Worcester City Assessor William Ford on Assessments
Worcester City Assessor William (Bill) Ford spoke at the Worcester meeting on the assessment process and form 38D, used to collect information about larger properties.
Assessments and Form 38D Transcript
Bill: First, thank you for having me here tonight. I didn’t realize you had such a nice setup here, I’ll be honest with you. I have never been here before. I’ve been to the voc school, but I’ve never been in this room before. This is quite a setup. I like it here.
I’m William Ford. I’m the assessor for the City of Worcester. The statements I’ll be making are specific to the City of Worcester; the way that we do things maybe slightly different than the assessors in the jurisdictions that you’re dealing with. That being said, we’re all required to send out the income and expense information that we request. It’s the 38Ds, the law that requires us to send it out, and it requires property owners to supply the information.
A couple of things: the way that information is used is we developed rates for our evaluations. If retail is renting at $15 a foot in your particular area, we need to know that. The best way for us to get that information is from the property owners. We also need to know what the rent includes. Is it triple net? Is it gross? Is it some variation inside of that? Typically, your industrial space is triple net. Retail is double net. It’s base plus cost. As the operating expenses and the taxes go up, the tenants are picking up a portion of that. Just so, I get a feel from the audience, how many property owners are nine units and above apartment buildings?
Audience: [unintelligible 0:01:44].
Bill: How many property owners are nine units and above apartment buildings?
Audience: [unintelligible 0:01:50].
Bill: Okay, and how many are commercial – retail, office? And smaller residential – eight units and below? Okay, so we got a mix of everybody here. That’s good, that’s very good. The reason I asked that question is because of the different property types. Your apartment buildings are totally gross, okay. Landlord is picking up all of the costs – heating, everything except electric in some instances. You’re responsible for removing the snow. In your industrial buildings, the snow is typically cleared by the tenant. The only thing that the owner has to worry about is a reserve for replacements, accounting costs, and things like that.
When you receive the forms, and again we’re going to be sending them out in a couple of weeks in Worcester, outside of Worcester, some of the assessors have already sending them out. They typically get mailed between January 15th and the end of February throughout Massachusetts.
Our form has a rent roll on one side. We’re asking about the leases. It’s a typical abstract. It’s requesting the tenant the use. Is it retail? Is it restaurant? We’re trying to find out information about the property. We have all the area breakdowns. We have the lease start and end dates.
The interesting thing in Massachusetts is the way the law is written, it says that we are at a full, fair cash value as of evaluation date. That means that we determine what the market rent would be as of evaluation date. Now you may have a long-term tenant in a retail situation. They signed a 30-year lease 10 years ago. Unfortunately, that’s not market rent. The market rent today could be $10 and you’re getting $15. Market rent today could be $20 and you’re only getting $10.
The assessors require to determine the market rent as of evaluation date. We do that by looking at comparable rents of properties that have leased in the time period that we’re looking at, so the evaluation date is the January 1 of the prior year. For fiscal year ’16, which will be coming up July 1, the fiscal year the prior January 1, so January 1, 2015, is our timeline. It’s our evaluation date, and we typically look at the year before, so calendar year ’14. Leases that were signed would determine the rental rates for the New Year.
Doug had talked to me about coming and talking about abatement applications, and the reason we didn’t do that is this is your first step for an abatement application. The reason I say that is part of the law limits you for abatements if you do not file your 38D. When you go to the Appellate Tax Board, if you have not filed your 38D, the case is typically dismissed because if you don’t provide the assessor with the information they need to value the properties, it’s a give and take situation. The ATB shall dismiss those cases.
The other information that we’re looking for are the expenses. Now again what we do is we look at all the properties that filed the information and we analyze it. We use typical information or typical expenses. We compare the information to national information. I’m sure you’ve all heard of Korpacz, Co-Star. Korpacz, I’m sorry I’m showing my age, now the PwC Realty Investors Survey. These are companies that send information to major investors, look at what they’re doing with their expenses, and they’re deriving calculations from that. We’re asking you to provide that information on a local level. It makes it more accurate if we have the information for our local area. If you’re running oil to heat the properties, it may be slightly different in local areas, so that’s why we’re trying to get the local information.
I get a lot of people that ask me why are you using my exact expenses? We standardize the expenses. Whereas you may be paying 1.5 percent for insurance, somebody else may be paying 2 percent for insurance. We standardize the expenses to a specific percentage, and all those properties are analyzed based upon that. Now it’s possible that your brother-in-law is in the insurance business and he gave you a great deal. We don’t use the specific numbers of each individual property, but we standardize that information.
We also again look at national trends. If a particular type of property, let’s use apartment buildings for a minute. On the national average, apartment building expenses are running 35 percent on the low end to about 50 percent on the high end. If somebody is showing 75 percent of expenses on their expense information, there’s a problem there. It maybe a management problem. It maybe a particular issue with a particular property, maybe a tenant issue. I don't know what the problem is, but we have to standardize it to eliminate those fluctuations.
It may be that improvements were done to the property – capital improvements, you replaced the roof, you replaced the boiler. Those types of items are capitalized over a longer period of time. We don’t look at that expense in one year. Those are valid expenses. It’s just a different way of looking at it. If you put a new roof on the property, that’s a 20-year item minimum, so we look at it and we take that cost, divide it over 20 years, and analyze that. When we’re doing our evaluations, this is adjusted in a reserve for replacement.
The standard expenses that are excluded. Okay, so the IRS allows you to deduct a depreciation expense. They allow you to deduct certain mortgage expenses. We don’t use those information. We don’t use that information. It does not help us with the operating expenses. Those are business expenses. You’re going to have somebody buy a property for cash. Should he have a higher value because he paid cash for a property and you have a mortgage on a property? Those are business expenses. Those are excluded from our analysis. There’s no need to put them on the forms. We don’t include that in any of the analysis for assessing purchase.
The other information again this is typically on the smaller four to eight units. I have one person that fills out every year his income and expense information, and he includes I think it’s $14,000. He owns two apartment buildings, four units, and he includes $14,000 for his cellphone charges in his expenses [laughter]. Now I’m guessing the entire family’s cellphone package is somehow being paid for by the buildings‑
Audience: [unintelligible 0:09:30]
Bill: Again, the fact that you may lease a car through the business, those are considered personal or business expenses. Whereas some of them are allowed by the IRS, they’re not operating expenses of the property, and they’re not useful to us in our information. So that’s basically your simple income and expense information that we’re going to be requesting. Again, for Worcester it will be going out in approximately 2 weeks.
Some of the other items is what the rentals are. By that, I mean if it’s a related party. If you own a strip mall and the major tenant is a supermarket owned by your brother and your mother made you lease it to him for $4 a foot [laughter], that’s not a market transaction. That information if it’s a related party, we just need to know about it. Are there any questions? Yes, ma’am.
Sandra: What exactly could you be specific in terms of the expense that you look for when we’re filling out these forms other than tax [unintelligible 0:10:45] insurance? Are those just the three staples or is it more?
Bill: Well, it depends on the property type. Let’s start with the‑
Sandra: [unintelligible 0:10:53] apartment.
Bill: Let’s deal with an industrial property for a minute. Industrial properties are triple net, so the expenses we’re looking for are the insurance, any structural repairs that you’ve done on the property – if you did replace the roof, I want to know what kind of cost you’re paying for the roof – and your administrative expenses, legals, accounting. If your attorney has to send them a letter every month and it costs you $1,500 for him to send that letter, we want to know that information. That is typical of a triple net. Those are the expenses that are acceptable.
On your apartment buildings, this is gross ‑ every item that you have to spend on that property for operating the property. Right now, snow removal, it’s been a huge expense for everybody. Anything – the heating, if you have electric for the common areas; all the other expenses associated to operating the property. If you go to a building owner’s meeting in Florida every year in January because you’re trying to get away from the cold, that’s not an operating expense. Did you have a question?
Tatiana: Are you going to publish the data? Is it available to the public?
Bill: The data supplied to us on 38Ds is not available to anyone.
Tatiana: [unintelligible 0:12:09] computerize the data.
Bill: The information supplied to us is not available‑
Tatiana: [unintelligible 0:12:20] research.
Bill: The results of the research are the assessed values. If we determined that the typical rent for a retail property is $15 a foot, that information is available, but none of the information supplied through 38Ds is available. We don’t even provide the statistical information for retail properties. The min and max for rentals is $10 to $20. We can’t even do that. Massachusetts law is very clear: information provided at 38D filings is completely secure. It is not available to the public. It is not subject to Freedom of Information, and no assessor should be releasing that information.
Tatiana: No, I’m not talking about a particular property. I am talking about standardized data.
Bill: I know what you’re saying – the statistical facts of the property.
Tatiana: Statistics, yes.
Bill: The min, and the max, the averages. Again, that information cannot be released. Even the statistics of it cannot be released. The minute that that’s released at any point in time, somebody can come in and say they want the actual data, and we cannot do that.
Tatiana: As I understand, you use this data for commercial properties and big apartment buildings. How about small apartment buildings like three, four units? Are they use the same data or use just sales data?
Bill: So in Massachusetts, four to eight units is analyzed on an income approach; one to three units is analyzed on a sales price, comparable sales market approach. Your three units, we do not use the income; we use the market. Four units and above, an income approach is analyzed. Yes, sir?
Rich: If anybody has questions, we have a microphone.
Male Audience 1: I’m looking at this maybe as a devil’s advocate, but where is the advantage to me? Every time I’ve ever filled out anything and gave it back to the city, it never comes back pleasantly to me. It is always an increase. There’s never a decrease, and so I’m wondering what this benefit is by giving you all this information.
Bill: So again as I started off, if you do not file the 38D‑
Male Audience 2: [unintelligible 0:14:31] back here.
Bill: Can you hear me now?
Male Audience 2: Yeah
Bill: Do you want me to turn it up [laughter].
Male Audience 2: No.
Bill: You cannot file with the Appellate Tax Board if you do not file the 38D. Certain assessors, in the City of Worcester, we’re still inspecting properties, doing interior inspections from properties that have never been inspected. We did exterior inspections for the last reevaluation, and we’re continuing to improve our information by getting inside the properties. If in the City of Worcester, you file your information with us, and you did not file a 38D, we’ll do a review of your abatement application. We’ll come out. We’ll inspect the property. We’ll make corrections of misinformation. However, in other jurisdictions if you did not file the 38D, they don’t even review the abatement application because you don’t have the right to go to the Appellate Tax Board. It’s not so much a benefit, but there is an impact if you do not file it.
Again, the more accurate the information that we have is, the better your assessments. I can’t say your assessment will go down or that your taxes will go down. That depends on the information after we analyze all of it, and we don’t use your property’s income to value your property. We use it to develop rates and schedules to value all the properties.
Audience: [unintelligible 0:16:00]
Bill: I’m sorry there wasn’t. I didn’t realize there was going to be these many people. I did bring the income and expense statements. Again, this is for the City of Worcester. I don't know again – I thought this was a Worcester-centric group also. I didn’t realize. I found out many of the people I was talking to were from outside of the City of Worcester, so that’s the other reason. I had 1015 copies. The reason I didn’t distribute them is I don’t want to confuse anybody by giving you something that is City of Worcester and you’re in Auburn. There was a question back here.
Female Audience 1: How do you tell‑
Rich: Hold on while I bring the microphone.
Female Audience 1: Pretty slow.
Rich: I know I’m slow [laughter].
Female Audience 1: How do you tell how many units are vacant? Is it unit by unit in each building on the questionnaire? What if someone decides to prorate, which we wanted to a lot all the time, what their rent value is as opposed to their true value?
Rich: Okay, first yes the information on the rent roll portion tells us what space is rented, what space is vacant. It has different locations for filling in that information. There is also an area for concessions. If you have a new tenant and they signed a 5-year lease, but you have to give them 3 months’ free rent, that is taken into consideration. I don’t understand what you mean by prorate. Are you talking about the rent in a concession in that, okay I have a lease for 12 months, and I had to give a month free?
Female Audience 1: By prorate, what I mean is a lot of people when you ask them what their rent is on their apartment, they will give you a figure, and it is not accurate. It’s what they would like to have it at or what they would like to tell you where is at.
Female Audience 2: So it’s not necessarily‑
Bill: Okay, again‑
Female Audience 1: So it’s not necessarily accurate.
Bill: What we’re looking for is that particular time periods specific rent that you’re receiving. If there is a lease, let’s say you signed the lease 3 years ago and the person was doing great for a while and they since had business troubles or whatever and you reduced the rate for them, so you’ve gone from a $15 rent to a $12 rent. I want to know that it’s a $12 rent. I want to know what the current rent is, and I’d like to know the timeline of any of those changes. If you did a rent concession or some kind of adjustment to the lease, we’d like to know the timeline of that change. This way we can take that into consideration.
Again about 4 to 5 years ago, your major retailers went to all of the mall owners and said, “We’re going to renegotiate.” There are two major players in the retail industry, and the mall owners majority of them gave reductions. They had no choice. I don’t believe certain of these retailers were all just going to pull out of these major malls, but they basically started sending them checks with 10 percent, 20 percent, 30 percent reductions in their rent, and it was take it or leave it. The mall owners did not file for eviction of these retailers, so we need to know about those changes.
Female Audience 1: So if someone has got a court order and they have some sort of agreement and it affects what the rent is, should they notify you because they’re not getting the rent that they reported, because the court has given them some sort of an agreement that they are to collect less for a certain period of time?
Bill: Understand that we’re always backwards looking. The information we’re looking for is calendar year January 1, 2014, to December 31, 2014. You’re filling out the information 3 months after that, so whatever the actual rent was for that time period is what we’re looking for whether it’s court ordered, whether it’s negotiated between you and the tenants. We’re looking for the actual.
Again, so there’s three typical terms. You have contract rent: the lease says the person is supposed to pay $15 a foot. You have the actual. You may have negotiated with them and said, “Okay, I know it says $15. I’ll let you pay $12.” And then there’s market, and the market may only be $10 for that space at this time, January 1, 2015. Those are the three different types of rent that we’re looking at and what we’re looking for is the actual.
Female Audience 1: [unintelligible 0:20:30] with it.
Rich: I should have.
Female Audience 1: Because [unintelligible 0:20:36] it does not [unintelligible 0:20:38] that will tell you what has improved and what has not improved.
Bill: Yes, and that’s when I talked about triple net, double net, and gross. If there are particular items, there’s an area for comments. If you tell me that it’s double net and the base year is 2012 for a particular tenant, or if you tell me that it’s a modified gross that we pick up the heat and the electric for this particular tenant, we need to know that, and there’s areas in the form to identify. It’s an apples-to-apples consideration. We’re trying to find out what they’re paying, what’s being covered by the landlord, what’s being covered by the tenants. This gentleman had a question first.
Male Audience 3: So there is no control group, so the variables can be quite a few variables and [unintelligible 0:21:31] have a lot of vacancies.
Bill: There’s again‑
Male Audience 3: How do you‑
Bill: In the City of Worcester, we have a significant number of properties. With the filings of all of them, we can remove the outliers. We analyze the information.
Male Audience 3: Variable.
Bill: Yeah. If I have a particular property owner that has a 90 percent vacancy and he’s running at that constantly, that’s not typical.
Male Audience 3: What happened to the [unintelligible 0:21:59]?
Bill: [laughter] You’d be surprised. In Worcester, we have a number of property owners that the building has been paid for two generations ago and they’re holding on with one tenant, two tenants in the building because they were waiting for the market to rebound. They were adjusting, wait and see what would happen.
Male Audience 4: What happened to the taxes? Are [unintelligible 0:22:23].
Bill: Again, we do not use a 90 percent vacancy in the City of Worcester anymore.
Male Audience 4: How do you do it?
Bill: We analyze it as if it was a market transaction, so we project out what the typical vacancy would be for that property type for the city. We increase it by a factor. Depending on the condition of the property, we adjust the vacancy factors and that’s what we look at when we’re getting the information in and somebody tells us their property is 50 percent vacant and it’s been that way for 5 years, we look at the condition of the property.
I had one person come in to me. He said, “Listen, the property has been vacant for 6 months. I don’t think I should pay any taxes.” Unfortunately, the law doesn’t allow that [laughter].
Audience: [unintelligible 0:23:08]
Bill: The property can sit vacant for 2 years. We’re looking at a typical holding period. Depending on the property type, your holding periods are 10 years, 20 years in certain instances. Two years out of 20 is a 10 percent vacancy.
Rich: Okay, I’m really slow with the microphone, so‑
Bills: Two years‑
Rich: If anybody has questions, could you give me more than a quarter second to get all of that, that would be awesome [laughter].
Bill: Can everybody hear the ones that are asking the questions?
Bill: Okay, I’m sorry.
Rich: Nobody has any idea what that guy is asking [laughter].
Bill: I’m sorry. So he was asking about the property owners that have significant vacancies and what happens in their situations, and I’m trying to explain that even if a property sat vacant for 2 years, the typical holding period for that property is a 20-year holding period. That’s only a 10 percent vacancy factor, and we would apply that standardized for that property type.
Male Audience 5: What does that mean on taxes?
Bill: What does that mean on taxes? Okay, so the way‑
Male Audience 5: The taxes were $6,000 and the property had been [unintelligible 0:24:20] vacant for 2 to 3 years [unintelligible 0:24:22].
Bill: Okay so he’s asking if a property was taxed at a tax of $6,000, and it was vacant for 2 years, he’s asking what the tax would be on that. Again, what happens is we apply a standard vacancy.
Male Audience 5: How much would the taxes be?
Bill: Let’s run through quick industrial property, so if an industrial property rents for‑
Male Audience 5: No, no, no. Just ‑
Bill: You have to understand the numbers.
Male Audience 5: Four to eight, rental.
Bill: Four to eight? So we’re looking at four-to-eight family, you say?
Male Audience 5: Yeah.
Bill: Okay, if I’m looking at four-to-eight family, understand the gross income let’s say it’s $25,000 just for a number here. The vacancy factor of 10 percent is $2,500 off of the $25,000. So the difference in value if we’re using a 10 percent cap rate, the difference in value of $2,500 is $25,000. What we do is we take the potential gross income of the property. We reduce that by the vacancy rate. We then remove all the expenses of the property, and we get down to that bottom line, we have a net operating income. To determine value, we use a capitalization rate. Just for a simple math, we’ll use 10 percent because it’s very easy to do that math.
If your net operating income is $25,000, divided by 10 percent the property has a value of $250,000. If the difference in the vacancy is $2,500, so the difference in value would be $25,000. We do not use 50 percent vacancy for any property types. That is not done even if the person as of January 1 had a 50 percent vacancy. We’re looking at the entire holding period, and that’s the difference. He doesn’t get a reduction in taxes because he’s 50 percent vacant for that one particular year. It does not work like that.
Male Audience 5: What does he get then? What does he get?
Bill: He gets whatever the standard is for that property in that condition.
Male Audience 5: Off the top of your head, if it’s regular 100 percent rented, let’s say $6,000. What does he actually pay if he’s 50 percent rented?
Bill: Again, so she just asked what cap rate Worcester uses.
Male Audience 5: Off the top of your head roughly.
Bill: Our cap rates run from 8.5 percent to 14 percent.
Male Audience 5: Top [unintelligible 0:26:55].
Bill: Our cap rates run 8.5 percent to 14 percent for different property types and different properties, okay so it’s not one cap rate for all properties in the city. Mr. Valeri.
George: Thank you.
Rich: If we can keep this one quick. I’m sorry we’re starting to run out of time. Bill is getting hammered here [laughter].
George: I just want to make‑
Bill: It doesn’t matter [unintelligible 0:27:28].
Rich: Okay [laughter].
George: I want to say Mr. Ford I got a call from your office a couple of weeks ago from one of your people. They wanted to go through the building that I filed an abatement on. Well, that appointment was for Monday morning, and I figured that appointment was squashed. Well, Ariel called me at 10 o’clock and said, “We have an appointment.”
I got to say I shook his hand and I said I’m impressed. To go through the snow, to go through my building, to help me get an abatement, all I can say he’s a credit to your office.
Rich: All right [applause].
Bill: Thank you very much.
Rich: That was a good way to end it. Thanks, George.
Bill: Let me actually give ‑ I happen to be very fortunate with my current staff. There was a large turnover. The people that we have retained and the people that we’ve hired have been great. I really am very lucky. If they were not there, I’d probably be dead [laughter]. Thank you all. Again [applause]…
Rich: All right.
Bill: If you have any questions, you can email at email@example.com, and my staff or myself will get back to you.