Is the owner of a property used for sporting events entitled to an exclusion from assessed value an allocation for future functional obsolescence?

Joaquín Torres v. San Francisco Assessment Appeals Board No. 1

Facts: An owner’s property is rented out for sporting and other public events. The county assessor uses the replacement cost approach to determine the assessed value as the property’s fair market value (FMV). The county’s assessment appeals board excludes from the assessed value an allocation for future functional obsolescence. No current functional obsolescence exists for reducing the replacement cost. The assessor seeks to exclude from reduction of the assessed value an allocation for future functional obsolescence.

Claim: The assessor claims the board’s exclusion from assessed value of an allocation for depreciation due to future functional obsolescence was improper since all property owners face the same need to reserve a portion of the income generated by a property to cover functional obsolescence and replacement costs, and no current depreciation from functional obsolescence exists for reducing the replacement cost.

Counterclaim: The board claims the exclusion of the revenue generated by the property and reserved to prevent functional obsolescence is valid since the property’s unique use is more susceptible to depreciation from functional obsolescence which will reduce the amount a prudent buyer will pay to buy the property and thus deducting the present value of funding a reserve is proper under the cost method.

Holding: A California appeals court holds the board improperly excluded from the assessed value an allocation for future functional obsolescence since an exclusion for future obsolescence is improper under the cost method when no functional obsolescence exists on the property. [Joaquín Torres v. San Francisco Assessment Appeals Board No. 1 (2023) 89 CA5th 894]

Joaquín Torres v. San Francisco Assessment Appeals Board No. 1

Related Reading:

Real Estate Principles: Chapter 29: The appraisal report

Three Appraisal Approaches: Cost Approach

Three Appraisal Approaches: Income Approach