Commercial property in Montgomery County may be underassessed - and thus contributing less than its share of county property taxes - because of inexact methods used by the state property assessor, a member of a special county task force studying property assessments said last week.
Leonard S. Rodwin, a Rockville resident and appraiser for the Internal Revenue Service, said the assessor's current method of determining the value of commercial property was inaccurate and could lead to under-valued assessments.
Many citizens have charged that commercial property is valued too low in relation to residential property. Task force chairman Scott Fosler pointed to Rodwin's recommendation as "a key area, because of concern for the discrepency between commercial and residential assessments."
As Rodwin explained it, property assessors may value property by using one of three methods: the market, cost or income approaches.
When a recent sale of a piece of property or comparable property is available, the sale price shows the value placed by the market. This is considered the best approach, but often is not available for commercial property where turnover is infrequent and there are few comparable sales.
The cost approach, now used by the assessor for commercial property, starts with the cost of a piece of property to the current owner. The cost of improvements and the general increase in value of property is added annually to obtain updated assessments. Rodvin criticized this approach as not properly reflecting the value of property held for investment.
Finally, the income approach, which Rodwin recommended, computes the value of investment property on the basis of net income and the expected rate of return.To obtain the value under this method, the assessor takes the net income from a piece of property and divides by the rate of return generally expected from investment property.
Rodwin called the income approach "a method to project how much a prospective purchaser would pay knowing what kind of return investors are looking for." As such, he said, it reflects value better than the cost approach. And he indicated to the task force that more accurate assessments obtained by the income approach would be higher than the current ones.
"The cost approach is a very, very poor approach for income property like that," Rodwin told the task force, referring to Wheaton Plaza. He said the shopping center owners accepted the assessments until this year, which suggested to him that prior assessments were too low.
"Every book I've read gives you the cost approach when nothing else works - when there are no sales and there's no income. You use it only when you can't use the preferred market or income methods," he said.
"The day before a shopping center opens, they (the assessor's office) will have the proper assessment - the cost of construction. But the day after the shopping center opens, the assessment will be wrong. Then the value depends on the income that could be obtained - and that could be 20 per cent greater than the cost."
The assessor's office has used the income approach for determining the value of apartment property, but it has used the income approach for commercial property only in the event of a challenge to an assessment, Rodwin said.
While the 20 task force members, appointed by the county council, took no formal position on Rodwin's recommendation, Fosler said he thought most of the members would accept it. But he noted that even if the income approach were used to assess commercial property, problems of inequity and underassessment could still arise.
For example, data assembled by one of the task force committees showed a disparity in the rate of growth of assessments of rental apartments, condominiums and single family homes.
Several task force members drew the conclusion apartments were underassessed, particularly because some of the same apartments doubled in assessment when they were converted to condominiums and assessed on the basis of recent market sales.
Fosler said that underassessment of apartments could result from improper use of the income method - for example, using the wrong rate of return. The same problems could arise if the income approach were used for commercial property assessments.
The task force is continuing its study, and will hold its second public hearing at 8 p.m. Aug. 4 at the auditorium of the Park and Planning Commission, 8787 Georgia Ave., Silver Spring. It plans to complete its recommendations in late August and send them to the county council in September.