Looking at Your Club’s Tax Assessment – Presume a Sale

Among the more interesting aspects of golf and club real estate tax assessments are the different perspectives often taken by the taxpayer and taxing authority sides.  Having served as an expert for both sides, I’ve learned that an accurate estimate of value relies heavily on one simple principle.

The most widely accepted components of market value are incorporated in the following definition: The most probable price that the specified property interest should sell for in a competitive market after a reasonable exposure time, as of a specified date, in cash, or in terms equivalent to cash, under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, for self-interest, and assuming that neither is under duress.  Since tax assessments are “ad-valorem” (as to the value) and market value is dependent on conditions requisite to a fair sale, inherent in any estimate of value is the presumption of a sale.  Accordingly, it is the duty of the assessor and appraiser to interpret how buyer and seller would evaluate the property in a negotiation for sale environment.

For many years, golf courses, and private clubs in particular were perceived to be such special use properties, that rarely traded in the marketplace that estimating value was only achievable by performing a cost analysis.  However, during the past 3o+ years, the valuation of golf properties has advanced significantly, along with the activity in the market for golf properties, creating an enhanced ability for accurately estimating their market value using ample market data.  What we’ve learned is that golf properties are purchased and sold largely based on their ability to generate revenue and their physical condition, especially as it relates to deferred maintenance and the need for capital improvements.

With many golf courses and clubs experiencing some financial distress, managing real estate tax expenses is a primary focus.  Tax assessors often rely on a replacement cost analysis to assess golf properties because they don’t have access to reliable and complete income/expense data and because they typically have too many properties to deal with to perform that research.

The first and most relevant issue with relying on a cost approach is that the cost to replace a golf facility is generally unrelated to what it might sell for in the marketplace.  Even the estimate of depreciation is speculative at best when one considers the difficulty in accurately estimating same, especially from external obsolescence.

For many years, until the early 1990’s it was common for appraiser to estimate the value of golf courses from comparable sales using a price per hole analysis.  This is also inconsistent with the presumption of a sale because most golf courses have the same number of holes (18) and no common denominator is developed.  Accordingly, as market participants relied more upon gross revenue multipliers and overall cap rates derived from either market sales or their own investment criteria, appraisers began using similar units of comparison in analyzing comparable sales.

The income approach can be the most reliable of the 3 when there is enough data to support income and expense estimates and when the property is stabilized or when future cash flows are somewhat predictable.  This approach, using traditional methods is the most widely used by buyers and sellers.

Since golf properties are typically sold as going concerns, including personal property and intangibles, an allocation is required to develop the real property value for assessment.  Among the methods used in tax assessment cases is the “market rent” method which estimates a market rent for the property and theoretically eliminates the need for an allocation of real and personal property to derive a real estate only value.  While conceptually this method does eliminate the element of personal property, it is NOT reflective of market activity and thus does not meet the requirement of presuming a sale.

Inherent in the presumption of a sale is an estimate of how the buyer will address any deferred maintenance or needed capital improvements to the property.  These elements are often a big part of any tax assessment case, assuming they can be identified and documented.  For instance, if the irrigation system is on its last legs its unlikely the assessor will see that.  The age and condition needs to be documented and the cost to replace professionally estimated.  With the cost of most irrigation systems well in excess of $1 million or more, this can have a big impact on the sale of a property and subsequently the assessment.

To learn more about your assessment and how much you might be able to save, visit our TAX CALCULATOR and call us to see if your club has opportunity to save on its real estate tax assessment.