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1 '~'~svn of Frami~~l~~~ Computer Assisted Mass Appraisal Systerre~o '~'~fl~ Three Approaches to Valuation To establish tax valuations for its 29,000 plus taxable real estate properties in Framingham the Town employs Computer Assisted Mass Appraisal (CAMA) system. A CAMA system is a statistical software tool that uses standardized procedures for collecting data and appraising properties on a uniform and equitable basis across property groups. It is the process of valuing all properties in a community as of a given date, using common data and standardized methods and then conducting statistical tests upon the results to ensure uniformity and equity in the valuations. These data, methods and statistical tests are then independently reviewed each year by the MA Department of Revenue prior to their certifying the values as representing "full and fair market value" for the purposes of property tax assessments. MA DOR conducts these reviews and makes these certifications in a11351 cities and town in Massachusetts LAMA systems each of the three approaches to estimating value of real property: Market (Sales) approach; the Cost of Replacement approach; and the Income approach. The Town is required by the MA. Department of Revenue to use at least two of the three valuation methods for all property types, including commercial properties. The Town of Framingham strives to employ all three approaches but most commonly it employs the Market/Sales and Cost of Replacement approaches for residential properties and Cost of Replacement and Income approaches for Commercial Industrial Properties. The CAMA system is used to establish values for all properties in a group using each of the three methods. The results of each of the three approaches are then compared and must be within a specific, narrow statistical range in order to be approved by the Dept. of Revenue. If the resulting values from one method are outside that statistical range then the data is must be checked for accuracy and additional data may be gathered to accurately value the properties. The Assessors perform these data quality tests using statistical measures such as the Assessment to Sales Ratio (ASR) and the Coefficient of Dispersion to ensure that the resulting values from each method do not vary significantly from full and fair market value and are uniform and equitable. If subsequent to the issuance of property tax bill, a taxpayer believes that his or her property has been assessed too high, the taxpayer files an appeal for an abatement for their specific property. At that time, the Sales/Market approach is viewed by the MA Appellate Tax Board as the Determinant Value for a specific residential property and the Income Approach is considered the Determinant Value for commercial property in the abatement appeal process. The relevant pages from the Mczss. Department of Revenue's publication, Assessment Administration: Law, Procedures and Valuation and Mass. DOR Certification Standards/ Approaches to Vnlue are attached for reference.

2 Rev. 01/ VALUATION METHODOLOGIES 6.1 Valuation Systems Most communities already have a valuation system in place, commonly referred to as a Computer Assisted Mass Appraisal (CAMA) System. These systems have the ability to apply market changes to all comparable properties within the municipality Adjustment of Existing Valuation System Sales analyses and other market data are used to identify what adjustments need to be made to the existing valuation system for improvements and land. This typically involves updating the CAMA system valuation models, such as land, cost and depreciation tables. Adjusting these tables maintains the integrity of the existing system because the values of all comparable properties would change at the same rate. s The existing land valuation schedule would be adjusted if the source of dispersion appears to be neighborhood differences. The existing building valuation models, base cost tables or depreciation schedules would be adjusted if the source of dispersion appears to be a specific style or age of property Trending or Factoring Existing Valuations In some cases, sales analyses may be used to adjust the assessments of a group of properties by a uniform percentage, rather than adjusting the CAMA system valuation models. This approach is effective when the underlying data is current and accurate and when separate trending factors are developed for comparable properties (such as by location, age, style, etc.) that appreciated or depreciated in value at the same rate. It may be an inappropriate appraisal technique where values have been previously factored and applying another factor would magnify underlying inequities. Sales of homes in a particular neighborhood indicate an ASR of 90%. The current valuations of all homes in a particular neighborhood are increased by 10%. 6.2 Residential Property Residential properties are usually valued using the cost approach. This method calculates the current cost to replace the building using a recognized cost manual, local building costs and/or a cost trending multiplier (from an applicable national cost service). This cost estimate is then adjusted downward for depreciation due Assessment Administration: Law, Procedures and Valuation Mass Appraisal r~i

3 Rev. 01/14 to age or condition. Land is valued separately and added to the depreciated cost. The commonly used term for the building component is RCNLD for Replacement Cost New Less Depreciation. Subject property is a 20-year-old, 2,000 square feet (SF) single family home. Updated construction costs are $75/SF. The RCN = $150,000 (2,000SF x 75/SF). Updated depreciation tables indicate a 20-year-old home has lost 10% of its value. RCNLD = $135,000 [150,000 15,000 (10% of 150,000)]. Residential house lot value is $45,000. Final value is $180,000 (135, ,000). 6.3 Vacant and Improved Land The approach to valuing vacant and improved land depends on the sales database. The most reliable method is to analyze sales of vacant, raw land. Additionally, a land residual analysis should be conducted. This method subtracts the value of all improvements on a parcel from its sales price leaving an indicated land value. The results of both approaches should support the adjustments the assessors make to existing land valuation schedules for all classes to ensure that their application reflects current market value. A single-family home sells for $300,000. The RCNLD = $200,000. The residual or indicated land value is $100, Commercial and Industrial Property Commercial and industrial properties are bought and sold on investor expectations. In valuing these properties, adjustments should consider the approaches to value that were used to determine their original base values. Certification guidelines require that assessors use at least two valuation methods to estimate the values of all investment properties. The three methods used to value commercial and industrial properties are: Cost Annroach This method calculates the current cost to replace the building, adjusts for depreciation due to age or condition and adds a separately determined land value. Assessment Administration: Law, Procedures and Valuation Mass Appraisal 2-17

4 Rev, 01/14 Subject property is a 10-year-old, 20,000 SF office building. Updated construction costs for this type of structure are $50/SF. The RCN = $1,000,000 (20,000SF x 50/SF). Updated depreciation tables indicate a 10-year-old office building has lost 10% of its value. RCNLD = $900,000 [1,000, ,000 (10% of 1,000,000)]. Commercial land value is X200,000. Final value is X1,100,000 (900, ,000) Income Approach This method requires the assessor to estimate the rental income from a property and capitalize that income into an estimate of current value. The approach recognizes that potential buyers demand property because they anticipate a future income stream. Assessors should collect current information on a community and regional level about rents, income, expenses, financing rates and terms and other data needed to develop capitalization rates. The necessary information can be obtained from a questionnaire, interviews with taxpayers, or from third party sources. The formula that relates income to value undet~ this approach is: Value (V) =Income (I) =Capitalization Rate (R). Subject property is expected to provide a perpetual net income of $50,000 a year. The rate of return on investments of similar safety is 10%. Final value is $500,000 (50,000 =.10) Market Approach This method analyzes recent commercial and industrial sales to develop units of value. These unit values may then be applied to comparable nonsold properties. Sales from surrounding communities with comparable property bases and market influences may also be used for analytical purposes. A 40,000 SF office building sells for $3,000,000. The dollar per square foot unit of value is $75/SF (3,000,000 = 40,000SF). Assessment Administration: Law, Procedures and Valuation Mass Appraisal 2-18

5 Bureau of Local Assessment Certification Standards the value of land, such as, size, shape and frontage, or develop a land valuation system based on these accurate measures of market value. Moreover, without accurate land information, existing appraisal systems cannot produce uniform assessments. Assessors in communities that do not have adequate tax maps must include the development and implementation of atax-mapping program as the initial component of their reassessment program. Assessors in all communities must provide for the maintenance and updating of their tax maps as a component of their reassessment program. Parcel Classification Assessors shall classify all property as of January 1 according to its uses Assessors must refer to the Property Type Classification Codes booklet prepared by the BLA. Property Record Cards Property record cards (PRCs) shall be completed for all parcels indicating the name and mailing address of the property owner. PRCs should contain all information regarding improvements and land required by the appraisal system to produce equitable assessments along with the visit/inspection history, sale information and assessment history. Additionally, the PRC should contain a sketch and photograph. Prior Certification Directives The Bureau of Local Assessment certification directives must be reviewed for compliance when developing the revaluation program. APPROACHES TO VALUE Assessors shall consider the market, cost and income approaches in the valuation of all vacant and improved parcels using the computer assisted valuation system (CAMA) in place in the community. The assessors must develop a program to collect and analyze three categories of data; general, specific and comparative to be used in all approaches to value. General data consists of neighborhood characteristics, trends and factors which affect value Specific data consists of site, external influences and improvement information. Comparative data consists of cosfi, sales, and income and expense information. Massachusetts Department of Revenue 6 Division of Local Services (Rev. 3/2014)

6 Bureau of Local Assessment Certification Standards To understand the current market conditions, the assessor should collect all sales data that has occurred in the community. Current asking prices, used as a guide in the determination of value, should be investigated and reviewed. The validity of any sales analysis is dependent on the use of the arms-length sales. An arms-length, (market value) sale implies the consummation of a sale as of a specific date, the passing of a title from seller to buyer whereby certain conditions are upheld: the seller and buyer are typically motivated, well informed and acting in their own best interest; the property has been exposed to the open market for a reasonable amount of time; payment is made in terms of dollars; and the price represents the normal consideration for the sold property unaffected by special financing or sales concessions. All sold properties should be inspected which will enable the assessors to validate the sale price, circumstances of the sale, verify existing property data and monitor property changes. To obtain sales data and circumstances relevant to the sales, the assessors should send sales verification questionnaires to buyers and sellers to determine the type of transaction, financing arrangements and any special circumstances of the sale. Local real estate brokers and the Multiple Listing services are also valuable sources for such information. The assessors should obtain information necessary to determine the fair cash value of property by requesting that owners and/or lessees of such property make a written return in accordance with Massachusetts General Laws, Chapter 59 ~ 38D (applicable to real property) and Chapter 59 ~ 38F (applicable to personal property). The returns can be used to request sale information, income and expense data, property descriptive information, cost, condition and age of personal property assets as well as annual reports filed with regulatory agencies or any other information required by the assessors to determine value. Sales Comparison Approach (market approach) The sales comparison approach is an interpretation of comparable sales data to arrive at an estimate of value for the subject property. Similarities and differences which affect market value including financing terms, market conditions, location, and physical characteristics of recently sold properties are analyzed and adjusted to estimate the market value of the subject property. The sales comparison approach is based on the principles of supply and demand (principle of change), contribution, and the principle of substitution. Adjustments to market conditions are based on the principle of change. Adjustments to individual items which affect value are based on the principle of contribution. The principle of substitution assumes that a prudent person will pay no more for a property than it would cost to purchase a comparable substitute property. In developing the sales comparison approach the assessor should attempt to interpret and measure the actions of parties involved in the marketplace, including buyers, sellers and investors. Massachusetts Department of Revenue 7 Division of Local Services (Rev. 3/2014)

7 Bureau of Local Assessment Certification Standards Cost Approach Utilizing the cost approach, the value of a property can be estimated by totaling the land value and the depreciated value of any improvements. This approach is most reliable when used on newer structures and less reliable when applied to older properties. The cost approach may be the most reliable approach in dealing with specialty use properties. The assessor shall value improvements in accordance with generally accepted mass appraisal practices, cost service manuals with applicable updates and or use of local building costs, where available. All data must be documented and presented for certification. In using the cost approach, base costs shall be determined as appropriate for each improvement style or type. Current local modifiers and costs appearing in a generally accepted cost calculator can be adjusted where necessary and documented by an analysis of local construction costs and market sales data. Accrued depreciation, including physical deterioration, functional and economic obsolescence must be accurately documented by market evidence prior to deduction from the replacement costs. Functional and economic obsolescence should be applied in accordance with generally accepted appraisal practices. These adjustments should be noted on the PRC, clearly defined and substantiation presented during certification. In reference to commercial and industrial property, the CAIVIA system must utilize all cost components necessary to value the various uses within the community. This should include type and size of the structure(s), story height, paved areas, signage, lighting, etc. Income Approach The income approach is used primarily to value investment properties. Since this approach is intended to model the expectations and/or behaviors of a typical investor it is considered to be the most applicable valuation methodology for income producing properties. For certification purposes, a second independent approach to value must be developed and applied to all properties bought and sold on investor' expectations. The two approaches to value should correlate within 15%. In valuing income producing properties, the assessor must collect current community specific information from owners, tenants, realtors, financial institutions and any other sources for use in the valuation process. There are sample forms and cover letters located at the DOR website at in the Local Assessment section under General Information. If sufficient data cannot be obtained locally then data should be obtained from alternate sources of information such as regional information from similar neighboring Massachusetts Department of Revenue 8 Division of Local Services (Rev. 3/2014)

8 Bureau of Local Assessment Certification Standards municipalities, the Internet or national/regional services. This data must be sufficient to develop verifiable schedules for all income producing property. Data to be analyzed shall include rental information, vacancy rates, and expense information. The capitalization rate (cap rate) is the ratio between the net operating income and its capital cost (original price paid to buy the property) or current market value. Proper cap rate development should represent market conditions such as financing terms, discount rates, recapture rates, yield requirements and local debt coverage ratios for the various uses within the community. All data and analyses used in the determination of value should be documented and presented for certification. STATISTICAL ANALYSES Once the arms-length sales have been identified and verified, the assessors should undertake a statistical analysis to determine both the level and uniformity of existing assessments and to identify the sources) of any existing inequities. The total number ofarms-length sales used in the analysis of any residential class should be at least 2% of all parcels in that use class. If the total number of sales is less than 2% or if 2% is less than 10 sales, twenty-four months of sales for that class must be analyzed and submitted to the BLA for review, time-adjusted as needed. If a timeadjustment is performed an analysis must be presented for certification. The analysis of the various classes of property must use sales from the same time period when obtaining the required number of sales. See pages A4 A9 in the Appendix for Time Trend Analysis information. All commercial and industrial sales should be similarly analyzed and submitted. The effective date of the analysis is the January 1 St prior to the fiscal year. For example, the assessment date for FY2015 is January 1, 2014, and the sales to be analyzed are those occurring in calendar year 2013 (January 1, 2013 through December 31, 2013). Since the object of the valuation program is to estimate fair market value as of January 1 5t of a particular year, the ratio study used to evaluate that program should reflect market conditions as of that same January first. In the event that two years of sales are needed, the addition of the sales from the previous calendar year can also be used or Massachusetts Department of Revenue 9 Division of Local Services (Rev. 3/2014)