In 2018 I was appointed to the Fairfax County Board of Equalization of Real Estate Tax Assessments (BOE). Every year the Department of Tax Administration (DTA) is charged with determining the value of each taxable property in Fairfax County for the purposes of collecting taxes. Residential and commercial property owners have the right to contest and appeal the assessed value of their property to the BOE whose especial duty is to determine whether the DTA has done so in a fair and uniform way. As a function of its role the board has the power to increase, decrease, or keep the same assessed value upon its review.

In addition to the honor and privilege of serving the County I’ve called home my entire life, this position has provided me with exclusive and invaluable access to behind-the-scenes market data and the various methods used to value real estate assets from office buildings to golf courses, multi-million dollar homes to vacant land, and apartment projects to shopping centers. Despite having to assess hundreds of thousands of properties per year, the DTA does a surprisingly good job of determining the market value of the County’s real estate assets within an acceptable margin of error. The accuracy of the valuations though are limited by the amount of data available to the assessors and, as one can imagine, the inventory of residential properties and annual sales dwarves that of all the County’s commercial assets combined.

My 11+ years of experience as a commercial real estate broker and CCIM education combined with my insight into the valuation methods used by the DTA have led me to an interesting revelation into the current state of our real estate market and how to effectively determine the appropriate listing price for both residential and commercial properties. As a commercial broker I will focus on commercial properties and only briefly touch on the residential market.

Anyone that lives in Northern Virginia knows that this is one of the hottest and highly desirable residential real estate markets in the country, if not the world. Nearly all of Fairfax County’s residential land has been developed and, as a result, supply is relatively static (it seems like there are more tear downs and rebuilds in Fairfax County than new development of single-family homes). When you have high demand and limited supply, prices go up.

Due to the number of residential properties and sales per year, the County generally uses the sales comparable approach to valuation. Depending on the uniformity of the homes and annual nature of the assessments, this can be a very accurate method to determine market value. As a result, when determining the appropriate listing price for a residential property the assessed value provides excellent guidance. Therefore, brokers should list residential properties at or slightly above the assessed value; paying close attention to sales comparables in the past 6 months and accounting for any upgrades or renovations that add value. Due to the high demand in Fairfax County, pricing a property even slightly below market value leads to a bidding war which pushes the final sales price above “market;” setting a higher market value for the following year and increased assessed values for neighboring properties.

Everyone needs a place to live and, as a result, the market for residential properties is essentially unlimited. This is not the case for commercial properties, which makes determining their market value significantly more difficult (certainly using the sales comparables method). The buyer for a small office condo is not in the same pool as the buyer for a shopping center who is also not in the same pool as the buyer for a 100+ unit apartment building, etc. etc. The DTA does its best to accurately assess these properties, often effectively using the income approach and applying market cap rates when recent sales comps are unavailable. This leads to a problem when a property is vacant; meaning, it has no income to capitalize. Certainly, one can estimate value by applying a market rental rate to the square footage and discount that potential income stream at a higher cap rate to account for the increased risk, but this is under the assumption that there is a [leasing] market for that particular asset.

The fundamental issue behind accurately determining the appropriate listing price for a commercial property is whether or not there is a market for that particular type of asset and within that asset class for the property, itself. Demand is based on a variety of economic factors and assumptions/projections. Amazon has disrupted the retail market, essentially eliminating the need/viability of big box retailers and creating a move towards service/experienced based tenants/businesses. So how much is a vacant, big box retail store worth? Most companies lease office space due to the natural expansion and contraction of their employee base. The small remaining market of office users that do choose to purchase are often sole proprietors or small partnerships, i.e. CPAs, attorneys, etc. which generally require approximately 1,000-2,000 SF. So how much is a 4,200 SF office condo worth? The 1,500 SF office condo that sold for $200/SF is not necessarily a comp for the 4,000 SF condo in the same building because the market for that amount of space is completely different. There are far fewer buyers for 4,000 SF than there are for 1,500 SF.

The conventional wisdom in commercial real estate for years has been that a property’s assessed value is the ground floor, acceptable sales price, and for some properties this still holds true. Property owners of valuable/desirable assets will often appeal their assessed value as a means of lowering their real estate taxes, which makes them more competitive in the leasing market. These properties tend to be more accurately valued or, better put, not overvalued from an assessment standpoint because of this active management and the prevalence of sales comps due to their marketability. There are many commercial properties in Fairfax County (and Northern Virginia) that are functionally obsolete. Whether due to age, location, etc. there is little to no leasing or ownership demand. How then do you appropriately price these listings for sale?

The assessed value can provide some guidance as an objective measure of value; however, brokers must determine the marketability of the asset to determine whether to list the property above or below the assessed value. In the absence of comparable sales, the DTA will either keep the assessed value the same for a property (sometimes spanning years) or apply a percentage increase or decrease based on market trends. This means that a particular asset may have been assessed years ago prior to economic/market changes that have decreased the value of/demand for that property. The very lack of demand that decreases the property’s value also contributes to a lack of sales that would provide the DTA with evidence of the decline in value.

After considering such factors as vacancy rates, permitted uses under the property’s current zoning, market rental rates, etc. a broker can determine if the assessed value is a relatively accurate measure of the potential market value of the property. Most of the properties with marketability/demand issues are best suited for owner users and thus the cost of ownership must significantly fall below the cost of leasing comparable space. The required spread between the cost of ownership versus leasing is magnified if the property is to be purchased by an investor on a speculative basis to compensate for the risk associated with leasing the property.

Some owners may be hesitant to list their properties at or below the assessed value for fear of selling the property below the market value. They would prefer to list the property high so that they can negotiate down on the sales price. Such properties can sit on the market for months, if not years. What one needs to remember is that market value is the price that a property would bring in a competitive and open market under fair sale conditions. If the property is effectively marketed, the price even if listed below the market value would be bid up by multiple offers/buyers until the property sells thus establishing the true market value.

For more information on listings and representation services, please contact Ryan Rauner, CCIM at 703-943-7079 or Ryan@RealMarkets.com