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Old 02-11-2008, 02:51 PM   #44
Senior Member
Join Date: Jul 2006
Posts: 103
Re: Alexandra Hotel

Originally Posted by tobyjug
You may misunderstand the full import of the theory behind tax assessment, but you are right to say that commercial properties tax assessents are not reflective of the market values when a real estate market is rising. This can been particularly acute for commercial properties, which are typically valued by the income approach..
Actually, I think I understand the theory quite well, and I stand by my point: it doesn't work, and it's a joke.

The problem is with properties held for speculation, which by definition yield little (parking, perhaps a legacy tenant) or no income. An income approach is clearly irrelevant to such properties. The fact that the income approach continues to be (mis)applied is the problem.

While no one claims that assessments are a perfect guide to value, in the residential world, where valuations are based on precedent transaction, it's difficult for assessments to be off by orders of magnitude from valuation. In the commercial world, this happens frequently, and the phenomenon is most acute for property held for speculation - income is not, and never will be, the point for owners of property like the Alexandra.

Moreover, it's not just a factor of "when markets are rising" - because these properties aren't run for income, tax valuations can be out of whack for decades on end. Which just encourages the owners to continue to hold on - as the tax burden is trivial, the value can just be accumulated over time as unrealized (and therefore untaxed) capital gains.

Indeed, other things (such as the zoning climate or local economy) being equal or improving over the long term, it makes sense to sit on such properties forever ... over the cycle, the value of the prospective redevelopment tends to increase. The owner potentially has much more to gain from a redevelopment in 2020 than a redevelopment now, even presuming that means riding out a cycle or two or three. Indeed, several of the most notorious vacant lots downtown have been handed down through generations of the same family! The development opportunity is "always there," silently appreciating, untaxed.

For this reason, the principle of taxation on basis of income ought to be abolished for any property that is severely underutilized.
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