Recent discussions of Buncombe County’s property tax appraisal process have been missing something — roughly $10.3 billion worth of something.
That figure represents the estimated taxable value of commercial real estate in Buncombe County. According to Buncombe tax analyst Eric Cregger, nearly a third of the county’s projected $239 million in property tax revenue for fiscal year 2022-23 will be generated through commercial property taxes.
But an ad hoc committee of real estate and urban planning professionals, convened in November at the request of Board of Commissioners Chair Brownie Newman to review Buncombe’s assessment process, did not consider commercial property over a series of 14 meetings. The committee’s final recommendations, delivered to county commissioners July 19, included no advice regarding commercial assessments.
“I think residential was at the top of the pyramid,” says Buncombe County Tax Assessor Keith Miller, when asked why commercial analysis was not included in the committee’s work. “Residential was really the [focus of] questions we were getting from property owners, who were concerned about their assessment values. We were not getting the same response from commercial owners.”
Issues of racial and economic equity dominated the debate over residential valuations, with critics arguing that Buncombe’s practices are unfair to low-income residents and communities of color. While those issues aren’t immediately apparent with commercial property, suggests ad hoc committee member Ori Baber, other deficiencies with county assessments likely do carry over from the residential side.
Baber, who works as an analyst for Asheville-based urban planning firm Urban3, argues that the county uses the same flawed method to assess its valuation performance for commercial real estate as it does for residential. While Buncombe reports that its commercial sales ratio for 2021 is 95% — meaning that the taxable value of commercial property averages 95% of that property’s actual sale price — Baber says that figure comes from a skewed sample of properties.
The 95% ratio, Baber continues, is estimated only from buildings that have been assessed according to data reported by real estate agents during their sale; other buildings may be assessed based on outdated information that depresses their value. “This process only happens for sold properties,” he says. “So the remaining population of unsold properties is not receiving the same degree of hands-on attention — and therefore is unlikely to have a 95% sales ratio,” said Baber.
Inaccurate assessments could have implications for county revenue. During the residential review process, Baber analyzed a sample of about 5,200 home sales and discovered that their total taxable value fell around $657 million short of their total sale value, with more expensive homes seeing wider gaps between their assessed value and market price.
If a similar trend held for homes across the county, there could be billions in untaxed property value, representing a multimillion dollar shortchange in Buncombe County’s property tax revenue each year. Baber notes that alternatively, if the currently untaxed value were added to the ledger, Buncombe might reduce its property tax rate and provide relief to those most impacted by the observed disparities.
“This ratio is based on the reappraisal methodology. This ratio is not based on a study of data quality,” says Miller of Baber’s criticism. The tax assessor says his office relies on a computer model to generate valuations for both commercial and residential properties. However, he notes that commercial assessments can differ significantly from residential in that a property’s revenue-generating potential is factored in.
Specifically, commercial assessments are usually calculated by dividing a property’s “net operating income,” or its revenue minus operating expenses, by its “capitalization rate,” or the rate of return expected from the investment. Residential assessments, Miller says, are calculated by a formula that considers each structure type, market data and sales figures.
Same but different
Baber’s colleague, Urban3 founder and principal Joe Minicozzi, reviewed assessment data on three similar commercial spaces: the former Kmart buildings on Patton Avenue and Brevard Road and the now-demolished Toys R Us building on Brevard Road. He found that the three showed wide differences in building value and overall tax value per acre (combined building and land value divided by lot size).
Buncombe County data shows that the former Patton Avenue Kmart building, built in 1967, dropped in valuation from $953,200 in 2020 to only $200 in 2021, or from roughly $7.51 to about 3 cents per square foot. Ingles Markets, which purchased the property and building for $8.5 million in 2019, subsequently paid $4,366 per acre in 2021 property taxes.
In contrast, the Brevard Road Kmart, built in 1991 and now leased by a home goods store, was valued at $13.67 per square foot and assessed at $3,170 per acre in property taxes this year. The Toys R Us building, located across the street and also built in 1991, was valued at $46 per square foot and assessed at $4,743 per acre in property taxes before it was demolished early this year.
According to Miller, the Patton Avenue Kmart’s value was adjusted when his office learned Ingles planned to demolish the building. “In a property such as that Kmart, we often will take the building value off, because the sale was actually for the land,” Miller says. “We made our own judgment that there is no value in the building. Actually, it’s a negative value, if you consider their cost to demolish it.”
“In our judgment, the Toys R Us building could have been repurposed. There was still life in that building, but the purchaser decided it didn’t suit their use,” Miller continues. “The other Kmart on Brevard Road is a much newer building. It also has a new tenant and a lease, so we know the value of that building.”
Business or personal?
Karen Ramshaw is the vice president of Public Interest Projects, an urban development and property management company in Asheville. Ramshaw oversees management of the Asheville Hotel, which despite its name is a mixed-use building with 29 apartment units, mostly one-bedroom residences.
According to Ramshaw, rents at the space are set to support “workforce housing,” defined by the county as housing that a family earning up to 140% of area median income can afford without spending more than 30% of income on rent. After receiving what she felt was an overassessment on the building, which also houses the independent bookstore Malaprop’s, Ramshaw appealed the tax bill.
In the appeal, she compared her building to the Haywood Park Hotel, an actual hotel that sits on a more prominent corner only one block from her building. Land value at the Asheville Hotel was $145 per square foot, while Haywood Park’s land was only $125 per square foot. The Asheville Hotel building was also valued at $129 per square foot, while the Haywood Park building was valued at $112 per square foot.
“Under no circumstances should the Asheville Hotel be valued more than a luxury hotel,” said Ramshaw, who used the county’s own commercial appraisal formula to claim she had been overassessed by nearly $1 million.
“As hotels have proliferated downtown and higher-end condos skyrocket in value,” Ramshaw argued in her appeal narrative, “the valuations of other downtown properties have increased apace … with high-end residential condos increasing at lower rates than apartments and small local retail.”
Ramshaw showed a 17% increase in valuations for her apartment and retail building, while condos at the adjacent Old Penney’s and nearby Aston condominium buildings only saw 9%-12% increases. The appeal was granted, and Asheville Hotel’s values were reduced significantly.
Assessors do not personally inspect properties, Miller says, so the computer model is relied on to generate valuations. “In mass appraisal, we will not have all income data for each individual property,” he says. “We often have to assume we know the appropriate income and expenses, but owners don’t always like sharing that data. If we get the valuation wrong, it will be because we had incorrect income and expense data.”
That lack of differentiation between different properties makes it harder for some smaller businesses, argues Ramshaw. “Margins for local businesses are smaller. We make a smaller return so we can have a Malaprop’s instead of a Border’s and workforce housing instead of luxury housing,” she says. (She also claims she was told by the assessor’s office during her appeal that “you need to raise your rents.”)
Miller says, “We often have a conversation with a property owner that the rent may be below market. We do that because we use market rent in the income approach rather than actually rent.” His office views apartments, hotels and condominiums differently. “Condo ownership is no different than a single-family home. Apartment buildings are built to produce income. It’s a totally different use.”
While Ramshaw feels that valuations should reflect county priorities, that work may fall to elected leaders, not assessors. “The rules don’t always align with what the community says it wants. If you value everything like a hotel,” she says, “you get more hotels. The assessors have a lot of constraints in valuation that may need to be offset on the political side.”