Commentary: The Market Rent Approach

The valuation of golf course properties for ad-valorem tax assessment cases is an interesting exercise. In recent years, the “Market Rent” approach to valuation has been used by some appraisers, with some success, particularly in New York State, where through case law the use of this method has become primary in “Tax -Certiorari” (as they are called in New York) cases.

While, in theory the method attempts to isolate real property value in a property that is almost always traded as a going concern, the first flaw in the process is just that, that the method is not reflective of market conditions because it fails to first evaluate the golf property (going concern) in question in a manner similar to market participants. This is only one element of concern I observe in using the market rent method to achieve fair real estate tax assessments for golf course properties.

While leases of golf course properties do exist, they are relatively few and far between, and it is difficult at best to derive units of comparison with which to compare them to the subject. It might seem that there would be a relationship between the rental rate and the revenues produced by the golf course, or possibly between the rental and the net income of the course. However, an analysis of golf course leases shows that;

  • The range of indicators is typically too wide to establish a reliable trend;
  • There is too little data to group leases based on commencement dates, thus often suggesting the need for large adjustment for market conditions.

Once the data is compiled, the results of the analysis are super-sensitive to minor fluctuations in the selected percentage rates for revenues, which could allow for a wide range of conclusions that might be inaccurate. Additionally, the “Market Rent” Approach does not address the issue of tangible personal property (equipment, merchandise, etc.) which can be a significant portion of the going concern value.

I prefer the method advocated by The Appraisal Institute for allocating real and personal property value for golf course properties, which employs the formula as follows: TAB = RE + PP + BEV, whereas TAB = Market Value of Total Assets of Business, RE = Real Estate Value, PP = Personal Property Value and BEV = Business Enterprise Value. This method is discussed further in this article. Though not perfect, unlike the market rent method, it addresses the elements of tangible personal property present in almost all golf course sale transactions that must be considered, and are not in the market rent approach. I’ve also observed that most instances where I’ve seen the market rent approach employed, the cap rate used has been similar to that employed in the going concern valuation. Since the object of the market rent method is to isolate real property value, I would suggest that the overall cap rate used be more consistent with other types of properties that don’t share the personal property (tangible and intangible) elements of golf course properties.

Of course, where required by law, we are happy to employ the market rent approach to the valuation of golf course properties, however, I believe it is flawed and plan to supplement with more traditional valuation methodology as appropriate.