Valuation is based on "full and fair cash value," the amount a willing and knowledgeable buyer would pay a willing and knowledgeable seller on the open market. The job of the Assessor is to determine the market value of every parcel of property in the City as of January 1.
In practice, there are three universally accepted approaches to determining value: market, income and cost. The Assessor does not create value. Rather, he or she is responsible for discovering and reflecting the changes that are occurring in the marketplace.
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Market Approach - market sales of similar properties which sold in the year prior to January 1 are analyzed, compared and adjusted to forecast what the property would sell for on January 1. When there are many sales, the market approach is the most accurate and dependable tool in the determination of value. Most residential property is valued by the market approach.
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Income Approach - the income approach is most applicable to real estate that is normally bought and sold on the basis of its income-producing capabilities, such as retail stores, office buildings and industrial properties. This approach requires significant data such as rents, occupancy rates, operating expenses and investor requirements. This approach is most useful in valuing investment properties where sufficient market sales are not available. The income approach considers the income stream that a property is likely to produce for an investor over a definite period of time. The process of capitalization converts the future benefits of ownership into present worth or market value. The elements of capitalization are income (I), rate (R) and value (V). The income approach formula is expressed as follows: value equals income divided by rate (V - I/R).
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Cost Approach - The cost approach involves an estimate of the current reproduction or replacement cost of the building, deducting an estimate of depreciation (or loss of value from any cause) and then adding an estimated value of land. Reproduction cost is the amount of money necessary to erect a new structure that is an exact replica of the existing building. This is appropriate in the case of recent construction. Replacement cost is the expenditure necessary to build a new building in utility to the original and able to serve as a substitute in function. It is more applicable to older buildings.