LOADING THE CAPITALIZATION RATE FOR TAXES
In June 2010, the Georgia Legislature passed a Property Tax Reform Bill into law to be effective
January 1, 2011 that dealt partially with over-assessed properties based upon ad valorem taxes in
the various counties in Georgia. The bill is identified as SB 346. It can be accessed at:
http://www1.legis.ga.gov/legis/2009_10/versions/sb346_SB_346_APP_9.htm
This law specifically states in Part V, Section 5-1 to 5-3:
PART V
SECTION 5-1.
Said title is further amended in Code Section 48-5-2, relating to definitions, by adding new
paragraphs to read as follows:
“(.1) ‘Arm’s length, bona fide sale’ means a transaction which has occurred in good faith
without fraud or deceit carried out by unrelated or unaffiliated parties, as by a willing buyer
and a willing seller, each acting in his or her own self-interest, including but not limited to a
distress sale, short sale, bank sale, or sale at public auction.”
SECTION 5-2.
Said title is further amended in Code Section 48-5-2, relating to definitions regarding ad valorem
taxation of property, by revising the introductory language of paragraph (3) preceding
subparagraph (A) as follows:
“(3) ‘Fair market value of property’ means the amount a knowledgeable buyer would pay for
the property and a willing seller would accept for the property at an arm’s length, bona fide
sale. The income approach, if data is available, shall be considered in determining the fair
market value of income-producing property. Notwithstanding any other provision of this
chapter to the contrary, the transaction amount of the most recent arm’s length, bona fide sale
in any year shall be the maximum allowable fair market value for the next taxable year. With
respect to the valuation of equipment, machinery, and fixtures when no ready market exists
for the sale of the equipment, machinery, and fixtures, fair market value may be determined
by resorting to any reasonable, relevant, and useful information available, including, but not
limited to, the original cost of the property, any depreciation or obsolescence, and any
increase in value by reason of inflation. Each tax assessor shall have access to any public
records of the taxpayer for the purpose of discovering such information.”
SECTION 5-3.
Said Code section is further amended in paragraph (3) by revising subparagraph (B) as follows:
“(B) The tax assessor shall apply the following criteria in determining the fair market value
of real property:
(i) Existing zoning of property;
(ii) Existing use of property, including any restrictions or limitations on the use of
property resulting from state or federal law or rules or regulations adopted pursuant to
the authority of state or federal law;
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(iii)Existing covenants or restrictions in deed dedicating the property to a particular use;
(iv) Bank sales, other financial institution owned sales, or distressed sales, or any
combination thereof, of comparable real property;
(v) Decreased value of the property based on limitations and restrictions resulting from
the property being in a conservation easement; and
(vi) Any other existing factors provided by law or by rule and regulation of the
commissioner deemed pertinent in arriving at fair market value.”
How does this impact the seller, the buyer and the appraiser? Will sellers and/or their broker use
this law as a marketing tool for potentially lowering the property taxes after a sale and therefore
increase the potential sales price of income-producing properties? Will the purchasers recognize
this potential and actually be willing to take a guaranteed tax reduction into consideration in their
purchase price decisions?
Many county taxing authorities have been slow to lower tax valuations in today’s depressed
economy, particularly on commercial, multi-family and industrial properties. While there have
been some adjustments, generally commercial properties are valued for tax purposes at more
than an “Arm’s length, bona fide sale” would likely bring.
If the appraiser utilizes the existing taxes in estimating the Market Value of an income-producing
property and the value conclusion is less than the taxing jurisdiction’s Fair Market Value
estimate, what should the appraiser do? While there are no specific requirements for this special
circumstance, the Uniform Standards of Professional Appraisal Practice (USPAP) states in
Standards Rule 1-1(b):
(b) not commit a substantial error of omission or commission that significantly affects
an appraisal
Some questions that the appraiser might consider are:

Is the difference significant?

Would a purchaser and/or seller consider the potential tax savings in their
purchase/sale decisions?

What is the tax assessor likely to do in the second year after the taxes are reduced to
the sales price?
Should the appraiser decide an adjustment needs to be made to the appraiser’s preliminary value
opinion for this factor, one way to ascertain the possible enhancement is to use a trial and error
system until the estimated tax value for computing taxes and the market value estimate are equal.
This is a tedious process.
However, there is an easier method by loading the capitalization rate for taxes and capitalizing
the net operating income before deducting ad valorem taxes. The result of this formula will
accurately calculate the value estimate to equate to the tax value in one step without trial and
error.
The formula is:
Capitalization Rate + (Assessment Ratio x Tax Rate) = Implied Cap Rate Before Taxes
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Then utilize the Implied Cap Rate on the NOI before deducting Taxes.
Let’s look at an example and proof of the formula’s accuracy. Let’s assume a property has a Net
Operating Income of $100,000 after deducting vacancy, collection losses and all expenses
including ad valorem taxes of $35,000, based upon a tax value of $2,500,000. The Capitalization
Rate derived from market analysis has been estimated to be 9.5% for the subject property.
Counties in Georgia assess properties at 40%, or .40 (Assessment Ratio) of the assessor’s Fair
Market Value estimate. Assuming the total tax rate for the taxing authorities (City & County) in
this case is $35.00 per $1,000 of tax assessment, or 0.035; then the Implied Cap Rate Before
Taxes is calculated:
Capitalization Rate + (Assessment Ratio x Tax Rate) = Implied Cap Rate Before Taxes
0.095 + (.40 x 0.035) = Implied Cap Rate
0.095 + 0.014 = 0.1090, or 10.9%
The indicated value would therefore be:
NOI + Taxes ÷ 0.109 = Value with Reduced Taxes
$100,000 + $35,000 ÷ 0.109 = $1,238,532
Proof:
Value / Sales Price
Times Tax Ratio
Tax Assessment
Times Tax Rate
Taxes based upon Sales
Price of $1,238,532
NOI Before Deducting
Taxes
Less Revised Taxes
NOI After Sale & new
Tax Value
Capitalized
Indicated Value
(Rounding Error)
$1,238,532
x 40%
$495,413
x 0.035
$17,339
$135,000
- $17,339
$117,661
÷ 0.095
$1,238,537
In this case simply capitalizing the NOI of $100,000 at 9.5% using $35,000 as a tax expense
indicates a vale of $1,052,632. Yet, with taxes reduced based on the sales price, a value of
$1,238,532 is indicated. The key question is what will purchasers do? Will they take into
consideration this potential tax savings, as it could result in a significant difference in NOI the
second year and therefore value?
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