Glossary of terms for commercial parcels

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ACCESSORY IMPROVEMENTS.  Improvements other than the principal buildings. ADJUSTMENTS.  Modifications in the reported value of a variable, such as sale price.  For example, adjustments can be used to estimate market value in the sales comparison approach by modifications for differences between comparable and subject properties. AD VALOREM.  According to value. AD VALOREM TAX.  A tax levied in proportion to the value of the thing(s) being taxed.  Exclusive of exemptions, use-value assessment provisions, and the like, the property tax is an ad valorem tax.  ANTICIPATION, PRINCIPLE OF.  Value is the present worth of all the anticipated future benefits to be derived from a property. The benefits, in the form of an income stream or amenities, are those benefits anticipated by the market.  The assessor should not allow personal opinion to influence the estimation of anticipated future benefits.  Prior sales and prior income streams are important only when the parallel the current actions of buyers, thus providing an indication of what may be expected in the future. The principle is related to the principle of change, which can sometimes make the prediction of future benefits difficult. APPRAISAL RATIO.  (1) The ratio of the appraised value to an indicator of market value.  (2) By extension, an estimated fractional relationship between the appraisals and market values of a group of properties. APPRAISAL RATIO STUDY.  A ratio study using independent appraisals as indicators of market value. APPRAISAL-SALE PRICE RATIO.   The ratio of the appraised value to the sale price (or adjusted sale price) of a property;  a simple indication of appraisal accuracy. APPRAISAL STANDARDS BOARD.  The division of the APPRAISAL FOUNDATION that develops, publishes, interprets, and amends the Uniform Standards of Professional Appraisal Practice on behalf of appraisers and users of appraisal services. ASSESSMENT.  (verb)  The official act of discovering, listing, and appraising property.   (noun) The value placed on property in the course of such act. ASSESSMENT EQUITY.   The degree to which assessments bear a consistent relationship to market value. ASSESSMENT LEVEL.   The common or overall ratio of assessed values to market values.  ASSESSMENT RATIO.   (1) The fractional relationship an assessed value bears to the market value of the property in question. (2) By extension, the fractional relationship the total of the assessment roll bears to the total market value of all taxable property in a jurisdiction. See level of assessment. ASSESSMENT-SALE PRICE RATIO.   The ratio of the assessed value to the sale price (or adjusted sale price) of a property. AVERAGE DEVIATION.  The arithmetic mean of the absolute deviations of a set of numbers from a measure of central tendency, such as the median.  Taking absolute values is generally understood without being stated.   The average deviation of the numbers 4,6, and 10 about the median (6) is (2 +0+4)/3 =2.    The average deviation is used in computing the coefficient of dispersion.  (COD). CAPITALIZATION.  Capitalization is the process of converting a series of anticipated future payments (income) into present value.  Capitalization transforms net operating income produced by a property into the property value. CAPITALIZATION RATE.  A composite rate used for converting property income into property value. CENTRAL TENDENCY.   (1) The tendency of most kinds of data to cluster around some typical or central value, such as the mean, median, or mode. (2)  By extension, any or all such statistics. Some kinds of data, however, such as the weights of cars and trucks, may cluster about two or more values, and in such circumstances, the meaning of central tendency becomes unclear.  This may happen in ratio studies when two or more classes of property are combined. COLLECTION LOSS.   The loss resulting from the failure of tenants to pay the rent. COEFFICIENT OF DISPERSION.   The average deviation of a group of numbers from the median expressed as a percentage of the median. In ratio studies, the average percentage deviation from the median ratio. COEFFICIENT OF VARIATION (COV).   A standard statistical measure of the relative dispersion of the sample data about the mean of the data; the standard deviation expressed as a percentage of the mean. COST APPROACH.  One of the three approaches to value, the cost approach is based on the principle of substitution – that a rational, informed purchaser would pay no more for a property than the cost of building an acceptable substitute with utility.  The cost approach seeks to determine the replacement cost new of an improvement less depreciation plus land value.  DATA.   Information expressed in any of a number of ways. "Data" is the general term for masses of numbers, codes, and symbols generally, and "information" is the term for meaningful data.  "Data" is the plural of datum, one element of data. DIRECT CAPITALIZATION.   Direct capitalization is the method used to convert net income from the property into an indication of property value using an overall rate developed from the market.  The method does not consider the land separate from the building as do the land and building residual techniques.  DISCOUNT RATE.   The rate of return on a real estate investment.  The discount rate reflects the compensation necessary to attract investors to give up liquidity, defer compensation, and assume the risks of investing.  It is the rate of return required on total property investment to meet investment requirements.  The discount rate is the weighted average of the mortgage interest rate and the equity yield rate, weighted by the proportions of total investment represented by mortgage(s) and equity, and is often called the property's interest rate.  DISPERSION.   The degree to which data are distributed either tightly or loosely around a measure of central tendency.  Measures of dispersion include the average deviation, coefficient of dispersion, coefficient of variation, range, and standard deviation. ECONOMIC LIFE.   The period during which a given tangible asset, building, or other improvement to property is expected to contribute (positively) to the value of the total property.  This period is typically shorter than the period during which the improvement could be left on the property, that is, its physical life.  EFFECTIVE GROSS INCOME (EGI).   Effective gross income is Potential Gross Income less vacancy and collection loss, plus appropriate miscellaneous income. EFFECTIVE TAX RATE.   The rate expressing the ratio between the property value and the current tax bill; the official tax rate of the taxing jurisdiction multiplied by the assessment ratio. EQUITY YIELD RATE.   The total rate of return on equity capital;  used in reference to return on equity investments as opposed to interest on mortgage loans. EQUITY DIVIDEND RATE.   The direct relationship between annual equity income and equity capital;  often referred to as the "cash on cash" rate. GRADE.   Classification by construction quality, which refers to the types of materials used and, the quality of workmanship.  Buildings of better quality (higher grade) cost more to build per unit of measure and command higher value.  GROSS INCOME MULTIPLIER(GIM).   A capitalization technique that uses the ratio between the sale price of a property and its potential gross income or its effective gross income.  Once calculated for several similar assets, a GIM may be multiplied against the income of a property to obtain an estimate of value. HIGHEST AND BEST USE.   That use which will generate the highest net return to the property over a reasonable period of time.  According to the United States Supreme Court (1894) :"The value of property results from the use to which it is put and varies with the profitableness of that use, present and prospective, actual and anticipated.  There is no pecuniary value outside of that which results from such use."  (Cleveland, C. C. and St. Louis Ry., Co v Backus 154 U.S. 445 (1894)       Washington law requires the Assessor to take cognizance of highest and best use in the establishment of true and fair value.      "Unless specifically provided otherwise by statute, all property shall be valued on the basis of its highest and best use for assessment purposes. Highest and best use is the most profitable, likely use to which a property can be put. It is the use, which will yield the highest return on the owner's investment. Any reasonable use to which the property may be put may be taken into consideration and if it is peculiarly adapted to some particular use, that fact may be taken into consideration. Uses that are within the realm of possibility, but not reasonably probable of occurrence, shall not be considered in valuing property at its highest and best use."  WAC 458-07-30 (3) IMPROVEMENT.  Anything done to raw land with the intention of increasing its value.  A structure erected on the property constitutes one very common type of improvement, although other actions, such as those taken to improve drainage, are also improvements. IMPROVEMENTS.  Buildings, other structures, and attachments or annexations to land that are intended to remain so attached or annexed, such as sidewalks, trees, drives, tunnels, drains and sewers. INCOME APPROACH.  The income approach defines value as the present worth of future benefits arising from the ownership of a property. This definition reflects the principle of anticipation.  Income-producing property typically is purchased for the right to receive the future income stream of the property.  The assessor analyzes this income stream in terms of quantity, quality, and duration and then converts it by means of an appropriate capitalization rate into an indication of market value. The basic formula is:  Value equals income divided by rate. LEVEL OF ASSESSMENT;  ASSESSMENT RATIO.   The common or overall ratio of assessed values to market values. MASS APPRAISAL.   The process of valuing a group of properties as of a given date, using standard methods, employing common data, and allowing for statistical testing. MASS APPRAISAL MODEL.   A mathematical expression of how supply and demand factors interact in a market.  MISCELLANEOUS INCOME.   Income from sources other than actual rent (parking, laundry facilities vending machines and so on). MODEL.   (1) A representation of how something works.  (2) For purposes of appraisal, a representation (in words or an equation) that explains the relationship between values or estimated sale price and variables representing factors of supply and demand. NET OPERATING INCOME (NOI).  Net operating income is the income remaining after subtracting operating expenses from effective potential gross income.  OVERALL RATE.  The direct relationship between annual net operating income and sale price or value;  includes the proper provision of discount and recapture. POTENTIAL GROSS INCOME (PGI).  Potential gross income is annual economic rent for the property at 100 percent occupancy. PHYSICAL INSPECTION.   At a minimum, an exterior observation of the property to determine whether there have been any changes in the physical characteristics that affect value.  The property improvement record must be appropriately dcoumented in accordance with the findings of the physical inspection.  (Defined in WAC 458-07-015)  RATIO STUDY.   A study of the relationship between appraised or assessed values and market values.  Indicators of market values may be either sales or independent "expert" appraisals. Of common interest in ratio studies are the level and uniformity of the appraisals or assessments. See also level of appraisal and level of assessment. RECAPTURE RATE.  The rate of return of a real estate investment;  the annual dollar requirement for returning to the investor a sum equal to the property value (improvements only) at the end of a given period of time. Recapture is the provision for returning to the investor a sum of money equal to the improvement value at the end of a given period of time.  The recapture rate may be selected by two methods:  1)  Economic-life method – requires a judgment as to the number of years the building will produce income and add value to the land.  2)  Market comparison method – obtains recapture rate by dividing net operating income after discount and taxes by the building value.  REPLACEMENT COST; REPLACEMENT COST NEW.  The cost, including material, labor, and overhead, that would be incurred in constructing an improvement having the same utility to its owner as a subject improvement, without necessarily reproducing exactly any particular chacteristics of the subject.  The replacement cost concept implicitly eliminates all functional obsolescence from the value given; thus only physical depreciation and economic obsolescence need to be subtracted to obtain replacement cost new less depreciation (RCNLD). REPLACEMENT COST NEW LESS DEPRECATION (RCNLD).  In the cost approach, replacement cost new less physical incurable depreciation.  REPRESENTATIVE SAMPLE.   A sample of observations from a larger population of observations, such that statistics calculated from the sample can be expected to represent the characteristics of the population being studied. SALES COMPARISON APPROACH.  Based on the concept of value in exchange, the sales comparison approach compares the property being appraised with similar properties sold in the recent past. The characteristics of the sold properties are analyzed for their similarity to those of the subject of appraisal.  Because no two parcels are exactly alike, the prices of the sold properties must be adjusted for any differences between the properties and the subject property. Value indications derived from the sales comparison approach are usually considered particularly significant because they express the reactions of buyers and sellers in the real estate market. The sales comparison can be used to value any property, whether improved or vacant, as long as that type of property is being exchanged periodically in the market.  SINKING-FUND METHOD.  A way of calculating the recapture rate in the income approach. It assumes that an investor will deposit recapture income in an interest-bearing account and will thus, in effect, accelerate recapture.  To use it, an appraiser goes to a compound interest table to locate the interest rate the investor would probably get and looks down the column of sinking-fund factors to the number of years equal to the remaining economic life of the improvements.  Adding that sinking-fund factor to the discount rate gives the recapture rate. UNIFORM STANDARDS OF APPRAISAL PRACTICE (USPAP).  Annual publication of the Appraisal Standard Board of The Appraisal Foundation: "These Standards deal with the procedures to be followed in performing an appraisal, review or consulting service and the manner in which an appraisal, review or consulting service is communicated….STANDARD 6 sets forth criteria for the development and reporting of mass appraisals for ad valorem tax purposes or any other universe of properties." UNIFORMITY.  The equality of the burden of taxation in the method of assessment. VACANCY AND COLLECTION LOSS.  Vacancy loss is a necessary deduction from gross income because property will not remain fully rented for entire period of life. VARIABLE. An item of observation that can assume various values, for example, square feet, sales prices, or sales ratios.  Variables are commonly described using measures of central tendency and dispersion.

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