In the world of ad valorem taxes—a tax based on the assessed value of real estate or personal property—the crux of appeal issues is the determination of fair-market value. Everyone has an opinion, from the assessor to the taxpayer. Generally, these opinions are far from each other. This situation often necessitates the taxpayer having to pay a third-party appraiser for an opinion, which can be viewed as impartial and, with hope, more reliable.
This environment has led assessors to believe that appraisers are needed by market participants to determine how much to pay for assets. Assessors confuse the idea that lenders need third-party appraisals to back up their lending decisions but participants in the market, or market makers, do not rely on appraisers to determine prices.
So this situation begs the question: Whose information is more reliable—that of an appraiser or a market maker?
To me, it is blatantly obvious: It’s the market maker.
Appraisers are measuring the market after the fact. They take information about a transaction they obtain from published sources, attempt to verify that information with the buyer or seller, and utilize the information from a statistical standpoint as input to valuation models that supposedly develop a supportable opinion of value.
The problem with that process stated above is appraisers rarely get much information directly from buyers and/or sellers. And while reporting agencies do a good job researching and reporting information about transactions, it is only to the best of their ability and often differs from the facts of a particular transaction.
This is where the idea of deal-pricing analysis originated. Deal-pricing analysis is an extension of the dealmaker’s work that breaks down a price determined in the marketplace to its component parts. It is performed prior to closing, and the results of the analysis are used to pay realty transfer taxes and record deeds. The benefits of it are 1) less, and more accurate, realty transfer taxes and 2) more technically correct information on a deed that transfers ownership of real estate.
So, what if, because of deal-pricing analysis, one was able to get the actual terms of the deal to analyze and paper the deal correctly. This would make the information appraisers gathered more technically correct—especially for hotel owners. At the time of acquisition, the buyer has the opportunity to record the deed with information about the price paid for real estate only. Then, when reporting agencies get the information about the transaction from the public land records, they can report the opinion of the market maker on what the price of real estate actually was. Appraisers will then have data that reflects the actions of the buyers and sellers in the marketplace.
Bernice T. Dowell is a Senior Managing Consultant for Paradigm Tax Group in Washington, D.C. A former Senior Manager of KPMG and President of Cynsur, LLC, she has focused her career in real estate transfer and property taxes on hospitality assets and the concept of removing the value of intangibles from a going concern. She began this endeavor as an employee in Marriott’s Tax Department in 1991. While at Marriott she was a member of the inaugural class at George Washington University for the Master’s of Science in Finance program and focused her senior thesis on the topic of hotel investment analysis and the contributory value of a trade-name to a going concern.
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