As a child I imagined
what it would be like to score a goal for the home team in a sold out
stadium. The deafening sound of tens of
thousands of fans celebrating my efforts was amazing. I still have a passion for sport, but by day,
my passion is property tax so I read with interest some recent reports on how a
handful of pro sports franchises significantly reduced their property tax
bills. The Montreal Canadians, San
Francisco 49ers and Carolina Panthers had their property tax bills slashed by 40%,
50% and 56% respectively. Chances are
your business doesn’t occupy a stadium, but there are tax lessons to be learned
for any businesses that owns or occupies a Special Purpose Property.
Special Purpose Properties
are properties that are designed in a way that makes them good for a single use. Some uses (like hotels) appeal to a broad
array of investors, but others appeal to a very limited market making them
difficult to value. Stadiums obviously fall
in this category but so do churches, schools, power plants, hospitals, and most
purpose built manufacturing facilities.
The most common method
for estimating the tax assessment of a limited market, special purpose property
is the cost approach. You start by
estimating how much it would cost to construct the improvements, deduct
allowances for all forms of depreciation and then you add the land value. Simple enough. So how is it possible that Bank of America
Stadium (the home of the Carolina Panthers) can have estimates of its value ranging
from $87m to $472m?
It’s because valuation
experts will differ in how they account for “all forms of depreciation”. Physical depreciation is readily understood,
however properties can also suffer from functional and/or external
depreciation. Although a stadium, pulp mill, food processing plant, church or
hospital may have been meticulously maintained, it may be subject to
significant amounts of functional and external depreciation if its
configuration is sub-optimal, if it is poorly located, or if the economic
prospects for which it was built have deteriorated in some way- all of which
are grounds for a reduction in its assessed value.
The Bell Centre in
Montreal opened in 1996. It cost roughly
$240m to construct (roughly $485m today).
The land is currently assessed at just over $50m and the total assessment
now stands at $167m. This implies a
total depreciation from all causes of approximately 75%. Only a small amount (+/-1/3rd) of this relates to physical
depreciation as stadiums can have very long physical lives. Anfield, Old Trafford, Fenway Park, and
Wrigley Field are all more than 100 years old so the key to accurately
estimating the total depreciation in a stadium (or any other special purpose
property) is in identifying and quantifying functional and external
depreciation. Unfortunately there aren’t any tables an assessor can use to
estimate these forms of depreciation. It
requires an understanding of why the property was configured the way it is, how
it would be configured were it to be re-built from scratch, and an
understanding of the location and economic factors that apply to the use it was
designed for.
During my career, consulting
on behalf of taxpayers I’ve often heard the argument from assessing authorities
“the owner is using it for the purpose in which it was built” and/or “the
business is very successful” which leads to the question “how can there be
significant functional and/or external depreciation.” In the Panthers case it’s
true the stadium was being used for the purpose in which it was built. It’s true that the business is viable (David
Tepper acquired the Panthers including the stadium for $2.2b in 2018) but those
are the wrong questions. The right
question is “would the business be worth more if it had the right stadium in the right location?”
The right stadium might
have more seats, more private boxes, more places to sell advertising and might cost
less to operate. It might also be built
in a location to make commuting easier so more fans buy tickets and spend more
on concessions while they are at the game.
The same concepts hold true for any special purpose property. A church located distant from its parishioners,
a school with declining enrolment, a power plant compelled to use high priced
coal, and a poorly configured manufacturing plant located too distant from its
markets or its raw materials can all suffer from functional and/or economic
depreciation.
2020 property
assessment notices are rolling out across Canada (New Brunswick is up
next!). If you own or occupy a special
purpose property, make sure you ask the right questions when you decide if it’s
time to request a review this year.
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Andre Pouliot is Vice President of our New Brunswick operations and Senior Manager of our Property Tax Division. For more information about our property tax services, feel free to contact Andre at (902) 429-1811 or apouliot@turnerdrake.com