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FEATURED ARTICLE
 A "Global" Look at Obsolescence pdf
The valuation and assessment of real and personal property should consider all forms of depreciation. While most assessors appear to have a handle on the physical deterioration aspect of depreciation, loss in value due to obsolescence is often deemphasized or overlooked altogether.
Obsolescence comes in all shapes and sizes. Functional obsolescence is an impairment of desirability and/or usefulness resulting from functional inutility (deficiencies and/or super- adequacies). External obsolescence can result from a myriad of causes such as locational inadequacies, adverse market conditions, economic distress, increased competition, new legislation, changes to regulations, etc. In many situations, the root cause of external obsolescence is global in nature and unless brought to the attention of assessment personnel by the taxpayer or his/her representative, external obsolescence of this type is rarely considered in the assessment process.
Global external obsolescence is particularly evident in manufacturing and process industries. It doesn't take a designated appraiser to understand the basic economic principle that manufacturers will locate their plants where the lowest overall cost of production can be achieved. Key considerations include the cost and availability of power, labor, transportation and raw materials. Governmental regulation, including pollution control constraints is also a major consideration. These are some of the reasons why many of our domestic manufacturing facilities and process plants have migrated to lower cost off shore sites. This industrial reorientation places an added burden on domestic capacity because they must compete with the newer lower cost plants around the world. As the domestic cost disadvantage escalates, margins are squeezed and investment returns fall below acceptable levels. Global external obsolescence due to the production cost disadvantage suffered by domestic producers when compared to preferred sites for new capacity, can be calculated by capitalizing the locational cost disadvantage. Care must be taken to make certain that the analysis of locational excess operating cost does not include the contribution of technology differences, which would be accounted for in the functional obsolescence analysis.
Compounding the problem for domestic producers is the fact that in a global economy, decisions made by foreign producers concerning product-pricing, as well as capacity additions, could result in further value degradation to domestic plants and equipment. This form of industry-wide obsolescence is experienced when product prices fall below economic levels or when global overcapacity exists.
Global obsolescence, as described above, has affected domestic asset values in a variety of industries including primary metals (both steel and aluminum), pulp and paper, the chemical industry and the automotive industry to name a few. For example, in the early 2000s, the steel industry was ravaged by declining product prices resulting from a global economic slowdown, including a deep economic recession in Asia, excess manufacturing capacity world-wide, and the continued inflow of foreign metal at very low prices. Due to the combined effects of low product prices and high manufacturing costs, the domestic steel mills were the first to idle capacity during these times of economic uncertainty. In fact, from 1998 through 2001 nineteen steel companies had declared bankruptcy. By the first quarter of 2003, seven additional companies filed for bankruptcy protection. Product prices became so depressed that the U.S. steel industry had claimed that foreign companies were using unfair business practices called "dumping" (selling a product below its cost of production) in order to gain U.S. market share and to keep their steel mills producing during the economic downturn. Whether the low steel prices were caused by excess capacity, illegally priced imports, world-wide economic slowdown, foreign exchange imbalances or a combination of these factors, the results were the same -reduced profits for domestic steel manufacturers and declining values for their production facilities. This type of global obsolescence can be measured capitalizing the income loss due to reduced product pricing.
Similar issues have plagued the primary aluminum industry over the years. New facilities in this industry are either located near the source of the raw material if the plant is an alumina refinery (the first step in the production of aluminum) or near a source of abundant low cost power (such as hydro power) if the plant is a smelter where the alumina is converted into aluminum by an electrolytic process. Since the U.S. has a limited supply of the raw material used to make aluminum and virtually no abundant source of low cost power when compared to off shore locations, plants of this type are no longer built domestically. The primary aluminum producing facilities that are located in the US suffer the same fate as their steel making cousins-excess production costs due to plant location resulting in external obsolescence of a global nature-in other words-impaired plant values.
The automotive industry also provides stark examples of depressed real estate and personal property values caused by global considerations. As noted in a recent publication, "International trade and globalization continues to impact the U.S. automotive industry, as production grows in low-cost countries and foreign competition increases." Many of the nation's automotive manufacturing facilities have been either closed or plagued with idle capacity because they can no longer compete in the global market. The components that were made at these facilities are now manufactured in countries that provide a lower cost structure. Additionally, only the most modern domestic auto assembly plants can hope to compete in today's global market.
It is often argued by the assessment community that manufacturing facilities such as an automobile assembly plant, a steel mill, aluminum smelter, etc. are special purpose properties and can only be valued for assessment purposes by use of a cost approach. Even if one were to accept this premise, an equitable value for assessment or any other purpose could only result if proper consideration is given to all forms of obsolescence, including the diminution in value caused by competitive forces in the global economy. Inevitably these negative external forces will eat away at the plant's economic viability until a change in highest and best use results. For example, after many years of appeals dating back to 1983, the General Motors case in Linden, New Jersey was recently settled. The plant, which was closed about three years ago, has been sold to a real estate developer, who plans to demolish the main plant and develop a mixed-use retail and industrial project. The obsolescence, both functional and external, which impacted the value of this facility as an automobile assembly plant, existed long before the plant closed. Unfortunately for the taxpayer, it often takes a catastrophic event, like plant closure, before the assessor recognizes the extent of the obsolescence.
Global external obsolescence is a very real force that must be accounted for in the assessment process and since it can impair the value of both real estate and personal property, its importance takes on an added significance. This article referenced a few industries to illustrate the concept but many other industries and property types are also subject to this form of depreciation. Any taxpayer, who works in an industry that participates in the global economy, should research and consider the global issues, which have an adverse impact on your properties' values for assessment purposes. Interviews with plant and corporate personnel as well as a study of published materials will help isolate specific issues.
International Appraisal Company (IAC) has assisted many clients in reducing their assessments by substantiating obsolescence claims through preparation of formal obsolescence studies. The information contained in our reports can be used as a negotiating tool or for presentation to local appeal boards. Our appraisal and property tax consulting experts have valuation experience in many industries and for a wide variety of property types. Our reports consist of a detailed narrative analysis of the specific obsolescence issues, which affect the value of a given facility and a market supported estimate of the appropriate obsolescence allowance. IAC's team of experts will present their findings, whether it be informally to an assessor or to a formal appeal board, in accordance with the highest level of professionalism.
In most cases, we are able to achieve the desired result at the local level. However, should litigation become necessary, our appraisal experts would be available to provide the necessary litigation support by completing fully documented appraisals and providing expert testimony. IAC consultants would also be available to participate in trial strategy decisions, exhibit preparation and consultation with legal counsel.
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CASE & POINT
 Does section 42.26 of the Texas Tax Code entitle a taxpayer to challenge only the land component of an appraised value without claiming that the total appraised value as improved is unequal?
The Texas Court of Appeals for the Third District at Austin recently addressed this issue of first impression in Covert et al (taxpayer) v. Williamson Central Appraisal District (WCAD). In its ruling, the court found that the statute at issue provides a taxpayer a cause of action for contestation of an appraised value as a whole, but provides no remedy for separately contesting the individual land or improvement components of the overall appraised value.
The properties involved consist of five separate parcels ranging in size from five to eighty-seven acres, with three of the five parcels improved by car dealerships owned by the taxpayer. With regard to the improved parcels, WCAD, as required under section 25.02(a) of the Texas Tax Code, listed separate values in its own records for both the land and improvement components of the overall appraised value.
Taxpayer brought suit for tax years 2001 through 2004, challenging the land portion only of WCAD's appraised value of the properties. They asserted that the lands underlying the dealerships, when compared to unimproved parcels along the same highway, were unequally appraised.
At trial, WCAD alleged that the tax code provides no remedy for a taxpayer who challenges only a singular component of an overall appraised value. The trial court agreed and as such the case was dismissed upon taxpayer's refusal to replead their cause of action and allege that the entire appraised value was unequal.
On appeal, taxpayer argued that nothing in the text of the applicable statute requires them to challenge every component of an overall appraised value in order to assert a cause of action.
The court disagreed, noting that the plain language of the statute only requires that any property appraised must be valued equally to comparable properties. The Court qualified this finding by noting that while WCAD listed separate values for both the land and improvement components of the contested appraised values, only the cumulative appraised values were certified to the taxing units. Furthermore, only the cumulative appraised values and not the component parts were included on the tax bills. As such, the court found that it is the total appraised value, and not its component parts, that may be challenged under the statute.
The court noted that while only the total appraised value may be contested, a taxpayer is not prevented from attacking only the land or improvement component of the appraised value. To do so however requires an assertion that an unequal appraisal of one of the component parts has resulted in a total appraised value that is unequal.
In the case at hand, taxpayer's own expert admitted under oath that even if the land component is unequally appraised, the entire property is "not necessarily" unequally appraised. Stated otherwise, a fair appraisal should not be disregarded "because one component or the other is subject to attack without some showing that the overall assessment is incorrect."
As such, any taxpayer challenge brought under 42.26 of the Texas Tax Code must assert that the overall appraised value of the subject property is unequal.
Read The Case Here
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TAXING ISSUES
March Appeal Deadlines
AZ - 60 days after assessment
CT* - 3/20
MN - 3/31, Tax Court for prior year
NH - 3/1
NM - 3/31 or 30 days after notice
NY - 3/20, Auburn & Rochester
OH - 3/31
VA - Arlington
AK* DE* GA* HI* KS* MI* SC* VA*
*Dates Vary. Check Jurisdiction
April Appeal Deadlines
KS - 4/1
NJ - 4/1
NY - Corning
ND - Townships 1st Monday. Cities 2nd Monday
AL* AZ* GA* HI* IA* KY* NC* ND* OK* SC* SD* VA*
*Dates Vary. Check Jurisdiction
Indiana: Lawmakers Pass Property Tax Legislation
Indiana lawmakers have finally worked out a deal and passed a property tax reform package. The package includes caps on property tax bills, based on assessed value, and a 1 percent increase in the sales tax rate. The legislation calls for residential property taxes to be capped at 1 percent per year, rental and farm properties will be capped at 2 percent and commercial properties will be capped at 3 percent. The bill has been passed by the General Assembly and will now be presented to Governor Mitch Daniels for Signature.
Learn more here
Florida: Emergency Rules Issued Regarding Amendment 1
The Department of Revenue has issued emergency rules regarding the passage of Amendment 1. The rules are retroactive to January 1, 2008. Learn more about Amendment 1 and view the emergency rules here
Minnesota: Appeal Dismissed For Failure To Comply With The 60-Day Rule
Another appeal has fallen prey to Minnesota's 60-Day Rule. In the case of McDonald's Corp. v. Scott County the taxpayer's appeal was dismissed by The Minnesota Tax Court after failing to provide information required under the 60-Day Rule.
Read the case Here
California: Clarification Of Escape Assessment Procedures
The California State Board of Equalization has issued a letter to tax assessors regarding the proper procedures regarding the enrollment of escape assessments.
Read the letter here
Illinois: Special Appeal Period For Chicago 2007 Assessments
The normal window of opportunity for Chicago taxpayers to file assessment appeals has expired. However, a special appeal period has been established to account for current economic conditions. The appeal period is from March 17th to March 31st. Read the press release here
Indiana: Marion County Reassessment Values Scheduled To Be Issued
In the near future Marion County taxpayers will receive tax bills. The tax bills will serve as the notice of value for the 2006 (payable 2007) tax year. Taxpayers will have an opportunity to appeal these values within 45 days from the issuance of the bills.
There also may be appeal opportunities in various counties throughout the state due to 2007 (payable 2008) values being issued. Please contact us for more information regarding the Marion County reassessment or for information regarding a specific county.
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Dates, guidelines & procedures. What you need to know