December 15, 2004
PROPERTY VALUATION OF DAY CARE CENTERS
By: Kevin E. McCarthy, Principal Analyst
You asked for a description of the laws governing the valuation of property for property tax purposes, particularly with regard to commercial day care centers.
There are no property tax provisions that apply specifically to day care centers. With limited exceptions, all property must be assessed based on its fair market value, which must include all improvements to the property. Assessors generally use one of three approaches to determine fair market value. These approaches look at sales of comparable properties, the income that a property produces, or the cost of constructing a comparable building, less depreciation. The law generally does not prescribe the approach that an assessor must use in valuing an individual property, since one approach may work better with certain types of property than others.
The valuation of an individual property involves a wide range of factors, including its size, location, age, and condition. In some cases, factors that increase a property's fair market value may be more obvious than those that detract from its value. The valuation of a commercial day care center is also based on the fact that it is a business. For this reason, assessors may use any of the three approaches described above to determine its value.
A municipality's legislative body can defer any increased assessment due to property rehabilitation or new construction. If the legislative body approves the deferral, the increased assessment is phased in over an 11-year period.
Day care centers and other businesses are generally subject to tax on their personal, as well as real property. If a municipality changes the approach it uses to value such property, it must notify those taxpayers whose taxes will increase as result of the change, describing the old and new methods and how to appeal the assessment.
Except for farm, forest, and open space land in the “490” program, property must be assessed based on its fair market value (CGS Sec. 12-63). OLR Report 2002-R-0568 describes the 490 program.
Assessors generally use one of three approaches to determine fair market value. The market approach determines the value of the property by comparing it to similar properties that were recently sold. The assessor values the land and buildings separately, dividing the town into geographic areas reflecting differences that could affect property values. These include market demand, zoning regulations and other land use controls, and the likelihood that the property will be used for new purposes.
For example, market data may indicate that a three bedroom, two bathroom home in a desirable neighborhood may have an average sales price of $300,000, while a similar home in a less desirable neighborhood may have an average sales price of $250,000. In determining the valuation of an individual property, assessors will adjust these standard values to reflect such things as lot and building size, property condition, and amenities. Assessors most frequently use this approach for residential properties, particularly in tract developments or condominium complexes.
The assessors normally determine the value of leased property, such as apartment buildings and shops in a mall, based on the amount of income they generate (i. e. , income approach). Finally, assessors can determine the value of property by calculating the cost, using current labor and material prices, to replace a building with a similar one and then determining how much the property has depreciated since it was built (i. e. , cost approach).
In most cases, the law does not specify the approach that an assessor must use. However, for property that is rented out to produce income, the assessor must use the cost approach or one of two versions of the income approach if there have not been recent sales of comparable properties. This provision does not apply to apartment buildings with up to six units, one of which is occupied by the owner (CGS § 12-63b). The assessor's choice of approach for a day care center may reflect the property's characteristics. For example, the cost approach may be the most appropriate approach when the center was built relatively recently and there are no recent sales of comparable properties. On the other hand, the income approach may be the most appropriate if the center is leased as part of a commercial complex, since the rent the center pays is indicative of the property's market value.
VALUATION OF INDIVIDUAL PROPERTIES
The valuation of an individual property involves a wide range of factors, including its building and lot size, location, age, materials, and condition. Valuation of unusual structures or uses is particularly challenging. While a municipality may have thousands of similar single family homes, it may have only a handful of commercial day care centers.
The valuation of an individual property often involves some degree of subjectivity. Several factors that may reduce a property's fair market value, e.g., an older roof, may be less obvious than factors that increase its value, e.g., a new roof. Similarly, an assessor is more likely to be aware of improvements to the property, such as additions, than changes that have decreased the property's value.
A municipality's legislative body can defer any increased assessment due to property rehabilitation or new construction, in the entire municipality or a designated rehabilitation area. The municipaltiy must give notice of the proposed action and hold a public hearing. The legislative body must designate the criteria for eligible property, which must include the property's initial condition, the extent and nature of the improvments, and other factors. If the legislative body approves the deferral, the increased assessment is phased in over an 11-year period (CGS Secs. 12-65d and 65e).