Assessment ratios change annually in many jurisdictions which can cause an unfavorable change in the market value. More frequent revaluations result in higher taxes. Tax escalators in some jurisdictions increase rates 3-4% annually. Most new construction is enrolled at a value close to cost but higher than market.
In 1997 our client purchased an 800,000 square foot research campus on 430 acres with pre-approval for campus building expansion to 2.8 million square feet. The purchase price was a relatively low $40 million, because the existing structures required comprehensive renovation. At the time of purchase, the assessment reflected a market value estimate of $75 million. We recommended the client not appeal the existing assessment but work cooperatively with the jurisdiction to enroll the renovation work and new construction on a favorable basis.
As the renovation and new construction project progressed over the ensuing years, the purchase price-to-assessment gap was "backfilled" on the existing structures and the new buildings were enrolled on the basis of the value they contributed to the campus as a whole. The result now, for tax year 2002, is an assessment with an implied market value estimate of $126 million, despite a project capital cost of about $250 million—essentially a 50% discount.