Agenda - 09-02-2008 - 4e - Laserfiche WebLink

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is a "bookkeeping figure" which the owner uses for Internal Revenue purposes and should not be considered in the income approach. In newer properties, this figure may provide an accurate indication of the original cost. Interest. Interest on borrowed capital is not a legitimate expense. All property is appraised as if it were "free and clear". It makes no difference to the appraiser whose money is used for purchasing the property. If a portion of the investment is borrowed capital, the owner of the fee (the property) is entitled only to a return on that portion of the property he owns, while the return on the balance of the investment is assigned to the holder of the mortgage. Interest paid for borrowed capital is not a deductible expense since interest on the total investment, as normal return, is considered in the capitalization rate. Land Rent. Land rent is paid in lieu of purchasing the land and is generally not considered an expense item in the capitalization process. It is, however, a significant item in that it may have a direct bearing upon the market value of a property. Land leases have the tendency to influence value of property upward or downward depending upon whether or not they are favorable or unfavorable to a prospective buyer. It is, therefore, advisable to obtain the amount and terms of all leases whenever possible. It is evident at this point that there are some expense items listed above which the appraiser should disregard. The question may come up, then, why ask for the information if we do not intend to use it? The answer is that expense forms should be designed to accommodate property owners and/or accountants. Their records include these categories, and if space is not provided to enter these items on the form, they have the tendency to either lump all of them under "Miscellaneous" or to include them in other categories, making it very difficult for the appraiser to abstract the legitimate deductions .