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How we Value
There are three fundamental approaches to value which assessors 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 it would cost to acquire a comparable property.
All sales in Nova Scotia are reviewed and either qualified or unqualified to be used in an analysis. 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 assessor estimates the land value only, and then adds to this value the cost of replacing the building(s) less depreciation and other improvements.
Value of Land + Cost of Improvements (i.e. construction) – Depreciation = Total Value of Property
When 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’s or owner’s profits and the cost of financing during construction).
Once the costs of constructing the building have been determined, the assessor 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 influences.
Income Approach
The Income Approach to value is generally applied when determining valuation of investment properties such as apartments, office buildings, hotels, mobile home parks etc. and 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 assessor determines the potential gross rental income the property could produce by analyzing 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.
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 assessor analyzes sales that occurred in the marketplace to determine what rate of return investors are seeking for the various types of properties. The capitalization rate increases proportionately with any risk.
Mass Appraisal
The methodology used for assessing all property in Nova Scotia, at market value is “Mass Appraisal.” Mass appraisal is defined as the valuation of large groups of properties as of a prescribed date, using standardized methodologies and tested using statistical measures.
PVSC assesses properties, on a mass appraisal basis, pursuant to an internationally accepted standard: the International Association of Assessing Officers (IAAO) Standard on Ratio Studies.
Using mass appraisal and applying the IAAO standards and ratios for testing ensures that the properties valued are assessed at market value, with a base date of January 1st two years prior to the year of assessment, and taking into consideration the state of the property as at December 1st the year prior.
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