Assessors do not create actual value. Buyers and sellers in the market create value through their transactions. The assessor analyses the market to determine value. Your assessment notice should reflect a realistic price that you could have reasonably expected to receive, if you had sold your property on or about the base date in an arms-length open market transaction, given reasonable exposure in the marketplace.
The instruction given to the assessor under the Assessment Act, 2006 is to assess at actual value and to consider the assessment of similar properties to ensure assessments are done in a uniform manner.
The Municipal Assessment Agency has an extensive data base on over 180,000 properties including physical details, sale information and financial information which is updated and broadened on a continual basis. Agency assessors collect data from a number of sources. Assessors conducting assessments will update the information on record. All other sources of data concerning properties in the community are investigated and pertinent information is gathered. Sources include the registry of deeds, real estate companies, surveyors, property owners and so on. On site inspections are conducted on an as needed basis.
The assessor's role is to determine the fair actual value of the properties in a municipality. Assessment is used to determine your share of taxes. The Council's role is to determine the amount of taxes required to operate, set the tax rate, calculate and send out the tax bills and collect the taxes. Each year, Council, during its budgetary process, approves the amount of revenue required to operate the municipality. From this amount they subtract the known revenues, such as grants, licences, permits and so on. The remainder represents the amount of money to be raised by property taxes.
The tax rate is a relationship between the amount of taxes to be raised and the tax base. The tax rate is calculated by dividing the tax base (total taxable value) into the amount of tax that must be raised. For example, if total assessed value is $ 100 million, and the amount of tax to be raised is $ 1 million, the tax rate is 1 percent or 10 mills.
The word mill is derived from the Latin word for one thousand. In tax terms, one mill is equal to 1/1000 of a dollar or one dollar ($1.00) in tax for every one thousand dollars ($1,000) of assessed value.
As the market changes and reassessments are completed, assessed values tend to shift up and down. A shift in assessed values may not mean a general tax increase within the municipality. Following the example from above, if total assessed value doubles, and the amount of tax raised stays at $ 1 million, the tax rate drops to 0.5 percent or 5 mills. In this case, if your property has increased in value, your tax may remain the same. However, if assessed value doubles to $ 200 million and the tax rate stays at 1 percent, the amount to be collected in taxes doubles to $ 2 million. In this case, if your property has increased in value, you will probably pay more tax.
There are three internationally accepted methods of measuring the value of property; the Cost Approach, the Sales Comparison approach and the Income Approach. Depending on the nature of the property being valued, one or more of the approaches may be used by the assessor.
The Cost Approach begins by establishing the value of the land on which the building sits, using sales of similar lands. To the land value is added the replacement cost of the buildings, less depreciation. In determining the replacement cost of a building the assessor considers such factors as age, size, condition, quality of construction and other features that influence value.
The Cost Approach is best suited to value special purpose buildings that rarely, if ever, sell in the marketplace and which do not generate rental income to its owners. Example of properties value by the Cost Approach would include large industrial plants, communication towers, and institutional buildings such as schools and hospitals.
Sales Comparison Approach
The Sales Comparison Approach utilizes property sales information to estimate the value of unsold properties. For the 2008 Assessment, the assessor is directed to value property at its 2005 value, being the "base date".
The Assessment Agency receives the record of all sales of property from the Registry of Deeds. Properties where sales have occurred are checked by staff in order to assure that:
- the amount of the sale value is correct;
- there are no unusual circumstances surrounding the sale; and
- the information on file accurately reflects the land/building characteristics which existed at the time of purchase.
Information concerning sales properties is confirmed mostly through property inspections and phone calls. Sales which are "non-valid" are excluded from the sales analysis. Examples of sales which may be non-valid are family sales, mortgage sales, and estate sales.
Land rates and building assessments can both be determined using the sales comparison approach. Location is one of the primary factors affecting market value. For this reason, municipalities within the Province are divided into "Neighbourhoods". Sales within these neighbourhoods are analysed using specially designed computer programs in combination with a full statistical analysis. Neighbourhoods can be analysed independently or in "Groupings". The purpose of grouping sales for sales analysis is to expand the sales base where sales patterns are similar. This helps to ensure equitable land and building assessments.
The majority of assessments are determined using the Sales Comparison Approach. It is important to recognize that assessment is "Mass Appraisal" and as such it is different than the individual appraisal of properties. Assessment reflects the most probable market value of the property in the reference year. If your property sold in 2005 (base date for 2008 assessment), your assessment will likely be close to the actual sale price but it need not be exactly that amount. The primary purpose of assessment is to ensure that similar properties receive similar assessments so that taxes are distributed fairly.
For some properties, the income that they generate is the best indicator of their value. Properties like hotels, apartments and commercial buildings that are leased out generate income for their owners. It is this rental income that attracts a buyer and determines the selling price.
To ensure accuracy by the Income Approach, it is essential that income and expense information, requested for the building owners, is submitted to the assessor. Information gathered is treated with the strictest of confidence.
The Income Approach converts the net operating income of a property into an estimated market value through capitalization. The net operating income is the gross revenue generated by the property minus typical operating expenses. In most cases the actual income is not used in determining value but the typical revenue generated by similar properties is used. This ensures equitable tax distribution among similar properties. Typical expenses are those necessary to operate and maintain the property as well as provide for replacement. The capitalization rate is derived by dividing the net income of comparable properties that have sold into their sale prices. This rate is applied to the net income and the resulting figure is the estimated market value. Simply stated, the income approach equations are:
Net Operating Income (sale property) / (Sale Price) = Capitalization Rate
(Gross Income - Expenses) / (Capitalization Rate) = Market Value
For the purpose of the income approach, certain expenses are not allowable as deductions from the gross revenue. For example, this may include depreciation charges and debt service charges.
It is important to note that the Income approach is only one of the approaches to value used by the assessor to estimate market value. Replacement cost and sales comparison values are also considered and the most appropriate value for the circumstances is chosen.