When appealing your assessment, you may encounter unfamiliar legal, real estate, and property appraisal terminology. In order to assist in understanding the assessment appeal process, the Board has prepared definitions for the most frequently used terms. The definitions are not intended to be exhaustive, but are designed to give the reader a basic level of understanding.
Direct comparison or market approach
The Assessment Act requires that properties be assessed at their actual value as of July 1st ("valuation date") of the year preceding the tax year. For example, valuation day for 2005 assessments was July 1, 2004.
Actual value means market value. It is the most probable price at which a property would sell in a competitive market, if it had been listed long enough to become generally known to real estate agents and prospective purchasers. It also assumes that both the buyer and seller are willing (i.e. it is not a forced sale) and that both parties are prudent and knowledgeable. It assumes that the parties are considering only factors that most other buyers and sellers would consider. Sales between related parties (i.e. parents to children, between separating spouses) and other unusual circumstances are not normally considered competitive market sales.
Because sales of identical properties don’t usually occur right on the valuation date, no one can say what the actual value is with absolute certainty. Therefore, actual or market value is really a range of values. The willing buyer would have a ceiling price (i.e. a price he or she will not exceed). The willing seller would have a bottom line price. Actual or market value, and the selling price ultimately agreed on by that willing buyer and that willing seller, will lie somewhere between those two figures. Since taxes must be calculated based upon a specific value, the Assessment Act requires that the assessment notice specify a single value. If the assessed value is in the range of actual value, then the Board normally will not interfere with the assessment, even though it may be at the high or low end of the range.
There are two options for making adjustments. Qualitative adjustments involves subjectively rating the quality of each sold property’s attributes in comparison to property being valued. Quantitative Adjustments are expressed as dollar values or as a percentage, added or subtracted to comparable sales. For residential properties, adjustments may be made for the time of sales and differences in age, lot size, view, and size of the improvements, among other things.
Advocate refers to anyone who is advocating a position on behalf of a party. There is no requirement that this be a lawyer. Parties will frequently act as their own advocates. However, they may also have a lawyer, friend or property tax agent present their case for them. With BC Assessment, frequently, the Assessor (or Deputy Assessor) will act as advocate and present evidence through witnesses (usually an appraiser who is also an employee of BC Assessment). Normally, the advocate will ask questions of the witnesses (examination and cross-examination) and will make submissions. However, the advocate will not be permitted to present evidence, unless the advocate takes an oath or affirmation. See FAQ, What is the difference between "evidence" and "submissions"?
Appraisal
An appraisal is the orderly and concise method of estimating value. The three common approaches to value are the Direct Comparison or Market Approach, the Cost Approach, and the Income Approach. An appraiser may rely on all three approaches, although the Direct or Market Comparison Approach is most often used for residential properties. The Cost Approach is often used for new construction, and the Income Approach is appropriate for income producing properties (apartment buildings, office buildings, shopping centres, etc).
An appraiser is the person who prepares an appraisal. In British Columbia, there are no legislated standards for real property appraisers. However, most professional appraisers have some form of provincial, national or international accreditation. Persons who present themselves as an appraiser will have to establish professional expertise for the Board to accept them as an expert in appraisal matters.
A transaction between independent parties, where each acts independently in their own best interest. A sale between close family members, for instance, would not be an arm's length transaction, because the relationship may affect the price paid, or other considerations may come into the sale agreement.
The Assessor is the local representative of the British Columbia Assessment Authority (or BC Assessment). Each assessment area in BC has an Assessor, responsible for preparing assessments within that area. The Assessor is a party (usually a respondent) to all appeals within his or her assessment area.
Classification
There are nine classes described in the Prescribed Classes of Property Regulation. Typically the tax rate applied to a property varies depending on the classification. Descriptions are found at the BCAA website.
The nine classifications are:
Class 1 - Residential
Class 2 - Utilities
Class 3 - Unmanaged Forest Land
Class 4 - Major Industrial
Class 5 - Light Industrial
Class 6 - Business and Other
Class 7 - Managed Forest
Class 8 - Recreational Property/Non - Profit Organization
Class 9 - Farm
Generally speaking, the classification of property is based on its actual use as of October 31 of the previous year. The classification of vacant land with no present use depends on its zoning. To be classified as Farm, a property must meet specific requirements set out in the Standards for the Classification of Land as a Farm Regulation.
The assessed value of mixed-use properties may be split among more than one class. For example, part of the assessed value may be assigned to Class 6 - Business and Other, while the remainder is assigned to Class 1 - Residential.
Ideally, a comparable sale is the sale of a property physically similar to the property under appeal, close in proximity, and selling close to the valuation date. If there are no sales close in physical characteristics, proximity or time, comparable sales of dissimilar properties may be adjusted to estimate the actual value of the subject. Appraisers use comparable sales when estimating value using the Direct Comparison or Market Approach.
This is one of the techniques used by appraisers to estimate actual value. The cost approach combines the estimated land value and the depreciated value of the improvements. The underlying presumption is that a person will not pay more for a property than the cost to replace it: that is, the cost of the site plus the value of the improvements. The value of improvements is determined using a manual that is adjusted for local conditions, or from construction costs derived from local contractors. The value new is then adjusted to reflect any depreciation to the improvements. This technique is not frequently used for older properties, due to the difficulties in accurately calculating the depreciated value of the improvements. See also Owner as Contractor.
Depreciation means the loss of value due to any cause. It is calculated by comparing the current market value of an improvement with the reproduction or replacement value of a new equivalent improvement. Depreciation may arise from physical deterioration, changes in function, or economic obsolescence. Depreciation may be curable (fixable or repairable) or incurable.
Direct comparison or market approach
This appraisal technique, frequently applied to residential properties, compares the characteristics of the property under appeal to characteristics of other properties recently sold in a comparable market place. Adjustments are made to account for any differences, and the sale prices are adjusted to the valuation date, if necessary. Adjustments may be made for such characteristics as age, lot size, size of the improvements, view, and any other amenities.
This means the period during which a property is expected to perform its intended function. An improvement’s economic life ends when the operating expenses exceed the expected income.
The effective age of an improvement is the age that reflects the remaining life of the property, considering the usual life expectancy of those kinds of improvements. It is useful for comparison purposes in the Direct Comparison or Market Approach. The absolute or chronological age may be different than the effective age. That is, a home built in 1960 may have an effective age of 1995, if recently extensively renovated and updated.
For Major Industrial improvements, “effective age” is defined in B.C. Regulation 395/99.
Equity requires that similar properties be assessed in a consistent manner in the municipality or rural area. Previous Board and court decisions have held that property owners are entitled to be assessed at the lower of either actual value or the equitable value. This principle is intended to ensure that all property owners within an area pay a fair share of the total property taxes for that area. However, simply because one or a few properties are assessed lower then yours, does not necessarily mean there is an inequity.
The condition where a property may have more land than necessary to support or serve the existing improvements. For vacant sites, it is the land in excess of that required to accommodate the site’s highest and best use. For example, this may occur with shopping centres or hotels where they may have more land than they need for site coverage, access roads and parking.
Fee simple interest means the interest in real estate of an owner, which includes the right to control, use, and transfer the property at will. It is this interest the Assessor is required to assess. For leased land, because the owner, as landlord, has given up some of its rights (i.e. the right to use the property) but kept other rights (i.e. the right to transfer) the fee simple interest includes both the owner and the tenant’s interests. Therefore, the value of the fee simple will include both interests. See also Actual Value.
Is the number assigned to the property for assessment administrative purposes, that is normally printed in the top right corner of your assessment notice. Most property taxation jurisdictions also use this number on tax notices. For most properties one roll number is used for each specific property. It is possible, however, that one property is comprised of several roll numbers, or one roll number can cover several properties.
Determining ‘Highest and Best Use’ is the first step in the appraisal process. Property is usually valued at its highest and best use. The Appraisal Institute of Canada defines it as the use which is most likely to produce the greatest net return over a period of time. The highest and best use may be the same as the actual use, but could be another use - if that use would provide a higher net return. For residential properties, the highest and best use is normally the continued residential use. In some cases, the property could be rezoned for a higher use, or it might be possible to subdivide the property into more lots. If the land value exceeds the value of the property as presently used, the highest and best use will be different from the present use. See also Land and Improvements.
Improvements, for assessment purposes, generally means any building, fixture, or structure placed on land or water over land. See also Land and Improvements.
The income approach, most frequently used to value income producing properties, estimates value by capitalizing the net operating income (usually based on market rent) into perpetuity. The components of this approach to value are:
The gross income from a revenue producing property, before any deductions, based on the rents achievable in the market.
Calculated by deducting vacancy and bad debt expenses from the gross income, plus miscellaneous income, considering the market rates for these items.
This is calculated by deducting from the effective gross income all operating expenses excluding financing costs. Operating expenses include property taxes, insurance, management, and other costs associated with operating the property. For assessment purposes, operating expenses must be market or effective expenses, while the actual operating expenses from a property may not be the same as market operating expenses.
This rate is used in the income approach to capitalize the net operating income, to arrive at an estimate of the actual value. The rate is derived from the sales of similar properties, by considering the relationship between the properties’ income expectancy and their values (sale prices).
The Assessment Act requires the total assessed value be split between land and improvements. The total is arrived at from market evidence, and the allocation is based on the sales of similar, but vacant lots. Any difference is assumed to be a result of the contributory value of the improvements.
Usually, the allocation between land and improvements does not affect the amount of taxes paid for a single-family residential property. Therefore, changing the allocation will not usually change the amount of taxes payable. The total value (for land and improvements) must be reduced to reduce the taxes. Even if you are only appealing land or improvements, the Board is required to consider the total value as well as the split between the two. See also Residual Value.
There are two main categories of property leased or licensed from the owner (landlord):
In the income approach, market rent is what the property would rent for if available in a competitive market. The actual or contract rent, that is the rent paid under the existing lease, may or may not be the same as the market rent.
The real estate market may be stable, or may be volatile over time. Changes in the market are generally not the same for all properties, and values may increase or decrease differently for different properties depending on such factors as neighbourhood, type of property, or type of amenity such as waterfront or view.
See Actual Value.
Due to the high number of properties it must assess, BC Assessment uses a mass appraisal system, using data from sales, Land Titles, Municipal Planning Departments and other sources. Only a limited number of properties are actually inspected in any given year, and individual property appraisals are usually not undertaken by BC Assessment unless an assessment is appealed.
An occupier refers to someone who possesses land through ownership, lease, licence, or other agreement, or who simply occupies the land.
Occasionally an owner will do their own construction, or act as the general contractor. They may find a difference between the cost to build their improvement and the assessed value. For assessment purposes, value includes the cost of construction and the market cost of the labour (which should include normal profit margin for general contractors). Therefore, the assessment for improvements may exceed the actual dollars spent by the owner. See Cost approach.
Real estate means the physical parcel of land, and any improvements.
Real property refers to the bundle of rights, interests and benefits connected with the ownership of real estate. Real property does not include such intangible benefits of ownership as the goodwill of a business.
Replacement cost is the cost required to construct a similar structure, with similar utility (usefulness) as the property being valued, using modern design and materials.
Reproduction cost means the cost required to construct an identical replica of the property being valued (i.e. using the same materials, of the same quality as the original).
The apportionment of value between the land and improvements is most frequently determined by valuing the total property, then valuing the land, and the difference or residual is attributed to the improvements. In the case where the land value comprises most of the total value, the residual attributed to the improvements may be small, although the replacement cost of the improvement may be much greater.
See Folio or roll number.
A single family residence may be a detached house, townhouse, duplex, strata unit or recreation cottage property without any business or commercial use.
The Assessment Act in section 18(2) requires the property be valued based the use and physical condition as it is found on October 31 of the year when the assessment roll was completed. That means, for the 2005 roll, the use and condition date is October 31, 2004.
This date is absolute, and not variable by the Board. For instance, if a property is destroyed by fire on November 1, 2004, it must be valued as it stood as of October 31, 2004 (undamaged) for the 2005 assessment roll. See FAQ: How is my assessment affected if the improvements on my property are damaged or destroyed?
The Assessment Act in section 18(1) requires that properties are assessed at actual or market value as of July 1 of the year during which the assessment roll is completed. That means for the 2005 assessment roll, the valuation date is July 1, 2004, since the roll is completed before the end of 2004.
Occasionally, a purchaser will pay more or less than the market price for a property. For example, the property may be immediately adjacent to property the purchaser already owns, allowing the owner to ensure privacy or control over future development on both properties. This may also occur when the property may have some extraordinary appeal to one particular person. Appraisers do not consider such sales good comparables, as they do not reflect the normal forces found in the open market place.