The Game of
Assessment Ratios

The Game of Assessment Ratios

It is that time of year again where property owners are receiving assessments on commercial properties.  It’s extremely important that property owners understand what an assessment ratio is as many states utilize these in the assessment process.  An assessment ratio is a fundamental concept in the realm of property taxes, playing a pivotal role in determining the tax burden of property owners.  It refers to the ratio of a property’s assessed value to its market value.

Assessment ratios are typically expressed as a percentage, with the assessed value representing the value assigned to a property by tax assessors for taxation purposes, while the market value reflects the price the property would fetch in the open market in a stress-free arms-length transaction.  Why is it important for taxpayers to understand this?  If you live in a state with a 50% assessment ratio, you might have a property that has a market value of $2M while receiving an assessment notice at $1.5M.  The taxpayer that is ignorant of assessment ratios might think this is a great deal, but in truth this property is actually being assessed at a market value of $3M.  That good deal no longer seems so good, and with this understanding you might rally the troops to engage in a negotiation with the tax assessor.

You might ask, what is the point of all this?  At the end of the day, it is a matter of politics.  Assessment ratios tend to give the appearance of a reduction in taxation and spreads the notion that local politicians are doing a good job.  How do these really work?  Cities, counties and other jurisdictions all have budgets that are covered by property taxes.  They calculate the tax rate by looking at the total assessed value of all property in the county, along with the total budget that property taxes need to cover.  In effect, states that apply assessment ratios simply have higher tax rates that ensure budgets are met.  What appears like a tax reduction, is more like a smoke and mirror.

Some states use assessment ratios to more heavily tax certain industry segments.  Colorado for example has always applied a much higher assessment ratio to oil and gas properties in comparison to other forms of commercial property.  Most commercial property is assessed at a 29% assessment ratio, while oil and gas has an 87.5% assessment ratio.  This sends a political message as well…’you can do business here but it will cost you.’  At the end of the day, it is important if you are a commercial property owner to fully understand the assessment ratios being applied to your property.  Make sure you are comparing apples to apples when looking at your assessments.  Being diligent in this area can save you quite the headache in the long run.

John Haettich

Director- KE Andrews

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