MONROE, CT — A state-mandated revaluation resulting in dramatic spikes in property assessments for homeowners, has made many residents question the process.
Board of Finance member, Samantha Spino, questioned why Monroe’s commercial properties had a much smaller increase in value than the residential ones. Chairwoman Rebecca O’Donnell shared Spino’s questions with Assessor Justin Feldman.
During a recent budget workshop, O’Donnell read the questions and Feldman’s answers to the board. Here’s the Q & A:
With the commercial growth in town over the past year, why is the tax assessment lagging over residential in such a drastic way?
Feldman: Unfortunately, commercial properties simply have not been demonstrating the same type of market appreciation that residential properties have since the last revaluation. While we have experienced some significant commercial development in recent years, which has certainly been helpful in generating grand list growth year over year, the totality of market appreciation experienced by commercial properties in contrast to residential properties is noticeable.
This is not a unique experience to the Town of Monroe. I had inquired about this to other municipalities on a similar revaluation schedule and was told that most were experiencing an 8-15 percent increase in their commercial grand lists.
So relative to other municipalities, Monroe appears to have performed on the higher end. Please note that commercial projects that were completed prior to the 10/1/2024 assessment date were largely already included in the grand list.
Why are we shifting the value from residential to commercial in this fiscal year? What has changed so drastically from the prior revaluation period?
Feldman: The primary driver of the disparity you are noticing is that Monroe completed our previous revaluation in 2019, which was prior to the residential housing market exploding in 2020 and thereafter. The resulting and continued lack of housing supply has only continued to drive residential prices up through our 10/1/2024 date of value.
I would suspect there are other structural forces that may be at play as well. Factors such as the dramatic shift to remote work that took place since the last revaluation and an increase in home-based businesses may also be playing a role.
It’s also worth noting that commercial property makes up a much smaller proportion of our total grand list. Out of 7,877 real estate parcels, only around 340 are zoned commercial or industrial. If residential values had stayed relatively flat as was the case during the 2019 revaluation, I suspect a 16 percent increase in commercial may be viewed a bit differently.
However, even if commercial had performed on par percentage-wise with residential (which of course would still be great), the dollar for dollar impact would still pale in comparison.
Most importantly, how are commercial assessments determined? I saw a very low increase in existing commercial property assessments relative to the increase in new/renovated residential property assessments.
Feldman: All real estate assessments, both commercial and residential, are based on a properties’ fair market value as of the 10/1/2024 assessment date. Prior to the revaluation, our valuation model was based on 10/1/2019 market conditions.
There are three generally accepted approaches to value that we utilize, the cost approach (replacement cost new less depreciation), the sales comparison approach, and the income approach.
For residential property, we primarily rely on the sales comparison approach to develop residential property values. For commercial properties, we rely primarily on both the income approach and the sales comparison approach.
Generally there are fewer qualified sales of commercial properties to work with and they may also have a bit more variation in the characteristics that influence value. The income approach is developed by aggregating lease rates, vacancy, and operating expense data for various commercial property subtypes through the confidential income and expense reports that we are provided.
We use this data to generate base market lease rates and expense ratios for various property subtypes. These base market inputs can be further refined based on the specific characteristics or circumstances of any individual property.
Once that has been worked out, an appropriate market capitalization rate is applied for that property type. Essentially, the net operating income divided by the “cap” rate is what ultimately gives us our fair market value indication.
The driving theory is that any potential buyer of an income generating property is going to be looking at it from an investment standpoint and would be taking the potential income stream into consideration. This methodology has been repeatedly substantiated by the Courts.
It may also be worth mentioning that in order to ensure equity, we have to meet certain statistical standards that measure both the level and uniformity of all our assessments against our qualified sales data, in order for the revaluation to be certified by the State. We are well within all of those parameters.
All respectful comments with the commenter’s first and last name are welcome.
