%
Debt
20%
5.94%
1.19%
100%
10.03%
e.
Capital asset pricing model.
The capital asset pricing model
				(CAPM) is utilized to develop the equity rate. The formula is:
Re = B (Rm - Rf) + Rf
Where: Re = return on equity
B = beta
Rm = return on the market
Rf = risk-free rate of return
Rm - Rf = market-risk premium
The beta is assumed to be 1 which indicates the risk level to
				  be consistent with the market as a whole. The risk-free rate is calculated by
				  finding the average of the three-month and six-month Treasury bill. The return
				  on the market is calculated by taking the average of the return on the market
				  for the Merrill Lynch Universe and Standard and Poor's 500 or by reference to
				  other published secondary sources.
f.
Properties under
				construction.
For Section 42 properties under construction, the
				assessor may value the property by applying the percentage of completion to the
				replacement cost new (RCN) as calculated from the Iowa Real Property Appraisal
				Manual and adding the fair market value of the land. Alternatively, projected
				income and expense data may be utilized if available.
g.
Negative or minimal NOI.
If the Section 42 property shows a negative or minimal net operating income
				(NOI), the indicator of value as set forth in these rules shall not be
				utilized.
h.
Eligibility
				withdrawn.
The property owner shall notify the assessor when property
				is withdrawn from Section 42 eligibility under the Internal Revenue Code. The
				notification must be provided by March 1 of the assessment year or the owner is
				subject to a penalty of $500.
This rule is intended to implement Iowa Code sections
				  421.17,
				  428.4,
				  441.21 as amended by 2004 Iowa
				  Acts, Senate File 2296, and 476.1D(10).