Golf property tax assessments can be complicated. With the deadline for filing appeals in many states rapidly approaching, club owners, CFO’s and GM’s need to be thinking about this. In an era when lots of clubs and courses are embarking on capital improvement programs, tax assessors, sometimes eager to expand their local tax base simply add the amount on the building permit to the existing assessed value and there can be a significant increase in annual tax liability.
While no club would seemingly invest in their property without enhancing the value, there are often situations where any increase in assessed value may be offset by a variety of factors.
First and foremost, in most cases local property tax assessors employ a cost approach to formulate their assessments. With most income producing properties and especially with golf and club properties, this is flawed because golf courses rarely generate market value equal to their cost to develop. Sometimes, the additional costs incurred are justified by enhanced values imputed to adjacent real estate or simply the need to keep up with competing clubs by improving facilities. Sometimes, the costs are incurred to address deferred maintenance issues that, while maybe they haven’t impacted the club’s income need to be corrected to avoid unexpected disasters. As an example, that 30 year old irrigation system may be functioning well, but the risk of failure in the heat of summer requires consideration of replacement.
This raises the issue of what I like to categorize as “required” versus “desired” improvements. The deferred maintenance items mentioned above are “required”. Renovation of golf course elements, such as lengthening some holes or adding bunkers may simply be desired. They may not impact value much, if at all, and any course is expected to have a functioning irrigation system, thus, depending on whether the age of the system was considered in the assessment valuation or not, replacement of same may or may not impact the value as assessed.
A most significant issue in golf property assessment cases is the allocation of real and personal property value. Most ad-valorem (as to the value) real estate tax assessments are focused exclusively on real property (land and improvements). Golf courses are and typically trade as going concern enterprises, including both tangible (equipment, furniture, fixtures, etc.) and intangible (business value) personal property. These personal property elements can be quite significant with golf properties and are often overlooked by property tax assessors who often have limited time and resources to invest on each property among the often thousands they’re responsible for.
Allocation of real and personal property value is a very inexact, and often subjective process, however, it must be considered and with the considerable amount of equipment, furniture and fixtures, along with revenues generated from retail sales (pro shop), inventory and food & beverage, the impact on value can be significant and cannot be overlooked.
We encourage clubs to have their real estate tax assessment reviewed on an annual basis. Even if there are no physical changes to the property, there are a number of variables that are constantly evolving. These include club economics (income/expenses), market dynamics, interest rates, cap rates and multipliers which all affect market value. The implied market values from even a stable assessed value can (and do) change regularly as a result of evolving equalization rates which are based typically on property sales in the broader market of the taxing jurisdiction in question. If residential home values increase in a given market and their assessments remain stable, changes in the equalization rate can render an assessment unfair with no other changes.
For a “back of the napkin” look at your assessment check out our property tax calculator or email me to learn how we might be able to help.