| (5) |
Valuation procedures. The
appraisal staff shall follow the provisions of this paragraph when performing
their appraisals. Irrespective of the valuation approach used, the final
results of any appraisal of personal property by the appraisal staff shall in
all instances conform to the definition of fair market value in Code section
48-5-2 and this Rule.
| (a) |
General procedures. The
appraisal staff shall consider the sales comparison, cost, and income
approaches in the appraisal of personal property. The degree of dependence on
any one approach will change with the availability of reliable data and type of
property being appraised.
| 1. |
Information
presented by property owner. The appraisal staff shall consider any
timely information presented by the property owner that may have reasonable
relevance to the appraisal of the owner's personal property. The appraisal
staff shall consider the effect of any factors discovered during the review or
audit of the return or directly presented by the property owner that may reduce
the value of the owner's personal property, including, but not limited to all
forms of depreciation, shrinkage, theft and damage. |
| 2. |
Selection of approach. With
respect to machinery, equipment, personal fixtures, and trade fixtures, the
appraisal staff shall use the sales comparison approach to arrive at the fair
market value when there is a ready market for such property. When no ready
market exists, the appraiser shall next determine a basic cost approach value.
When the appraiser determines that the basic cost approach value does not
adequately reflect the physical deterioration, functional or economic
obsolescence, or otherwise is not representative of fair market value, they
shall apply the approach or combination of approaches to value that, in their
judgment, results in the best estimate of fair market value. All adjustments to
the basic cost approach shall be documented to the board of tax
assessors. |
| 3. |
Rounding.
The appraisal staff may express the final fair market value estimate to
the board of tax assessors in numbers that are rounded to the nearest hundred
dollars. |
|
| (b) |
Special procedures. The appraisal staff shall observe the
procedures in this Subparagraph when appraising inventory and construction in
process.
| 1. |
Valuation of inventory.
When appraising inventory, the appraisal staff shall consider the value
of inventory to consist of all the charges incurred from its original state as
raw material to its final resting place for ultimate consumption, including
such items as freight and other overhead charges, with the exception of the
cost of the final sale The appraisal staff shall also consider factors
contributing to any loss of value including, but not limited to, obsolescence,
shrinkage, theft and damage. |
| 2. |
Construction in progress. Property owners who are constructing or
installing a large piece or line of production equipment may be required by
generally accepted accounting principles to accrue the total costs associated
with such equipment in a holding account until the construction or installation
is complete and the equipment is ready for production, at which time, the
property owner is permitted by such principles to post the total cost to a
fixed asset account, taking appropriate depreciation. If such holding account
is maintained by the property owner, the appraisal staff shall consider the
total cost reported in the property owner's holding account when appraising
such property. Construction in progress shall be appraised in the same manner
as other similar personal property taking into account that there may be little
or no physical deterioration on such property and that the fair market value
may be diminished due to the incomplete state of construction. If comparable
sales information of personal property under construction is generally not
available and there is no other specific evidence to measure the probable loss
of value if the property is sold in an incomplete state of construction, the
appraisal staff may multiply the identified total cost of construction by a
uniform market risk factor of .75. |
| 3. |
Overhauls. When appraising
machinery, equipment, furniture, personal fixtures, and trade fixtures, the
appraisal staff shall consider the cost of all expenditures, both direct and
indirect, relating to any efforts to overhaul an asset to modernize, rebuild,
or otherwise extend the useful life of such asset. The following procedure is
to be used by the appraisal staff to estimate the value of an overhauled asset:
An adjustment to the original cost of the asset is made to reflect the cost of
the components that have been replaced. The cost of the overhaul is divided by
an index factor representing the accumulated inflation or deflation from the
year of acquisition of the asset on which the overhaul was performed to the
year of the overhaul. This amount is then subtracted from the original cost of
the asset being overhauled. The remainder is then multiplied by the composite
conversion factor for the year of the original acquisition as specified in Rule
560-11-10-.08(5)(f)(4)(iii)
of this section. The current year's composite conversion factor is then applied
to the cost of the overhaul, and these two figures are combined to represent
the estimate of value for the overhauled asset. |
|
| (c) |
Level of trade. The
appraisal staff shall recognize three distinct levels of trade: the
manufacturing level, the wholesale level, and the retail level. The appraiser
shall take into account the incremental costs that are added to a product as it
advances from one level to another that may increase its value as a final
product. The appraisal staff shall value the property at its level of
trade. |
| (d) |
Ready markets.
When the appraiser lacks sufficient evidence to demonstrate the
existence of a ready market, he or she shall consider any evidence submitted by
the property owner demonstrating that a ready market is available. When the
property owner cannot prove the existence of a reliable ready market, the
appraiser may use other valuation approaches as authorized by law and Rule
560-11-10-.08(5).
| 1. |
Liquidation sales. The
appraisal staff should recognize that those liquidation sales that do not
represent the way personal property is normally bought and sold may not be
representative of a ready market. For such sales, the appraisal staff should
consider the structure of the sale, its participants, the purchasers, and other
salient facts surrounding the sale. After considering this information, the
appraisal staff may disregard a sale in its entirety, adjust it to the
appropriate level of trade, or accept it at face value. |
|
| (e) |
Sales comparison approach.
The sales comparison approach uses the sales of comparable properties to
estimate the value of the subject property being appraised.
| 1. |
Widely used pricing guides.
The appraisal staff should make a reasonable effort to obtain and use
generally accepted pricing guides that are published and widely used within the
market. When using such a guide to estimate the comparative sales approach
value, the appraiser shall begin with the listed retail price and then make any
value adjustments as provided in the guide instructions, based on the best
information available about the subject property being appraised. |
| 2. |
Lesser-known pricing guides.
The property owner may submit, and the appraisal staff shall consider,
lesser known publications, periodicals and price lists of the specific types of
personal property being returned. Such lists should be regularly consulted by
buyers of the type personal property reported, and should list prices at which
sellers, who regularly deal in the types of property reported, typically offer
such property for sale.
| (i) |
Validation
of lesser pricing guides. In all cases where unpublished, unrecognized,
or unverified sales data are submitted by the property owner, the steps the
appraiser may take to validate such data include, but are not limited to, the
following:
| (I) |
Arm's length
transactions. as defined in OCGA 48-5-2(.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." Transactions where the lien holder receives or repossesses the
property, and deed under power of sale transactions are not to be applied as an
arm's length transaction. |
| (II) |
Representativeness. Verify that the sales data submitted is either
all-inclusive or has been randomly selected, so as to be unbiased and fairly
represent the market for the personal property being appraised. This may be
accomplished by contacting known dealers of the subject personal property to
determine whether other significant market data exists that supports the data
submitted by the property owner. |
| (III) |
Financing. Adjust the sale
price of the subject property for non-conventional financing. |
| (IV) |
Time of sale. Adjust the
sale price of the subject property for the date of sale in order to estimate
the value as of the January 1 assessment date. |
| (V) |
Discounts. Adjust the sale
price to remove trade and cash discounts. |
| (VI) |
Comparability. Adjust the
sale price of the subject property for characteristics of the subject not found
in the sales to which it is being compared, such as condition, use, and extra
or missing features. |
|
|
| 3. |
Other factors. To finalize
the sales comparison approach, the appraiser shall consider any other factors,
appropriate to the approach, which may be affecting the value. When the
comparative sales approach is used as the basis for the appraisal of personal
property, the appraiser shall not make further adjustments to the value to
reflect economic obsolescence, functional obsolescence, or
inflation. |
|
| (f) |
Cost
approach. The cost approach arrives at an estimate of value by taking
the replacement or reproduction cost of the personal property and then reducing
this cost to allow for physical deterioration, functional and economic
obsolescence.
| 1. |
General procedure.
In applying the cost approach to personal property during a review or
audit of a return, the appraiser shall identify the year acquired, and total
acquisition costs, including installation, freight, taxes, and fees. The
acquisition costs shall then be adjusted for inflation and deflation and then
depreciated as appropriate to reflect current market values. |
| 2. |
Book value. The appraiser
should recognize that the appraisal and accounting practices for depreciating
personal property might differ. Accounting practices provide for recovery of
the cost of an asset, whereas appraisal practices strive to estimate the fair
market value related to the current market. The appraiser should consider
depreciation in the forms of physical deterioration, functional obsolescence,
and economic obsolescence, which may not necessarily be reflected in the book
value. The appraiser should consider that accounting practices of property
owners might also differ. |
| 3. |
Valuation as a whole. The appraiser may arrange the individual
items of personal property into groups with similar valuation characteristics
and value such group as a whole when the itemized appraisals of each item of
personal property will not add substantially to the accuracy of the
determination of the cost approach value. |
| 4. |
Basic cost approach. The
appraisal staff shall determine the basic cost approach value of machinery,
equipment, furniture, personal fixtures, and trade fixtures using the following
uniform four-step valuation procedures: Determine the original cost new of the
item of personal property to the property owner; determine the uniform economic
life group for the item of personal property; and multiply the original cost
new times the uniform composite conversion factor appropriate for the economic
life group and actual age of the item of personal property. Then determine a
salvage value of any item of personal property when it is taken out of use at
the end of its expected economic life.
| (i) |
Original cost new. The appraisal staff shall determine the
original cost new of the item of machinery, equipment, furniture, personal
fixtures, and trade fixtures. Any real improvements to the real property,
including real fixtures that had to be installed for the proper operation of
the property, shall be included in the appraisal of the real property and not
included in the basic cost approach value of the personal property. Those
portions of transportation costs and installation costs that do not represent
normal and customary costs for the type personal property being appraised shall
be excluded from the original cost new when determining the basic cost approach
value. |
| (ii) |
Economic life
groups. When determining the basic cost approach value of machinery,
equipment, furniture, personal fixtures, and trade fixtures, the appraisal
staff shall separate the individual items of property into four economic life
groupings that most reasonably reflect the normal economic life of such
property as specified in this subparagraph. The appraiser shall use Table B-1
and B-2 of Publication 946 of the U.S. Treasury Department Internal Revenue
Service, as revised in 1998, to classify the individual asset into the
appropriate economic life group. For property that does not appear in such
publication, the appraisal staff may determine the appropriate economic life
group based on the best information available, including, but not limited to,
the property owner's history of purchases and disposals.
| (I) |
Group I. The appraisal staff
shall place into Group I any assets that have a typical economic life between
five and seven years. |
| (II) |
Group II. The appraisal staff shall place into Group II any assets
that have a typical economic life between eight and twelve years. |
| (III) |
Group III. The appraisal
staff shall place into Group III any assets that have a typical economic life
of thirteen years or more. |
| (IV) |
Group IV. The appraisal staff shall place into Group IV any assets
that have a typical economic life of four years or less. The appraisal staff
shall also place into Group IV those assets classified as Asset Class 00.12 in
Publication 946 of the U.S. Treasury Internal Revenue Service, Table B-1, as
revised in 1998. |
|
| (iii) |
Composite conversion factors. The appraisal staff shall, in
accordance with this Rule, use the composite conversion factors as provided in
this subparagraph and apply the appropriate factor to the original cost new of
personal property to arrive at the basic cost approach value. The last
composite conversion factor in each economic life group shall not be trended
and shall represent the residual value.
| (I) |
Group I composite conversion factors. The following composite
conversion factors shall be applied to Group I assets to arrive at the basic
cost approach value for years one through seven: Y1-.87, Y2-.74, Y3-.58,
Y4-.43, Y5-.32, Y6-.26, Y7-.21. Thereafter the residual composite conversion
factor shall be .20. |
| (II) |
Group II composite conversion factors. The following composite
conversion factors shall be applied to Group II assets to arrive at the basic
cost approach value for years one through eleven: Y1-.92, Y2-.85, Y3-.78,
Y4-.70, Y5-.63, Y6-.54, Y7-.44, Y8-.34, Y9-.28, Y10-.25, Y11-.25. Thereafter
the residual composite conversion factor shall be .20. |
| (III) |
Group III composite conversion
factors. The following composite conversion factors shall be applied to
Group III assets to arrive at the basic cost approach value for years one
through sixteen: Y1-.95, Y2-.91, Y3-.87, Y4-.82, Y5-.79, Y6-.75, Y7-.70,
Y8-.63, Y9-.57, Y10-.52, Y11-.47, Y12-.41, Y13-.35, Y14-.31, Y15-.29, Y16-.28.
Thereafter the residual composite conversion factor shall be .20. |
| (IV) |
Group IV composite conversion
factors. The following composite conversion factors shall be applied to
Group IV assets to arrive at the basic cost approach value for years one
through three: Y1-.67, Y2-.54, Y3-.31. Thereafter the residual composite
conversion factor shall be .10. |
|
| (iv) |
Basic cost approach value.
The basic cost approach value shall be determined by multiplying the
composite conversion factor times the original cost new of operating machinery,
equipment, furniture, personal fixtures, and trade fixtures. |
| (v) |
Salvage value. Once personal
property is taken out of service at or after the end of its typical economic
life, it shall be considered salvage until disposed of and the appraiser shall
determine a basic cost approach value by taking ten percent of the original
cost new of such property. The basic cost approach value for property withdrawn
from active use but retained as backup equipment shall be one-half the basic
cost approach value otherwise applicable for such property. |
|
| 5. |
Further depreciation to
basic cost approach value.
| (i) |
Physical deterioration. The appraiser shall consider any evidence
presented by the property owner demonstrating physical deterioration that is
unusual for the type of personal property being appraised. |
| (ii) |
Functional obsolescence.
The appraisal staff shall consider any evidence presented by the
property owner demonstrating functional obsolescence for the type of personal
property being appraised. One method the appraisal staff may use to determine
the amount of functional obsolescence is to trend the original cost new for
inflation to arrive at the reproduction cost new, and then deduct the cost of a
newer replacement model with similar or improved functionality. |
| (iii) |
Economic obsolescence. The
appraisal staff shall consider any evidence presented by the property owner
demonstrating economic obsolescence for the type of personal property being
appraised. One method the appraisal staff may use to determine the amount of
economic obsolescence is to capitalize the difference between the economic rent
of an item of personal property before and after the occurrence of the adverse
economic influence. |
|
|
| (g) |
Income approach. The income
approach to value estimates the value of personal property by determining the
current value of the projected income stream. This approach is most applicable
to machinery, equipment, furniture, personal fixtures, and trade fixtures. The
approach should only consider the income directly attributable to the personal
property being valued and not the income attributable to the real or intangible
personal property forming the same business. The appraisal staff may use one of
the following methods when using the income approach for the appraisal of
applicable personal property:
| 1. |
Straight-line capitalization method. The straight-line
capitalization method estimates the income approach value of personal property
by computing the investment necessary to produce the net income attributable to
the personal property. In essence, it is determined by first computing the
potential gross income for a subject property by taking the monthly rent, when
that is the rental basis, and multiplying that total by twelve months. The
potential gross income is then adjusted to a net operating income by
subtracting any expenses that legitimately represent the costs necessary for
production of that income. The net operating income will represent the amount
of revenue left after operating expenses that is available to return the
investment, pay property tax on the property, and return a profit to the owner.
| (i) |
Income and expense analysis.
While complete data is not required on each individual property, there must be
sufficient data to develop typical unit rents, typical collection loss ratios,
and typical expense ratios for various type properties. Income and expense
figures used in the income approach must reflect current market conditions and
typical management. Actual figures may be used when they meet this criterion.
When actual figures are not available or appear to be unrepresentative, typical
figures should be used. Income and expense analysis builds upon the following
important components: typical unit rent, potential gross rent, collection loss,
typical gross income, typical expenses, and typical net income. Excluded are
expenses such as depreciation charges, debt service, income taxes, and business
expenses not associated with the property. |
| (ii) |
Capitalization.
Capitalization involves the conversion of typical net income into an estimate
of value. The estimated income is divided by the capitalization rate to arrive
the estimated income approach value. The capitalization rate consists of three
components. The discount rate, the recapture rate, and the effective tax rate.
The discount rate represents the amount of return a prudent investor could
reasonably expect on an investment in the subject property. The recapture rate
represents the return of the potential investment. The effective tax rate
represents the portion of the income stream allocated to pay resulting ad
valorem taxes on the property. |
| (I) |
Discount rate.The appraiser should calculate the appropriate
discount rate through a method known as the band of investment. The band of
investment represents the weighted-average cost of the money needed to purchase
the applicable personal property. The appraiser determines the percentage of
the cost typically borrowed and multiplies this percentage times the typical
cost of borrowing. The appraiser then determines the remaining percentage of
the cost typically contributed by an investor and multiplies this percentage
times the expected rate of return to the investor. An analysis of similar
properties might reveal the discount rate typical for a property of a given
type. |
| (II) |
Recapture
rate. The appraiser should calculate the recapture rate by dividing one
by the number of years remaining in the economic life of the subject property.
The resulting percentage is the current year's recapture rate. |
| (III) |
Effective tax rate. The
appraiser should calculate the effective tax rate by multiplying the forty
percent assessment level times the tax rate in the jurisdiction in which the
subject property is located. The effective tax rate is included in the
capitalization rate because market value is yet unknown and property taxes can
be addressed as a percentage of that unknown value in lieu of their inclusion
as an expense in calculation of net annual income. |
|
| 2. |
Direct sales analysis method.
The direct sales analysis method estimates the income approach value of
personal property by computing the relationship between income and sales data.
This relationship is expressed as a factor. The method represents a blend of
the sales comparison and income approaches because it involves application of
income data in conjunction with sales data. Sales of items similar to the
subject property are divided by the gross rents, for which they or identical
properties are leased, to develop gross income multipliers. A gross income
multiplier is selected as typical for the market, and multiplied against the
gross income of the subject, or that of an identical property, to result in an
estimated value. Limiting the income to rental income only produces a gross
rental multiplier.
| (i) |
Gross income or
rent multiplier. The appraiser should compute the gross income
multiplier by dividing the typical gross income on the personal property by the
typical sales price of the personal property. The appraiser should compute the
gross rent multiplier by dividing the typical gross rent on the personal
property by the typical sales price of the personal property. The appraiser
must identify the specific item of personal property to be valued and determine
the typical gross income as gross income is determined in Rule
560-11-10-.08(5)(g)(1)(i).
The item is then stratified according to its typical use. Typical use strata
may include, but are not limited to, office equipment, light-duty manufacturing
equipment, heavy-duty manufacturing equipment, retail sales equipment,
furniture, personal fixtures, trade fixtures, restaurant equipment, or any
other stratum the appraiser believes will have similar sensitivity to market
fluctuations as the subject item. The appraiser may develop an individual
multiplier on a single item of personal property when there are sufficient
sales and rent information. This multiplier may then be used for similar items
of personal property for which there may be limited sales and rent information.
The income approach value estimate is computed by multiplying the estimated
gross income times the gross income multiplier or the gross rent times the
gross rent multiplier.
| (I) |
Adjustments.Income data and sales prices used in the development
of income multipliers should be reasonably current. Older sales may be matched
against recent income figures when the sales are adjusted for time. Sales must
also be adjusted for financing, condition, optional equipment, and
level-of-trade. |
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