How We Value
In Nova Scotia, property assessments reflect market values as of a base date. For example, the base date for the 2010 reassessment was January 1, 2008. We reassess property every year.
In general terms, market value is the price expected if a reasonable amount of time is allowed to find a purchaser and if both seller and prospective buyer are fully informed. For assessment purposes in Nova Scotia, market value is the most probable price that an unencumbered property would sell for on the open market.
There are three fundamental approaches to value which both private and public appraisers use to develop market value estimates. A summary of each approach follows.
Direct Comparison Approach
The Direct Comparison Approach to value is based on the assumption that an informed purchaser would pay no more for a given property than the cost of acquiring a comparable property.
All sales in Nova Scotia are reviewed and either qualified to be used in analysis or determined to be non-arms length. Generally, sales occurring within 6 months either side of the base date are used.
Using the Direct Comparison Approach to value is most appropriate when the market is active and many properties with similar characteristics are selling.
Cost Approach
The Cost Approach to value is based on the assumption that an informed purchaser would pay no more for a property (land and buildings) than it would cost to buy a similar piece of land on which a building could be constructed with characteristics comparable to the property to be purchased.
The appraiser estimates the land value only, and then adds to this value the cost of replacing the building(s) and other improvements.
Value of Land + Cost of Improvements (i.e., Building) - Depreciation = Total Value of PropertyWhen applying this approach to value, costs must be adjusted to the valuation date, reflect market values in the property's geographic location, and include all indirect costs (such as the developer or owner's profits and the cost of financing during construction).
Once the costs of constructing the subject building have been determined, the appraiser estimates a deduction for:
- Physical Depreciation - loss in value due to normal wear.
- Functional Depreciation - loss in value due to the structure's inability to function effectively.
- External Depreciation - loss in value due to economic or location.
Income Approach
The Income Approach to value is based on the assumption that the value of a property is directly related to the income it will generate over its economic lifetime. When applying this approach, net operating income is estimated:
Potential Gross Income - Vacancy/Bad Debt = Effective Gross Income - Operating Expenses = Net Operating Income
The appraiser determines the potential gross rental income the property could produce by analysing rents paid for the subject property, as well as those paid for comparable properties located in the same geographic area. An allowance is then made for vacancy and collection loss (which varies depending on the type and location of property).
From effective gross income, operating expenses are deducted which determines the annual net operating income.
Note: Standard appraisal methodology does not provide an allowance for mortgage interest. Different owners have different mortgage requirements. Completing the calculation as though there are no debt service charges, puts all such owners on the same footing and is an important principle in assessment law.
Based on expectations a typical investor would have for the property, the annual net income is converted to a capital value using a market-derived capitalization rate:
Value = Net Operating Income / Capitalization Rate
The appraiser analyze sales that occurred in the market place to determine what rate of return investors are seeking for the various types of properties. The capitalization rate increases proportionately with any risk.
The Income Approach is widely applied when appraising income producing properties such as apartment buildings, office building, shopping centres, etc.
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