Real Property Valuation and Taxation: A Developer’s Perspective
The state of real estate development of a nation is the meter by which a nation’s economic growth is measured.
Anyone can make quick assessments with what can be seen. Science tells us that we believe what can be proven. Material wealth is evidenced by the size, scope and standards of the structures standing on land. Human senses are sufficient to make a relative gauge of growth. Statistics, however, are introduced for these relative comparisons to be more precise.
Precision is not perfection. Precision is defined as:
- the ability of a measurement to be consistently reproduced¹
- characterized by or having a high degree of exactness²
It is this precision of measurement which is one major concern of Valuers (assessors and/or appraisers) in real estate. Correspondingly, it is this precision in measurement that is, likewise, a major concern of Developers (real estate developers) in the valuation, appraisal and assessment of properties. Precision in this subject is about the regularity and consistency to a degree achievable given the financial, logistical, organizational, and time constraints by the measurement takers, analyzers and makers.
The Valuers’ tasks include “make” — and that refers to a decision created or rendered that is subjective in nature. The degree or the allowance for variations is due to this intrinsic factor. Conclusions may vary when analysis is made through a filter of personal experiences, desires and wants. Bias can sway numbers assigned in either direction — high or low — depending on what best provides benefit or serves the interests of a Valuer.
Another major concern is with regards to the dimension of “time.” “Change is constant” is a cliché’ that is to be regarded as a fact in the state of real estate. A century ago, Makati if then valued would have just an almost insignificant value relative to the value it has now. If Marikina were valued immediately, just mere moments after Ondoy, its valuation would have seen a fall of half or more of its previous value. It may be centuries, it maybe mere seconds, but change happens — constantly.
Relevance is of prime importance, and it is relative to time. Conclusions stale and expire. Valuation is like taking a still photo of a moving car. If the car is too fast, the photo will show only a blur, or may entirely miss the object. The photo will then be a poor representation of the subject. What is true now is no longer so after a year or a split-second later. Technology can help. Modern cameras can be adjusted as to shutter speeds. Technology affords man to hasten the process. This is akin to the computerization of certain processes in valuation. The photographer may try to anticipate the movement and pan forward; but what if the car stops or moves in reverse?
Valuation of properties in a dynamic environment is not all science. Anticipation is an act of predicting. It is instinct-based. It requires foresight and gut-feel. Science and mathematics can only aid.
Relevance is not just about being up-to-date, referring to the present, the here-and-now; but in some cases, valuation requires Valuers to look back to the past or to the future. What should have been or what should be the value of the properties on such periods?
Needs dictate the relevance of valuations. The skills and abilities called for of Valuers are immense. This is because valuations are highly important. They can increase one’s economic worth or decrease it. One can make money or lose money. Real estate developers are primarily building and making improvements to land for the purpose of producing profit.
The main objective of Developers is to create wealth. It needs to be repeated and emphasized: it is about self interests. There is beauty, however, in the foregoing dynamics among the “business,” the government, and the general population. The drive to satisfy these “self-interests,” causes the fulfillment and satiation of the objectives, desires, and wants of the other interest groups (the government and the general public). The other two groups take the “ride,” but their participation is beyond passive dependence.
The population fuels and feeds the demand for the real estate developers’ products. They pay for rent or for the purchase. A good portion of the Developers’ profit is then retained in the development business for further development. It rolls a beneficial cycle. Buildings are then raised. Roads and bridges are then constructed. Landscapes are then beautified. Utilities like power, water, and telecommunications are then delivered and supplied. The population, at large, benefits. Again, the prime reason for this propensity to develop real estate is for self gain.
The government plays a no less important role. It keeps the said dynamics in check. It provides the balance. Balance is key, and that key is in the form of taxation. The government provides regulation and control by way of laws, policies and ordinances; but taxation is the tool that produces the material effect. Taxation, thus, ensures equity in that it helps distribute the economic gains of development (by the Developer) to the nation. This is the development that helps produce the investors’ profits, from which the taxes are derived. The magnitude of development is proportional to the developers’ profits, which in turn is proportional to the taxes.
Taxes are then spent for the building of more infrastructures, for the delivery of more utilities and other services to the populace. It differs with the kind of “building” that private developers do, in that the government provides for everyone, even for those who can neither purchase nor rent. The government builds without maximization of profit in mind, thus, we see highways traversing what may seem barren, idle, unprofitable land. The government, thus, bridges the gaps or fills the holes.
Development projects financed by private developers are then inter-linked, inter-connected, matched-to-fit like missing pieces of a jigsaw puzzle. Developers benefit in this dynamic. Paying taxes pay. The feasibility of investing in certain locations takes into account the existing development in the area, the economy, and financial capacities of the “market.” In the perfect setting, there is a 3-way yin-yang³ among the three (real estate developers, government, and general public).
3-Way Yin Yang Model of the “real estate-taxation” relationships
Equity and balance are principles that can be realized fully in theory only, however, where everything is in its purest form — the ideal. In actuality, there are humps and bumps; there are inefficiencies; there is corruption; shortage in budgets; there is politics; aversion to taxes (right or wrong it may be); there are all sorts of problems in the real world.
In bold strokes, these are the issues and challenges, presently, affecting the relationships among the three role players, or the practice of real property appraisal, taxation, and real estate development in the country:
- There is inconsistency. There is a misunderstanding between the providers and users of valuations
- The quality of public and private sector valuations and their reporting are wanting, needing improvement
- There is a need for more transparency and reliability in valuations
- There is a resultant risk absorbed by users of valuations
How can we address enumerated problems or challenges?
We should review, model after or adopt proven, tested and widely-accepted valuation standards like the: a.) Uniform Standards of Professional Appraisal Practice (USPAP), b.) International Valuation Standards (IVS), and c.) Royal Institution of Chartered Surveyors (RICS), among others.
LAMP2 defines and delineates what Standards are:
- They are recognized principles and concepts
- They are best practices in valuation services and reporting
- Accepted definitions
- They do not describe different valuation techniques
- Does not prescribe specific methods of valuation for different purposes
- They do not tell valuers how to value
The drafted Philippine Valuation Standards should be adopted, tested in practice, and improved as needed. The Valuation Reform Act (VRA) should be passed into law.
We should further improve the application of technology as an aid to improving the relevance and precision of valuations. Mass appraisal entails high cost. Upgrading computers, improving software, revising and completing databases, and inter-connecting via the internet require a sizable initial investment. The benefit-to-cost ratio evaluation of having an efficient system, delivering transparent, accurate, timely and relevant data should justify the investment.
The law-prescribed every-3-year general revision of real property assessment can be shortened to one-year. The ideal, which I deem not impossible if pegged at an acceptable accuracy, can improve the process to having updates even up to “real time” or its approximate.
How can this possibly be implemented with the fast pace of development and changes, especially in the Metro Manila area? The volume and velocity appear daunting to catch up to. All new real estate developments and even demolitions require permits from the government office, like from the LGU and the HLURB. Each time a permit is granted, the details and data, which include the location and costs of the projects, among other things, should be encoded and entered into a data base. All such information should be immediately, through a system/software, processed based on an approved algorithm by the assessment and taxation groups of the government, and transmitted promptly through the Internet. All other assessment-essential data can be entries in the system, like inflation rate, interest rates, etc.
LAMP’s¹¹ project, the RESAS or Real Estate Sales and Transaction Database, is an example of an effort that moves towards this direction of technology-based enhancements. The above suggestion is a good subject for future study, review and testing, as is similarly being done with the RESAS.
We should reconsider the responsible authority in the preparation of assessment levels. They should be depoliticized. Voters’ approval should not be a consideration. Raising taxes, understandably, is unpopular. The setting up of these levels should be left to a trained and experienced core, preferably a committee consisting of valuation professionals, real estate developers, and specially-trained representatives of the populace.
We should build upon the initiatives of UP Open University: education and training of Valuers is essential in establishing standards in practice and raising the timeliness and quality of the valuations.
The fact that the forces and factors (social, economic, government or political, and physical or environmental) that affect value are numerous, highly unpredictable, and unwieldy raises the level of challenges in valuation.
Mass appraisal is the attempt to capture and control these. Mass appraisal — as it is currently — uses methodologies that create estimates quickly and at low cost. They are accepted as appropriate for taxation purposes. The recommended improvements, changes and upgrades should eliminate the weaknesses presently found in mass appraisal. Simplification, generalization, averaging, and other forms of estimation are resorted to in the absence of an alternative that is equally fast, cost efficient and effective.
The quality of valuation and its resultant taxation affects real estate development. Over-valued properties result to high taxes, which are disincentives to development. Right taxes applied, collected and put into public works and services, encourage investments by the Developers.
Taxes were initially presented as part of the 3-way yin yang model. It is an ideal model, achievable only if balance is attained; and balance is possible only in having appropriate taxes through apt and fair valuations.
The nation’s progress is then a result of the balanced interplay among tax payer-developer, the tax valuer and collector, and the buyer-renter-user of real estate.
1 (The American Heritage® Dictionary of the English Language, Fourth Edition copyright ©2000 by Houghton Mifflin Company. Updated in 2009. Published by Houghton Mifflin Company. All rights reserved.)
2 (Collins English Dictionary – Complete and Unabridged © HarperCollins Publishers 1991, 1994, 1998, 2000, 2003)
3 In Asian philosophy, the concept of yin yang (simplified Chinese: 阴阳; traditional Chinese: 陰陽; pinyin: yīnyáng), which is often referred to in the West as “yin and yang”, is used to describe how polar opposites or seemingly contrary forces are interconnected and interdependent in the natural world, and how they give rise to each other in turn (Wikipedia)
11 LAMP is the Land Administration and Management Project, a Philippine-Australian government joint initiative
Department of Finance, Bureau of Local Governance Finance, Manual on Real Property Appraisal and Assessment Operations, Manila, Philippines, January 2006
LAMP2 (Second Land Administration and Management Project). The Philippine Valuation Standards Component 4.2 Powerpoint Presentation. 2009