May 26, 2001

Presented to Florida Bar Real Property Roundtable

Either Chaos and Confusion,

Or A System of Professional Controls

I'd like to tell you what happened to a friend. She was invited to visit a business acquaintance. His family lives in another country - south of us. It was December. The host asked my friend to bring a new box of Christmas lights. A $5 item. Then, the host gave a detailed explanation about how to hide the lights in her luggage to avoid discovery by customs.

My friend was appalled. Her host was asking her to smuggle. When she objected, he explained.

There were no guidelines governing customs. If there were any laws, they were not applied. So, custom inspectors charged whatever duty they decided. A $5 box of Christmas lights could be taxed - as if the value was $100, even more. It was an "every man for himself" environment. So, the only way to be protected was to cheat. Or else, pay the arbitrary and unreasonable taxes. Or, the merchandise would be confiscated.

What does this have to do with real property?

Well, there is no uniform system in Florida's ad valorem process. This is because there are no guidelines, even though, there is a statute mandating it. The last guidelines put into place are more than 18 years old. They were updated around 1990, but no one seems to know how. The state has a list of needed corrections. But DOR never makes the changes, and has advised the county assessors not to use the old document. Most important, the existing guidelines have no mass appraisal instructions. The lack of guidelines causes conditions very similar to that customs situation.

Let me show how.

A lending institution purchased a building a few years ago. It was an arms length transaction. The price was around $40 million. Yet, the taxable value was about $60 million, according to the assessment. The impact of those numbers is huge. If the combined tax rate is about 20 mils in that location, and an assessment is - say - $40 million, ad valorem taxes would be about $800,000. But, if the taxable assessment is $60 million, taxes jump to $1,200,000. Over and above "just value," there is a cost of about $400,000. In addition, the actual tax rate, based on the wrong assessment, really is over 33 mils (divide $40,000,000 into $1,200,000).

That effective millage rate discriminates against the owner. The excessive cost also has a negative impact on cash flow. Arbitrary and unreasonable taxes can cause an owner into default - very similar to confiscation at customs.

These kinds of problems occur all over the state, all the time, affecting every type of property. Part of the reason is a growing use of computers, without a system of professionally sound guidelines. The result is legal principles of due process, equal protection, and uniform tax rates do not exist. It leaves every property owner at the mercy of the same lack of controls as that customs scene.

Well . . . the lending institution's experience led to new law. The statute (F.S. 194.301) mandates the methods and process to assess "properly consider" the eight factors affecting value (in F.S. 193.011). The missing ingredient is what "properly consider" means.

In this talk, I want to describe certain guidelines, what their value is to Florida tax process, and how we all can get them into use.

Guidelines are the protection that makes the whole process work. But, only if the guidelines are comprehensive, impartial, and up-to-date. The compelling reason to have competent guidelines is they are step-by-step instructions. That's how to achieve properly considered opinions of value with uniform accuracy and fairness "within the counties and among the counties" (which is the standard in Florida statutes). Having instructions, and following them, is key. According to other Florida laws, there shall be "uniformity". There shall be "annually updating" of guidelines. In other words, there are parameters and principles to give context to the taxing process.

"Uniformity" really means to reach "just value" instructions are applied in the same way to similar properties. It's the way all taxpayers really are treated alike. It's also efficiency in managing the great numbers of individual taxable parcels which government must assess each year.

Frankly, government really has a daunting task in Florida, given the annual process and so many taxable parcels. It is common sense to use computers to store data. But, there are serious limits to what computers can do, and there must be a systematic procedure in place to turn computerized or automated process into appraisal conclusions, to avoid undocumented or unverified tax rolls throughout the state.

But, we are not using guidelines, even though there are some. We can use them right now, "as is". We just need to make the decision!

Florida law recognizes "Uniform Standards of Professional Appraisal Practice". USPAP is the national standard of appraising and assessing property, published by The Appraisal Foundation. The Foundation was established by Congressional act after the savings and loan scandals exposed problems with appraisals. Since then, every state recognizes USPAP. In addition, every segment of the real estate industry recognizes USPAP - sponsors are listed in your blue folder. The International Association of Assessing Officers (IAAO) was a founder of The Appraisal Foundation. IAAO advocates the adoption of USPAP. I mention IAAO because it is the instructional authority for Florida's government appraisers, most of whom are members.

Let me tell you why USPAP is so well regarded around the nation. First, it's comprehensive, as well as objective. It's updated each year in a process that's wide open and ethical. Anyone can contribute. At the same time, everyone can see how the suggestions and recommendations evolve. There are no behind closed doors drafting sessions to compromise the application of a method. Neither government nor taxpayers can influence it for the sake of private agendas.

Second, there is a code of ethics. The ethical component is another way of assuring taxpayers they are fairly taxed. It also lets local governments know their revenues are appropriate. Because just as taxes can be too high, they also may be too low. Again - this means a defense against political manipulation. Also, confidence in the assessing process and in government is an economic development message. Put another way - how many business investments would be encouraged by the customs practices in that other county?!

Third - very critical - USPAP has a mass appraisal standard. It's the only one we can find in writing. It's called Standard Six, and a copy is in the folder. The concept of mass appraisal assumes the use of automation to go beyond managing data to reaching assessment conclusions. Standard Six is the key to accuracy, particularly in Florida, where reliance on computers is growing.

Let me explain this in a little more detail. The inherent fallacies in using computers and automating assessments is because mass appraisal relies on "means" or "medians" to arrive at values. So, it really is statistical analysis, rather than appraising. And, this is most significant, because averaging is forbidden in appraisal. Also, significantly in Florida, averaging is not the meaning of "just value". That grossly overtaxed $40 million building situation came out of a computerized process. It shows that just because data is managed in computers does not mean the results are accurate. And, similar situations occur now. All the time.

Here's another example. Hypothetically, let's assume there are two buildings. One is valued at $40 million, and the other at $60 million. The average of the two buildings is $50 million. That's the mean average, which could become a taxable assessment in a computerized analysis when there are no appraisal guidelines. Obviously, if each building is assessed at $50 million, neither is taxed correctly. It's like having a bookkeeper add up the costs of items on an invoice, to verify the total being billed. We have to go to the next step and ask - what if the prices (or values) for the items are not accurately listed, does it matter if the total adds up correctly?

If it's about "just value", and equal protection, and due process, and uniformity - if it's about accuracy and fairness - it matters. Standard Six takes into account the differences in detail. Those two buildings may really belong in two different assessment categories or "sub-strata". One may be a Class A; the other Class B. One may be newer, command higher rents, or be on more land. The distinctions in details are critical to achieve "just value" because in the case of those two buildings, one taxpayer is being cheated. The other is gaining a windfall. In the end, no one is treated lawfully.

When only two properties are involved, it's easy to see how the error happens. When hundreds of thousands, even millions of properties, are subjected to the same systemic flaws, we all lose. Government may not fund our schools adequately or maintain the infrastructure we need for quality of life and keeping up the returns on our investments in property. And, in extreme cases, like that $40 million building assessed at $60 million, we might be driving some owners towards foreclosure with all the ripple effects that result.

Remember, mean averages or medians are the middle of higher and lower numbers. "Just value" is intended to be specific and exactly correct. In addition, mass appraisal is more reliable when applied to homogeneous properties. Luxury housing and commercial or industrial properties typically are not accurately assessed using a mass appraisal system. And, just using a computer to assist in assessing is not an appraisal method. There are professional principles and criteria involved in appraisal methods. USPAP recognizes the traditional methods of specific fee appraisals are superior to mass appraisal and should be applied when possible and appropriate. So, the guidelines for the cost, income, and comparable sales approaches - standard appraisal methods - are as thoughtfully written and carefully described as the mass appraisal standard.

There is another reason for needing to do something, and doing it now. If we read the last 15 years of Auditor General's reports, and a statewide grand jury presentment from 1989/1990, we know Florida has serious tax roll problems, made even greater for lack of guidelines. In 2000, the Auditor General made twelve recommendations to DOR. Two recommendations are to adopt USPAP, and specifically Standard Six. Yet, even with the recommendations, and a response from DOR saying "we concur" on every single point, adopting USPAP has not occurred. To date, no guidelines are in use.

So, what do we face? And why USPAP? Standard Six says that not to follow certain steps is prohibited. That caution, repeated at many plateaus in the process, is about "properly considered" and documented data. It is about precision. Failure to follow the step-by-step instructions opens the door to all kinds of errors, and the potential of manipulations or mistakes. "Properly considered" data, consistently applied following Standard Six addresses the possible problems. The reason we need to know there is precision is because we don't know what those custom inspectors did with the collected taxes.

But, we can imagine how assessments can be changed when uniform rules are not in place or not properly supervised. None of us wants to be the buyer who pays 33 mils when everyone else is taxed at 20 mils. We certainly do not want to be overtaxed by $400,000. We also want our schools funded and government services to be provided within the 10 mil cap. Besides, to be taxed at any rate other than "just value" is not only not fair. Bottom line . . . it's not legal.

And, right now, with the lack of credible tax rolls for lack of good guidelines, the school funding formula is off. That has been a problem for decades according to the Auditor General's findings. Even more dangerous, in some communities property owners pay egregious taxes, disguised by other names, which are outside of the capped millage rates. Every problem traces its roots back to lack of guidelines.

Without an objective, continuous, ethical process, which is inherent in The Appraisal Foundation's publication and process of updating USPAP, we face political intrusions in writing guidelines and the costs of spending years reinventing the wheel. We don't need the expenses or loss of credibility in government. Besides, we don't have to create guidelines. They already exist. And, they are state of the art.

Yes, USPAP is tough and demanding. Yes, it is updated every year. Yes, it requires professional training to understand and use correctly. Yes, it was not originated in Florida. And, yes, it is really good professional practice. So, it is ludicrous to waste time talking about needing guidelines, of spend years creating guidelines from scratch, or paying anyone to write guidelines, when superior guidelines exist and can be put into effect immediately.

What we really need is action. To act, we need leadership. Right now. You understand the constitutional principles as they apply to property, and to taxation. You have the professional stature to lead the state insuring the entire ad valorem taxing system is complete, credible, and has the confidence of both taxpayers and local governments. You can educate and advocate at the state level to demand the highest standards of practice in the assessing system, and the careful supervision by DOR to make sure each and every one of us is taxed at "just value".

Thank you for the honor of inviting me to speak today. I invite each of you and the Florida Bar to support the immediate adoption of USPAP.