How does a property’s assessment, or assessed value, compare to an indication of value in a property appraisal? This article discusses some of the similarities and differences between each of these seemingly similar terms. An overview of this article was included in Video Tax News Monthly Tax Update Issue No. 458.

Property Assessment

The assessed value of a property can be thought of as its tax value, or the value a municipality places on a property for taxation purposes. How this indication of value is estimated, and by whom, varies from province to province. Generally speaking, the amount of property tax owed by a property can be summarized as follows:

• The “Assessment Authority” is responsible for estimating value and classifying properties into specific classes;
• The Municipality is responsible for establishing the property tax rates, also known as “mill rates”, that apply to each property class; and therefore
• Property Assessment Value x Property Mill Rate(s) = Annual Property Tax Levy

For example, Alberta’s Municipal Government Act (MGA) calls for an annual valuation cycle with the responsibility of preparing annual property assessments resting with the municipality’s internal property assessment department, or a qualified property assessment firm retained by the municipality. Conversely, Ontario’s Assessment Act designates the Municipal Property Assessment Corporation (MPAC) as Ontario’s only Assessment Authority. MPAC has a four-year valuation cycle. These “Assessment Authorities” are responsible for estimating property values and determining property classifications; however, they are not responsible for establishing mill rates – municipal governments are tasked with this responsibility.

Property Appraisal

A property appraisal contains an estimate of value based on the purpose, intended use, and scope of work outlined in the appraisal report. Unlike property assessments which are specifically prepared to distribute the municipality’s property tax burden in an equitable manner, property appraisals are used in several contexts, including but not limited to: purchase and/or sale of property, financing, legal dispute, estate planning, strategic planning, and property assessment appeals.

Property appraisals are carried out by independent appraisers who have the requisite licence(s) and credentials to value real property in a specific jurisdiction. These appraisers are typically hired by the property owner although, in theory, any individual or organization can request to have any property appraised. In practice, appraisers seldom appraise properties where the property owner is unaware and/or unwilling to share information.

Similarities & Differences

Date of Valuation

In an appraisal, the client decides the effective date of valuation, with this date aligning with the intended use of the appraisal (eg., today, a specific historical date, etc.) Conversely, the valuation date in a property assessment is established by the Assessment Authority.

Valuation Process

Assessment values are generally estimated using “mass appraisal” process involving common data, mathematical models, and statistical tests. While these techniques help assessors value numerous properties in a short period of time, market participants (including appraisers) seldom use these mass appraisal techniques in practice.

Scope of Work

The valuation of real property is premised on the fundamental concept of Highest and Best Use. In short, the Highest and Best Use of a property is that use which results in the highest property value after considering the physical, legal, and economic characteristics specific to the property. Stated differently, the Highest and Best Use of a property is whatever use results in the highest residual land value. Assessors seldom have the time and resources and complete a thorough Highest and Best Use analysis, potentially resulting in material errors in valuation. Moreover, although assessors have the right to, they seldom have the time and resources to personally inspect each property. Conversely, appraiser’s are required to conduct an inspection and if not able to do so, they must clearly state this information as an Extraordinary Assumption within their appraisal report.

Terms of Reference

Generally speaking, the assessment value of a property is based on the “as-is” market value of the property as at the date specified by the Assessment Authority. There are situations, however, where the “as-is” value of the property is not what a stakeholder is looking for. For example, a developer may need to know the value of a proposed development “as-complete” or perhaps a you need to know the leasehold value of a 50% ownership interest in a particular property. The parameters, or terms of reference, between the assessment and the appraisal would be materially difference in this circumstances.

Summary

In the end, stakeholders looking for information on the value of real property should be mindful of the similarities and differences between a property’s assessment value and its appraised value. Using a property’s assessment value as a proxy for its current market value may appear reasonable in some situations but depending on the intended use and potential value at stake, doing so may result in unintended consequences with material implications.

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