Property Assessment Valuation

British Columbia's Assessment Act requires that every property owner receive a property assessment reflecting its market value. Market value is the most probable price, as at July 1st in the previous year, a property should sell for after a reasonable amount of time is allowed in an open and competitive market where both seller and buyer are under no duress and whose actions are in their own self interest.

Assessors, like appraisers, use the three traditionally accepted appraisal valuation approaches to estimate market value; the direct comparison, cost and income approaches. The assessor must first determine the highest and best use of the property. Highest and best use is the most probable use of the property which will return the highest value, giving consideration to legal, economic and social factors.

Direct Comparison Approach

The Direct Comparison Approach is based on the notion that market value can be estimated by comparing the property being assessed to similar properties that have sold recently, applying similar standard units of comparison, and making adjustments to the sale prices of the comparables based on the units of comparison. This approach is the most common and preferred valuation methodology when comparable sales evidence is available.

Cost Approach

The Cost Approach is based on the assumption that a potential purchaser will consider the cost of buying land with similar characteristics and constructing a new building. This assumes the cost of replacing the existing building plus the value of the land will equal market value.

The steps in applying the Cost Approach include:

• estimating the vacant site value through analysis of comparable vacant land sales;
• estimating the cost of replacing the existing building with one of similar utility (reflecting current building design and materials);
• deducting all sources of accrued depreciation.

The Cost Approach is relevant when the property being appraised is new or nearly new, where there are no comparable sales, or where the building design is relatively unique or specialized.

Income Approach

The Income Approach to value is based on the premise that the value of a property is directly related to the income (rents) it will generate in the future. The assessor analyzes a property's ability to produce future income and related expenses to arrive at a net operating income before debt servicing. This net operating income is then capitalized by a market return rate based on an analysis of similar income properties which reflects the ratio between sale price and net operating income.

The systematic steps in applying the Income Approach to determine the stabilized, net-operating income are as follows:

• estimate potential gross income for income from all sources;
• deduct an allowance for vacancy and bad debts; and
• deduct all direct and indirect operating expenses.

The resulting net-operating income is capitalized by a market rate, reflecting the property type and effective date of valuation, to produce an estimate of overall property value.