Impact of Increased Non Residential Property Assessments
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Impact of Increased Non Residential Property Assessments
Finance & Taxation - Municipal Policy
Issue(s): The City of Medicine Hat’s 2013 assessment of non-residential property values resulted in sudden, unexpected and significant increases to many property owners’ tax liabilities. Of the concerns raised, four main issues were identified, including:
- Analysis of Market Value and Market Segmentation
- Calculation of the Capitalization Rate
- Customer Service d. Disclosure of Information
Through the 2013 process of assessing non-residential property values, the City of Medicine Hat interpreted data in a manner which varied from the assessment process in previous years. This led to significant changes to the assessed value of a number of local properties. With over 100 properties that had assessed values of greater than 30% compared to 2012 and approximately 116 properties that appealed, there is concern about the methodology used for the 2013 assessments. Additionally, businesses expressed concerns related to the level of customer service received, issues with compliance and disclosure of information, as well as fees associated with the disclosure of information. For these reasons, the Medicine Hat & District Chamber of Commerce is recommending the City of Medicine Hat put certain measures, process and procedures in place to mitigate reoccurrence of this situation and the impacts that this process has imposed on business.
Through the 2013 non-residential property value assessment process, the City of Medicine Hat interpreted data in a way that differed from previous assessments. This new process has resulted in significant changes to the assessed value of numerous commercial properties. Of the 1400 non-residential properties, 1047 were based on the income approach to value, with the remaining properties primarily based on the cost approach (for linear, vacant and heavy manufacturing properties). The sales approach was used primarily for residential.
Market Value and Market Segmentation
The Municipal Government Act gives direction to municipalities to prepare assessments every year and sets out two types of valuation standards; the market value based standard and the regulated procedure based standard. The market value based standard is considered the most fair and equitable means of assessing property. It is fair because similar properties are assessed in the same manner; it is equitable because owners of similar properties in a municipality will pay a similar amount of property tax.
Market value is defined as the price a property might reasonably be expected to sell for if sold by a willing seller to a willing buyer after appropriate time and exposure in an open market. Key characteristics of market value are:
- It is the most probable price, not the highest, lowest, or average price.
- It is expressed in terms of a dollar value.
- It assumes a transaction between unrelated parties in the open market.
- It assumes a willing buyer and a willing seller, with no advantage being taken by either party.
- It recognizes the present use and potential use of the property.
There are three primary approaches to market value. A sales comparison approach, a cost approach and an income approach. A sales comparison approach compares sales prices of similar properties to the property being assessed. The cost approach take the value of land + cost of improvements – depreciation = value of property; while the income approach estimates what a potential purchaser would pay for a property given its expected rate of return.
In a smaller market, there are challenges with using an income approach to value properties; and more difficulties arise when analyzing values in an economic climate such as Medicine Hat has experienced for the past few years. Regardless of the approach, assessors are generally encouraged to use as much data as possible which could include going back to previous years’ assessments, as well as expanding the analysis area, while putting as much weight as possible on the most recent data. One of the problems assessors have encountered is obtaining the lease data from property owners to be used in the income approach. For the 2013 assessment year Medicine Hat was able to obtain approximately 60% of the data from the requests for information. There were concerns that the assessor did not obtain enough data to determine the assessment, which is both a responsibility of the property owner and the assessor. Municipalities that have the most success gathering data work diligently with the owners to obtain it. Detailed information about each property should be gathered by making on-site visits and/or by corresponding with the owner of the property. Information collected by the assessor in the assessment process is also available from other sources including Alberta Land Titles, real estate Multiple Listing Services, and financial institutions, as well as consultation with other local appraisers.
While the classification rate table the City has developed outlines seemingly appropriate categories, it is still unknown as to how properties were grouped into those categories, as there were reports where the categorization did not seem to align with the property in the segmentation.
Assessors are expected to determine capitalization rates based on the best available data. While there are a number of methods that can be used to determine capitalization rates, the most effective method would be using sales of leased properties, subject of course to the availability of data. In areas where there is limited sale activity, this can create a challenge and assessors should support their conclusions with alternate data sources. Recommended practice would be to determine capitalization rates through an ongoing process of interviewing local appraisers, analyzing sales and consulting with ratepayers and their tax agents. As minimal sales make a more complex study difficult for the mass appraisal methodology, assessors should utilize local knowledge, expertise and consultation in determining appropriate capitalization rates, while verifying the calculation and capitalization with other methods such as the market derived method, band of investment method and/or Akerson method.
Customer Service & Disclosure of Information
There was significant concern related to how the 2013 assessments were handled as it related to customer service and customer relations. While we understand that issues on both sides of the counter existed regarding treatment of individuals, there must be the utmost understanding for the customer and the level of concern that this particular circumstance would generate. We do not condone mistreatment of any individual, but would suggest that there are positive steps that can be taken to improve the situation, rather than those that may cause a situation to escalate to a more negative outcome overall.
The concerns identified were the lack of consultation and awareness before the assessments notices were distributed and the lack of consultation and communication following the distribution of assessments notices. There was also ongoing concern with the treatment of customers, the response time to deal with an issue, the disclosure of information, the fees associated with obtaining assessment information and the “unfinalized” assessment notices.
Many of the concerns may have been addressed if the 2013 assessments had been compared to the 2012 assessments and flagged for any irregularities. These irregularities could then have been managed in a consultative capacity to educate, inform and gather proper information prior to notices being distributed.
Additionally, consultation and communication with property owners, appraisers and other market experts leading up to the 2013 assessments, as well as more effective communication following the assessments, could have alleviated some of the issues and negative publicity and backlash that arose as a result. There were reports of delays in responding to inquiries and compliance issues related to obtaining information in breach of section 299 and 300 of the Municipal Government Act. An assessed person may ask for information in accordance with Municipal Government Act sections 299 and 300 and the municipality must comply in accordance with the act and regulations. The regulation sets out additional details, timelines, and the right to request a compliance review and penalties that may be imposed. If the assessed person has requested information about their property under Municipal Government Act, section 299, or other property under Municipal Government Act, section 300, the assessor is obligated to provide the information within 15 days.
Additionally, the fees associated with Bylaw 3031, to establish fees for tax certificates and other information regarding assessments and taxes provided by the City’s Assessment and Taxation Department, are among the highest in the province. In reviewing several other similar sized and larger municipalities in the province, Medicine Hat’s fees were the highest found.
Within bylaw 3031, which has not been updated since amended in February 2009, it outlines in section 1 that the following fees are established for tax certificates, information and services provided by the City’s Finance Department:
|For a manual tax certificate
|For an e-service tax certificate
|For written information regarding assessments and taxes and other property information
|For verbal information regarding asseesments and taxes and other property information
|For e-services searches (e.g. legal descriptions)
|Transfer of outstanding Utilities to the Tax Roll
Other municipalities interpret section 300 of the Municipal Government Act to read that because properties owners are entitled to this information, the municipality does not charge for the information, as they are required to provide it. Some municipalities will apply a limitation or restriction on the number of free summaries requested and after a certain number of summaries (i.e. 5) they then will charge a nominal fee to cover off the administration costs for supplies and copies.
During the 2013 assessment there was also “Un-Finalized assessment” letters that were sent out to some property owners. Under the Municipal Government Act, only “assessment notices” or “amended assessment notices” can be issued by a municipality. The Municipal Government Act does not reference an “Un-finalized Assessment”. The inclusion of a letter from the assessor indicating the assessment on the notice is “un-finalized” could call into question the status of the notice. Since it is the assessment notice that triggers the complaint period, such a letter could also call into question when the complaint period began and when it has ended.
If property owners receive such notice they should then have the ability to call this to question and raise the issue of appropriate notice with the City or alternatively file a complaint with the Composite Assessment Review Board and ask the board to address the matter of appropriate notice.
While there continues to be speculation and conversation over the accuracy of many specific assessments, the purpose of this policy is to limit the negative impact of significant and unexpected tax increases to business and mitigate the issues related to assessments moving forward.
The Medicine Hat & District Chamber of Commerce is committed to fostering a positive and predictable environment for businesses to operate and the ability to accurately predict expenses is important to the sustainability and growth of any successful business. In circumstances where governments impose unexpected taxes, fees, regulatory burdens or procedures, The Medicine Hat & District Chamber of Commerce feels that reasonable notice and explanation is required.
After considering the short notice of the increases and significant impact on local business, we feel that this issue needs to be addressed so that processes can improve for future years and current issues can be addressed. This would lessen the negative affect on businesses and allow a reasonable period of time to prepare for increased expenses.
The Chamber understands the limitations and that Council can not direct valuations of the assessor, as the assessor is independent, arms length and appointed by Council to ensure there is no political influence and vested stake in the results. We also understand that council can cancel, refund, defer or phase in tax increases or decreases and they have exercised that right for the time being, until they know what other measures or options Municipal Affairs will be taking or recommending.
The concern is that the process for assessments provincially has not changed, yet there are such extreme cases in our municipality for the 2013 year that need to be addressed so that we can mitigate the challenges and the negative impacts moving forward. Additionally, while the Provincial Government regulates assessments, they do not regulate the specific process taken when it comes specifically to market segmentation and determination of capitalization rates.
We understand that because of the various methods and approaches, it can become a challenge to appropriately select the best methodology in assessments. However, in consulting with colleagues in other municipalities and within our own municipality, there is a very feasible and combined approach that can be patterned.
In our research, we have found various examples of assessment methods, which include some municipalities citing a direct or sales comparison approach for condos; a cost approach used for properties such as partially completed buildings, churches, schools and industrial businesses; and a cost approach or sales comparison approach used in a few examples found for warehouses. Rental properties or revenue producing properties such as malls, restaurants and retail outlets were assessed using an income approach and we found circumstances where gas stations were assessed on a cost approach as their income is hard to predict.
Additionally, some municipalities, such as Lloydminster, don’t employ their own assessor, but will hire a third party company from another municipality to conduct the assessments on their behalf.
In researching various other municipalities, speaking with various appraisers (particularly those who are non-partisan to the issue) and speaking with Municipal Affairs, we have come to some conclusions and recommendations that are reasonable to assist in alleviating this problem moving forward and addressing the current challenges.
The Medicine Hat & District Chamber of Commerce recommends the City of Medicine Hat:
- Assessment Department diligently corresponds with property owners to obtain all information necessary to accurately assess market value, as well as to consult with and obtain information from other sources including Alberta Land Titles, real estate Multiple Listing Services, financial institutions, and other local appraisers.
- Assessment Department re-evaluate the classification table and provide summaries to each category that would explain what criteria a business must meet in order to be classified in a particular category (ie. what types of business are included and what types of businesses are excluded).
- Assessment Department requests information for properties throughout the year and ensure that there is proper advertising and media exposure of this requirement. Information needs to be communicated effectively to property owners in a timely fashion.
- Assessment Department actively and regularly meets with other municipal assessors as well as other professional assessors and appraisers to discuss market conditions, market values, processes and practices.
- Assessment Department supports their conclusions on capitalization rates with alternate data sources through an ongoing process of interviewing local appraisers, analyzing sales and consulting with ratepayers and their tax agents, while also verifying the calculation with other methods such as the market derived method, band of investment method and/or Akerson method.
- Create a Customer Service and Customer Satisfaction policy that addresses more prompt response times and the manner in which customers are dealt with. This may include, but would not be limited to, a service level agreement that addresses response time for walk-ins, telephone and email inquiries as well as the response time to call back and provide further information beyond the initial point of contact.
- Assessment Department compare current assessments to prior year assessments and flag irregularities (in excess of a 20% variation), which would then be followed up with individualized consultation, education and information in order to gather proper information prior to assessment notices being distributed.
- Assessment Department commences the assessment process two months in advance in order to allow time to address irregularities.
- Update bylaw 3031 to establish fees for tax certificates and other information regarding assessments and taxes provided by the City’s Assessment and Taxation Department and either reduce or remove the fees associated to the provision of assessment information.
- Ensure that “un-finalized assessment notices” are not distributed to property owners, using only “assessment notices” or “amended assessment notices”, as un-finalized assessments are not in compliance with the Municipal Government Act and calls into question the status of the notice.
- Continue to pursue a Provincial Audit of the 2013 Tax Roll with Municipal Affairs and report any findings to the nonresidential property owners.
Guide to Property Assessment and Taxation in Alberta, Government of Alberta, Municipal Affairs Steve White, Executive Director, Assessment Services Alberta Municipal Affairs, Government of Alberta
Date Drafted: August 27, 2013
Date Reviewed: September 10, 2013
Date Approved: September 18, 2013
Date Completed: 2018