Santa Cruz County Grand Jury
• 2007-2008
Property Assessment: What’s business property really worth? Synopsis
⚠️ Aviso de traducción: Este contenido ha sido traducido automáticamente. El texto original en inglés es la versión oficial. La traducción puede contener errores.
⚠️ Este contenido ha sido traducido automáticamente. El texto original en inglés es la versión oficial. La traducción puede contener errores.
Findings 8 findings
F1
The case studied involved one company having a large number of parcels and multiple businesses. It was necessary for the assessor, with the property owner’s eventual concurrence, to segregate the parcels and associated improvements and other assets in order to determine which parcels, improvements and other assets were related to the requested assessment reduction.
F2
The business associated with the requested assessment reduction in this particular case is relatively unique making the use of “comparables” difficult. The Assessor’s Office, therefore, relied on the Income Method for determining the value of the property.
F3
The initial assessment was established using base-year values adjusted per the requirements of Proposition 13 and augmented by annual valuations of equipment. Reductions under the auspices of Proposition 8 were based on multiple factors including the capitalization of the business’ five-year average income stream.
F4
A one-year study of the business was conducted by the assessor. Industry experts were consulted to assure the assessor’s understanding of the business and the reasonableness of various valuations.
F5
Externally audited consolidated financial reports were used as a starting point for the income analysis. Secondary financial reports, isolating the business associated with the requested assessment reduction from the consolidated financials, were prepared by the property owner.
F6
The property owner’s accounting processes, audited consolidated financial reports and breakouts were tested by the assessor’s staff working both at the property owner’s site and in the Assessor’s Office.
F7
An agreement stipulating the value of the property in question for tax purposes (Settlement Agreement and Mutual Release) was approved by the Assessment Appeals Board and executed by the property owner and the county.
F8
Annual reviews by the assessor of the reduced assessment are being conducted as required. Conclusions
Recommendations 3
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R1Expand the Assessor’s Office web site to include a discussion of how business assessments are conducted. Without disclosing confidential financial information, the methodology used by the Assessor’s Office should be explained for different categories of properties so that the appraisal approach is more transparent. This would enhance the public’s understanding and perception of the fairness of the assessment process. Response: The Assessor PARTIALLY AGREES. The Assessor’s web site, under Property Tax Information, has a pamphlet titled “Business Property.” It explains what we do, who must file, types of property, etc. Based on your recommendation we have added a direct link to the State Board of Equalization handbook, AH 504 Assessment Of Personal Property And Fixtures for additional reference.
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R2When the income method is used, thoroughly investigate the ownership structure of a business to assure that the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is not being reduced through expenses that principally benefit the owners or owner-related parties (e.g., excessive salaries, “consultancies,” travel and entertainment, gifts). If such expenses are found to have reduced the income of the business being evaluated, they should be added back into the stated EBITDA. Response: The Assessor AGREES. It is and has been our practice to review all expenses when analyzing EBITDA.
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R3When using a business property owner’s financial statements to determine the income stream to be used in the assessment of business property, require that those statements be audited and certified by an independent external auditing firm for the applicable portion of the business. Response: The Assessor DISAGREES. The Assessor has a staff of State Certified Auditor-Appraisers who are qualified to perform all types of business audits. It would be an undue burden on the small business owners to require certification of their financial records by an independent auditing firm.
Conclusions 5
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CL1 Page 4A company’s stated income can be suppressed by paying excessive salaries or other benefits to owners, employees or vendors. This can affect the company’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), which can then artificially lower its assessment.
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CL2 Page 4Based only on the case described in this report, the Grand Jury found the assessor’s process for handling the request for a reduced assessment of business property owned by a privately held company to be reasonable, thorough and professionally conducted.
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CL3 Page 4A higher level of confidence in the financial statements provided by business property owners would be realized by having an external auditing firm review and certify the statements. The certification should apply to that portion of the business which is being used for property evaluation purposes.
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CL4 Page 5The current Assessor’s Office web site does a reasonably good job of describing the assessor’s functions for the majority of the county’s properties. However, many citizens are concerned about how the larger county taxpayers are assessed and whether their size and influence leads to preferential treatment.
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CL5 Page 5A more effective public outreach could reduce the concerns about possible preferential treatment for some large high profile land parcels.
No Responses Found 1
Government entities assigned to respond to this report. No response documents have been linked in our database.
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