Question: “Are commercial/industrial property values calculated differently from residential property values?”

Answer: Yes.  There are three general methods of assessing property: the sales comparison approach, the cost approach and the income approach.

The sales comparison approach is the preferred method for estimating the values of residential properties.  We use this method to estimate the value of a particular property by statistically analyzing the sale prices of similar properties within the same area (such as a neighborhood or an entire town) and within the same sales time frame.  We obtain sales data from the Middlesex County Registry of Deeds and other reliable sources.

The cost approach is a reliable way of estimating the value of newer structures that are of standard materials, design, and workmanship.  To do this, the cost data must be reliable, complete and typical.  Current construction costs should be based on the cost of replacing a structure with one of equal utility, using current materials and current design, and building standards.  This data can be obtained from industry manuals such as the Marshall & Swift Residential Cost Handbook and its Cost Index.

The income approach is the preferred method we use to value commercial and industrial income-producing properties.  This method requires the collection, maintenance, and careful analysis of income and expense data.

We obtain this income and expense data directly from property owners, who are asked to fill out and return an Income and Expense form each year.  If these forms are not submitted, we draw data by subscribing to online data sites, such as CoStar Group and Realty Rates, which provide current property information on rent per square foot, maintenance expenses, income capitalization rates and leases.

With this information in hand, we first look at the potential gross income that a building could generate .  From this, we subtract vacancy rates to get the effective gross income.  Next, we subtract operating expenses to calculate net operating income.  The final step is to divide net operating income by the capitalization rate to arrive at a property value.  Capitalization rates (also called “cap rates”) are used to estimate and compare the rates of return on multiple commercial or residential real estate properties.

Here is an actual example of how we assessed a commercial property in Holliston: Based on the cost per square foot to lease this building, it had a potential gross income of $206,250 in calendar year 2022.

The owners reported a 5% vacancy rate, and 5% of $ 206,250 equals $10,313.  Subtract that from $206,250 and you get $195,937 in effective gross income.  Annual expenses to operate the building are 25% of income, and 25% of $195,937 is $48,984.  Subtract that from $195,937 and you get $146,953 in net operating income.

The capitalization rate, including the cost of property taxes, was 0.0775 % as of the January 1, 2022 assessment date.  Divide the $146,953 net operating income by the 0.0775 cap rate  and you get a property value (land and buildings) of $1,896,168.

To calculate the property taxes for this property, multiply the $1,896,168 assessed value by the tax rate (in Fiscal Year 2023 it was $15.40 per thousand dollars of value, or 0.1540) and you get a $29,200.99 tax bill.

Then, to calculate the 1.5% (0.015) Community Preservation tax, subtract $100,000 from the property value.  That leaves $1,796,168.  Multiply that by the tax rate and you get $27,660.99.  Multiply that figure by 0.015 to get the Community Preservation charge of $414.91.

The total FY23 taxes for this property were $29,200.99 plus the $414.91, which equals $29,615.90.

Next Article: “What are personal property taxes?”