1. Real or Personal Property

a. A personal computer – personal property because it’s equipment

b. A mainframe computer – personal property because it’s equipment

c. Computer network wiring in the wall and ceiling of a building – real property because it’s a part of the makeup of a building

d. The office building for a computer marketing firm – real property because it’s a building

2. Method of Evaluationa. A McDonalds franchise store in suburban Washington, D.C. – There are two feasible approaches. The

first is the market comparison approach, since there is an active real estate market for such commercial properties. The second is the income capitalization approach would be one form of valuation because (1) it is commercial property, and (2) it will generate a stream of income over time, thus allowing the assessor to calculate net income.

b. A cornfield somewhere in the middle of Iowa – the market comparison approach would be the best form of valuation because the assessor can compare the cornfield and its characteristics to other cornfields that have been sold in the same area (as a result of supply and demand forces establishing prices)

c. A General Motors assembly plant in Flint, Michigan – the replacement cost approach would be the best form of valuation because of its uniqueness: (1) there are no data available for comparable sales, (2) nor are there data available on the plant’s net income. Thus, the best method would be for the assessor to compute what it would cost to build a similar production facility and then depreciate that figure.

d. The lavish home of Bill Gates in suburban Seattle – the replacement cost approach would be the best form of valuation because of its uniqueness.

3. Property Assessment

a. Compute the effective tax rate te (0.02)*(0.8) = 0.016

b. Explain the difference between nominal and effective tax rates

The nominal tax rate is merely the rate applied to the statutory value of the property, while the effective tax rate is dependent upon the nominal tax rate and the assessment ratio; the higher the assessment ratio, the higher the effective tax rate. Thus people want to look at the effective tax rate, not just nominal tax rate.

c. A reassessment raises the assessed value to AV=$130,000. Explain the effect of the reassessment of the effective tax rate.

Because the AV is larger, this will make the assessment ratio (larger and) closer to 1, thereby also making the effective tax rate larger: 0.0174

Property AssessedAV = $120,000MV = $150,000tn = 0.02