By: Mark Lansing

We live in an economy where provision of products and services is ever changing, including the hard assets by which such products and services are provided. For complex industrial and manufacturing property that remain subject to the cost approach (or even hospitality property – although, normally, this property is valued by either the income or market approaches), whether using the reproduction cost new or replacement cost new approach (or both), making sure the right replacement property is chosen is essential. That replacement facility must reflect market realities, and be the most economical replacement of the subject property’s utility and purpose. For example, if valuing a coal fired plant by the cost approach, the replacement facility must reflect that coal plants are no longer being constructed. Instead, they are being replaced by combined cycle gas turbines (or even wind and solar). The same applies for nuclear plants. Yet, and notwithstanding market realities, some assessors continue to use like kind replacement (i.e., coal for coal). This approach is non-market based and over- values the property.

This issue is not limited to electric generation plants. It arises in reviewing assessments of industrial plants, hospitality facilities and retail stores as well.  For example, in the hospitality arena, extended stay facilities formerly had a horizontal layout with exterior unit entrance. Today, the construction and design is vertical with solely interior unit entrances and greater disability access. Modern hospitality facilities are often accompanied with another brand to share certain services and common areas. Thus, in applying the cost approach to value older extended stay hospitality units, the appraiser should, again, choose the appropriate replacement facility that accounts for market realities (i.e., choosing the vertical and interior unit access design as the replacement). Unfortunately, assessors or appraisers that apply the cost approach often ignore the replacement choice (or choose an inappropriate replacement facility).

To achieve equitable assessment and taxation of commercial and industrial properties, valuation approaches need to reflect market realities.

 

If you have any questions, please contact Mark Lansing in our Washington D.C. office at (202) 466-5964.