1. Shopping Centers Valuation and Appeal Arizona Dept. of Revenue
Darren Rasmussen
Appraiser IV County Liaison

2. Contents A.R.S. 42-13201 and 42-13202 Two valuation methodologies:
Replacement Cost New
Effective Age/Physical Depreciation
Straight Line Building Residual
Weighted Effective Age
A.R.S
A thru E
A.R.S and A.R.S
Business Realty v. Maricopa County case precedent
Questions/Discussion

3. Definition
A.R.S
In this article, unless the context otherwise requires, "shopping center" means an area that is comprised of three or more commercial establishments, the purpose of which is primarily retail sales, that has a combined gross leasable area of at least twenty-seven thousand square feet, that is owned or managed as a unit with at least one of the establishments having a gross leasable area of at least ten thousand square feet and that is either owner-occupied or subject to a lease that has a term of at least fifteen years.

4. Procedure and Confidentiality
A.R.S
A. A shopping center that is subject to valuation for purposes of property tax shall be valued pursuant to this article. This article establishes the exclusive valuation methods and procedure for determining the valuation of a shopping center.
B. All information that a taxpayer submits pursuant to this article is confidential pursuant to chapter 2, article 1 of this title.

5. RCNLD/Effective Age Model for Replacement Cost New Less Depreciation
LV + (RCN-D) Land value plus replacement cost new less all forms of depreciation.
Land Value is typically a CAMA and/or sales comparison value.
RCN is from a accredited resource like Marshal Swift.
Depreciation is a loss in value from all causes (Physical, Functional. External).
Effective Age:
Effective age is needed in order to determine depreciation (due to age aka. Physical Depreciation).
Effective age is the number of years of age of the improvement as indicated by its condition.
Determined by the Assessor’s Office based on property inspections and review of any updating and refurbishing.
It is applied to individual improvements within cost approach.
Weighted Effective Age is determined for recapture rate within the income approach.

6. Total Economic Life(42-13203) - Remaining Economic Life
RCNLD/Effective Age
Total Economic Life( )
- Remaining Economic Life
= Effective Age
35 years TEL
-30 years REL
=5 years EFF
2000 YB
-5 years EFF
=1995 EFF YB

7. RCNLD SUMMARY
Unless prescribed by A.R.S , Original valuation notice is based on the RCNLD which includes an accelerated depreciation schedule and additional obsolescence( ) based on SLBR.

8. Weighted Effective Age
Multiple improvement weighted effective age.

9. Weighted Effective Age
Most commonly a Weighted Effective Age must be completed for SLBR:
Shopping center that is 100,000 sf total with four (4) improvements.
Improvement #1 has 25,000 sf with an effective age of 20 years.
Improvement #2 has 25,000 sf with an effective age of 16 years.
Improvement #3 has 25,000 sf with an effective age of 8 years.
Improvement #4 has 25,000 sf with an effective age of 4 years.
20 x .25= 5
16 x .25= 4
8 x .25= 2
4 x .25= 1
12 year effective age

10. Straight Line Building Residual
Subject Property has four (4) attached retail improvements at 25,000 sf each totaling 100,000 sf. It has a Weighted Effective Age of 12 years and land value of $1.5 million.
Total NOI is $650,000
CAP rate development: A.R.S
Discount rate 10% or .10 ( (D)(1))
Recapture rate 4.35% or (1/(35 TEL -12 EFF)) ( (D))2))
Effective tax rate 2.52% or (.14 nominal x .18 ratio) ( (D)(3))

11. SLBR Building Land Total Income Rate Value $650,000 X $1,500,000 B L T
$462,200
$187,800
$650,000 R
.1687
.1252 X V
$2,739,775
$1,500,000
$4,239,775
Known Data: Total NOI and Land Value

12. SLBR B L T I
$650,000 R
.1687
.1252 X V
$1,500,000
Known Data: Total Income and Land Value
Developed CAP rates: Building and Land
10% discount rate % recapture ETR

13. SLBR B L T I
$187,800
$650,000 R
.1687
.1252 X V
$1,500,000
Known Data: Total Income and Land Value
Developed CAP rates: Building and Land
Land Value x Land CAP rate= Land Income

14. SLBR B L T I
$462,200
$187,800
$650,000 R
.1687
.1252 X V
$1,500,000
Known Data: Total Income and Land Value
Developed CAP rates: Building and Land
Land Value x Land CAP rate= Land Income
Total Income – Land Income= Building Income

15. SLBR B L T I
$462,200
$187,800
$650,000 R
.1687
.1252 X V
$2,739,775
$1,500,000
Known Data: Total Income and Land Value
Developed CAP rates: Building and Land
Land Value x Land CAP rate= Land Income
Total Income – Land Income= Building Income
Building Income/Building CAP rate= Building Value

16. SLBR B L T I
$462,200
$187,800
$650,000 R
.1687
.1252 X V
$2,739,775
$1,500,000
$4,239,775
Known Data: Total Income and Land Value
Developed CAP rates: Building and Land
Land Value x Land CAP rate= Land Income
Total Income – Land Income= Building Income
Building Income/Building CAP rate= Building Value
Building Value + Land Value = Total Value

17. Valuation
A.R.S
A. Except as provided by section , the county assessor shall determine the valuation of a shopping center by using the replacement cost less depreciation method.
B. This method shall use base rates in existence on January 1, 1982 subject to any changes that are necessary to reflect changes in costs of construction. The base rates shall be based on average costs that relate to this state as reported in professional cost manuals and publications that are approved by the department.

18. Valuation
A.R.S
C. The depreciation schedule used under the replacement cost less depreciation method, including any adjustment for obsolescence ( E), shall be the schedule in existence on January 1, 1982 and used by the county assessor.

19. Appeal 2. A recapture rate based on a thirty-five year economic life.
A.R.S D
On review or appeal of a valuation determined under this section, the owner of a shopping center may elect to have the valuation of the shopping center determined by the income method commonly known as the straight line building residual method if the owner submits all reasonably necessary income and expense information. The reviewing body shall use the information submitted by the owner and may also use any other information customarily analyzed under this method. The capitalization rate used for purposes of this subsection shall be comprised of:
1. For the 1983 tax year a discount rate of 10.5 per cent, adjusted each year thereafter according to the percentage change in the weighted average cost of monies derived from interest paid on savings accounts, federal home loan bank advances and other borrowed money as reported by the federal home loan bank of San Francisco for this state for the most recent twelve month period ending June 30th . The discount rate shall not be less than ten percent.
2. A recapture rate based on a thirty-five year economic life.
3. The effective tax rate for the property for the most recent tax year.

20. Obsolescence A.R.S. 42-13203 E. The department shall:
1.) Determine the average differences in valuations for similar size and age shopping centers that result from the two valuation methods (RCNLD and SLBR)prescribed by this section and section and from which…

21. Obsolescence A.R.S. 42-13203 E. The department shall:
1.) Determine the average differences in valuations for similar size and age shopping centers that result from the two valuation methods prescribed by this section and section and from which…
the department shall develop a schedule of obsolescence factors that can be added to the depreciation schedule used in the replacement cost less depreciation method. County assessors shall incorporate the obsolescence factors into the deprecation schedule.

22. RCNLD/Obsolescence A.R.S. 42-13203 E. The department shall:
2.) Develop obsolescence factors prescribed by paragraph 1 of this subsection based on statistical research in order to, on average, equalize the valuations that result from the two valuation methods prescribed in this section and section (RCNLD and SLBR). The department may use data from state sources, nationally recognized publications and journals and other related research.

23. Replacement Cost New Less Depreciation Straight Line Building Residual
Obsolescence
Replacement Cost New Less Depreciation Straight Line Building Residual
obsolescence

24. Depreciation Schedule

25. Election To Use Income Initially
A.R.S
In lieu of valuation under section , the owner of a shopping center may elect to have the valuation of the shopping center determined by the income method commonly known as the straight line building residual method if the owner submits all reasonably necessary income and expense information for the owner's three most recent fiscal years to the county assessor before September 1st of the year immediately preceding the year for which the property will be valued.

26. APPEAL
A.R.S
On appeal of a valuation determined by the income method pursuant to section or an appeal in which the owner has elected the income method pursuant to section , subsection D, the valuation of a shopping center shall be determined by whichever one of the following valuation methods most closely approximates fair market value:
1. The income method commonly known as the straight line building residual method pursuant to section , subsection D. If the reviewing body finds that other information that is customarily analyzed under the income method must be used to properly apply the income method to the property, it may use the other information to supplement information provided by the owner if:
(a) The credible and accurate information provided by the owner remains the primary basis for the valuation under the income method.
(b) The supplementary information is credible, is derived from properties or circumstances that are substantially comparable to the property and is valid under the income method.
(c) The reviewing body specifies in its written order what other information was considered, the manner in which it was applied and the change in the valuation under the income method, if any, resulting from the use of the supplementary information.

27. APPEAL
A.R.S (cont.)
2. The replacement cost less depreciation method pursuant to section
3. The market comparison method, if a sale of the subject property occurred within two years before the date of valuation and no material change to the property, its lease terms, tenants or occupancy rates or any other material fact has occurred since the sale. If the market comparison method is applicable, the reviewing body may consider information on sales of other properties that occurred within two years before the date of valuation and that are determined to be comparable to the subject property by clear and convincing evidence

28. Case Precedent Business Realty of Ariz. V. Maricopa County
Facts and Procedure:
Taxpayer owns Camelview Plaza Shopping Center in Scottsdale. This major shopping center (the property) encompasses over 426,000 square feet of improvements, including department stores, many smaller retail tenants, a movie theater, and two large parking structures. This appeal arises from the county's 1990 valuation of the property for real property taxation.
Noticed Value: $26,301,328
County Board of Equalization reduced to $18,475,184 using SLBR
Tax Court reduced value to $12,896,672
Court of Appeals upheld decision
Supreme Court reversed decision

29. Supreme Court Conclusion
A.R.S. § ( ) establishes a property valuation system designed to estimate fair market value. It was intended to bring uniformity to a difficult process by first requiring an estimate of fair market value through the reproduction cost approach, then, if the owner was dissatisfied, by a variation of the income approach to fair market value. Then, on appeal, the statute allows the reviewing body to consider all facts and techniques recognized by the appraisal profession in determining fair market value. Thus, if the SLBR technique provides a figure that falls within the range of reasonable market values, it should be upheld on final review. However, if, as may be the situation in the present case, the value estimate from use of the SLBR income method produces a figure not reasonably within the range of market value indicated by the facts, the final reviewing body may use all other relevant information and standard techniques of valuation to determine fair market value. § (D).
This result applies the statute in a way providing uniform taxation for all commercial property and retail stores in class (3). This is the most reasonable interpretation of the law because it furthers the stated legislative goal and provides a sound constitutional basis for the law.
On this record, of course, and as a court of review, there is no way we can determine the value of the property. The tax court, following the statutory procedure in estimating value and applying the prescribed methods, will have to determine the property's market value. We therefore reverse the tax court's judgment, vacate the court of appeals' opinion, and remand to the tax court for further proceedings consistent with this opinion.

30. Discussion/Questions
Thank you