Understanding the First & Eighth Criteria (or Must the Property Appraiser Always Deduct 15%)?


Florida property is required to be assessed at 100% of just value, which has been deemed equivalent to fair market value.  So why do the Property Appraisers sometimes deduct 15% for the “first and eighth”?  And does the Department of Revenue’s new bulletin require 15% to be deducted from the values of all property?  This post will briefly explain the first and eighth criteria of section 193.011, Fla. Stat., when those factors apply, what “costs of sale” may be deducted, and why a 15% deduction is commonly used.

What are the “first and eighth factors”?

The phrase “the first and eighth” refers to subsections (1) and (8) of Fla. Stat. 193.011.  Fla. Stat. 193.011 sets forth the eight factors that must be properly considered by the Property Appraiser in assessing property for tax purposes.  Subsection (1) requires the Property Appraiser to consider “the present cash value of the property, which is the amount a willing purchaser would pay a willing seller, exclusive of reasonable fees and costs of purchase, in cash or the immediate equivalent thereof in a transaction at arm’s length.”  The relevant portion of subsection (8) requires the Property Appraiser to consider “the net proceeds of the sale of the property, as received by the seller, after deduction of all of the usual and reasonable fees and costs of the sale, including the costs and expenses of financing, and allowance for unconventional or atypical terms of financing arrangements.”  Although these subsections contemplate consideration of a variety of information, the phrase “first and eighth” generally refers to the requirement that the Property Appraiser consider the costs of purchase and the costs of sale.”  In Turner v. Tokai Financial Services, the court explained that while subsection (1) contemplates the transaction from the buyer’s perspective and excludes fees and costs incurred by the buyer in addition to the purchase price, subsection (8) excludes the reasonable fees and costs that the seller would pay out of the proceeds received from the buyer.

Do the first and eighth criteria apply to both real and personal property?

Although some of the factors of section 193.011 are undoubtedly more relevant to appraisals of real property, the Tokai court held that, despite some legislative history to the contrary, because Fla. Stat. 193.011  is not expressly limited to real property, it should be interpreted as applying to both real and personal property.

What “costs of sale” should be deducted?

For real property, the Supreme Court of Florida has construed the phrase “reasonable fees and costs of sale” to include only those fees and costs typically associated with the closing of a sale of real property, such as reasonable attorney’s fees, broker’s commissions, appraisal fees, documentary stamp costs, survey costs and title insurance costs.  Determinining the costs of sale of tangible personal property can be a bit more challenging.  In Tokai, the court adopted the taxpayer’s market approach value for its used equipment, but rejected the taxpayer’s request for a 20% cost of sale deduction for sales commissions, advertising, warranties, delivery, installation and product demonstration, finding that such expenses were internal expenses, rather than external “costs of sale.”  For tangible property assessed by the cost approach, the Supreme Court later held in the Walmart case that sales tax should not be deducted as a cost of sale, because it is a generally accepted appraisal practice to include acquisition costs such as sales tax, freight and installation in the original cost when performing a cost approach valuation.

Does the “costs of sale” adjustment apply to values determined by the cost approach and income approach?

This, of course, is the hot question of the day.  Years ago, the court held in Bystrom v. Equitable Life Assur. Society that a costs of sale adjustment to a value arrived at by the income approach was improper because subsection (8) could only be applied if there had been an actual sale of the property.  Fast forward to January 2011, when the Florida Department of Revenue issued PTO Bulletin 11-01 , advising all county value adjustment boards that they may make cost of sale adjustments to values determined by any of the three traditional approaches (cost, income, or sales comparison).  This came on the heels of the DOR issuing VAB training materials that indicated that the eighth factor should result in a value less than fair market value. 

Many Property Appraisers take issue with the DOR’s interpretation and contend that it contravenes established Florida law.  Hillsborough County Property Appraiser Rob Turner has filed a challenge to the DOR’s VAB training materials, asking that they be deemed invalid.  The Clay County Property Appraiser and the Florida Association of Property Appraisers have joined in that action.  A separate rule challenge was also recently filed by the Property Appraisers of Alachua, Monroe and Okaloosa counties.   Also, the DOR’s bulletin, even if accepted and followed by the Property Appraisers, is carefully phrased to only require the VABs to make an eighth criterion adjustment “when justified by sufficiently relevant and credible evidence.”  Thus, absent a directive from the courts, it is doubtful that taxpayers will suddenly see lower assessments as a result of this bulletin, although it may provide them with an additional argument to be raised in VAB hearings.

Is the “cost of sale” adjustment always 15%?

Under the law, the Property Appraisers are only required to make such adjustments as are justified by the facts, and those adjustments may be higher or lower than 15%.  In the past, some county property appraisers were called out by the courts for unfairly assessing property at a level of assessment that was less than 100% of just value.  Thus, in reviewing each county’s tax roll, the DOR conducts sales ratio studies to ensure that the county property appraisers are sincerely attempting to reflect the full fair market value of the property in their jurisdiction.  In conducting those studies, the DOR generally assumes a 15% adjustment for costs of sale and uses those adjusted values to evaluate the fairness of the county’s tax roll.  Also, every year the Property Appraisers must submit Form DR-493 to the DOR to notify the DOR of the “costs of sale” adjustments made to each type of property in their county, and Rule 12D-8.002(4) requires them to submit documents justifying any adjustments in excess of 15%.

The confusion tends to arise because the certifications made by the Property Appraiser relate to the adjustments made in their mass appraisal process.  Thus, while a Property Appraiser may certify that they made a 15% adjustment during the mass appraisal process, if a taxpayer challenges their assessment, the Property Appraiser may prepare a fee appraisal using all three approaches to value, and may or may not make similar adjustments in each approach.  However, while the Property Appraisers may take issue with the DOR’s bulletin, the bulletin seems to suggest that if a Property Appraiser has certified that they used a 15% adjustment on Form DR-493, the VAB would be justified in making a 15% adjustment to any values that do not affirmatively appear to include such a deduction.  Until the courts weigh in, this will likely continue to be a hotly contested issue before the VABs and the courts.

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2 Responses to “Understanding the First & Eighth Criteria (or Must the Property Appraiser Always Deduct 15%)?”

  1. Legal News - RETAX CONSULTANTS: Florida's Commercial Real Estate Tax Professionals Says:

    […] Understanding the First & Eighth Criteria (or Must the Property Appraiser Always Deduct 15%)? […]

  2. Estate taxes nj Says:

    Great topic. A lot of people still need to know the ins and out of First & Eighth Criteria with regards to Property Appraisal.


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