Building a Sales Comparison Adjustment Grid for a Commercial Tax Appeal

Start with the right sales, not the most convenient ones

Every grid is only as good as the sales inside it. Each one should be an arms-length transaction between unrelated parties, with no unusual financing or seller pressure, and verified with a party to the deal, a broker, or a recorded document. Sales between affiliates, sale-leasebacks priced off the lease rather than the real estate, portfolio allocations and distressed transfers all need either an adjustment you can support or exclusion.

Some states spell out the test. Texas Tax Code §23.013 requires an appraisal district using the market data comparison method to adjust comparable sales to the subject and generally limits comparable sales to those within 24 months of the valuation date. It lists the factors that decide comparability: location, square footage of the lot and improvements, age, condition, access, amenities, views, income, operating expenses, occupancy, and easements, deed restrictions or other legal burdens affecting marketability. That list is a useful checklist in any state, because it is close to what any board will ask about.

Define the search before you run it: property type and use, a size band around the subject, a date range around the valuation date, and a geographic area. Then present every sale that meets those rules. A grid built from the five lowest prices in the county is easy to attack. A grid built from documented selection rules forces the assessor to argue with the rules.

Adjust in the right order

Appraisal practice applies adjustments in a sequence, because the first group changes the price itself while the second group compares physical and locational differences. Transactional adjustments are applied one after another to the sale price. Property adjustments are then applied to the transaction-adjusted price, usually summed as percentages.

Indicated $/sq ft = Sale price/sq ft x (1 + transactional adj.) sequentially x (1 + sum of property adj.)

• Real property rights conveyed: a sale of the leased fee with above-market or below-market leases needs adjusting toward the interest being assessed, often the fee simple.
• Financing terms: seller financing or an assumed below-market loan can push a price above cash equivalence.
• Conditions of sale: related parties, distress, 1031 exchange pressure or a buyer assembling adjacent land.
• Expenditures immediately after purchase: deferred maintenance the buyer had to cure, such as a roof, is added to the price.
• Market conditions (time): the change in values between the sale date and the valuation date, supported by paired sales, resales or index data.
• Property characteristics: location, size, age and condition, quality, and the features that matter for the property type, such as clear height and dock doors for industrial or parking ratio for suburban office.

The worked grid: Westpark Commerce Center

Westpark Commerce Center is a 212,000 sq ft Class B industrial building with 28-foot clear height, built in 1998. The county assessed it at $28,600,000, about $134.91 per sq ft, as of January 1. Five verified sales from the same industrial submarket within 24 months of the valuation date make up the grid. Market conditions are adjusted downward because regional industrial values softened over the period; the rate comes from a resale of the same building and the submarket's sale price trend.

Comparable C sold with a long lease to a single tenant at a rent above market, so it carries a property rights adjustment before anything else. Comparable B is a newer, better-located building with 32-foot clear height, which is why its net physical adjustment is a large negative.

Reconcile, do not average

The adjusted range is $115.46 to $125.35 per sq ft, with a median of $121.27 and a mean of $121.55. A board will look at that range before it looks at the conclusion. Reconciliation is a judgment about which sales are most like the subject, and the grid tells you where to look: the lowest gross adjustment marks the most comparable sale. Comparable E (9% gross) and Comparable A (10% gross) carry the most weight. Comparable B, at 19% gross with three physical adjustments in the same direction, gets the least.

Weighting toward E and A and supported by C, the reconciled value is $121.00 per sq ft, or $25,652,000. That is $2,948,000 (10.3%) below the assessment. At a 2.4% effective tax rate, the reduction is worth about $70,750 a year.

Say all of this in the narrative. A reconciliation paragraph that explains why one sale gets more weight than another is the single most persuasive page in a sales comparison exhibit, and it is the one most often missing.

Support each adjustment, or expect it to be thrown out

Boards rarely reject a grid outright. They strike the adjustments they cannot follow, and the conclusion moves with them. Each percentage should point to a source.

• Market conditions: paired resales of the same building, a sale price index for the property type, or the trend in submarket sale prices per square foot. State the monthly rate and the months applied.
• Size: a regression or paired comparison of price per square foot against building area within the sample, since larger buildings usually sell for less per square foot.
• Age and condition: effective age from inspection, and depreciation evidence from paired sales or cost schedules, including the assessor's own schedules where they help.
• Location: rent differentials between submarkets capitalized into value, or paired sales across the boundary.
• Clear height, dock ratio, parking: rent premiums for the feature from lease comparables, converted to a value difference.

Where the sales comparison approach fits in the package

For leased commercial property the income approach usually leads and the sales grid confirms it. If the two indications disagree, find out why before the hearing: a sale grid that implies a much higher value than the income approach often means the sales were priced on in-place leases, or the cap rate is out of step with the transactions. For owner-occupied industrial buildings, small-bay flex, and other property types with an active user market, the sales approach can carry the case on its own.

ATALI ELECTRIC's Sales Comps module builds the grid from verified arms-length commercial sales, applies transactional adjustments in sequence before property adjustments, shows net and gross adjustment for every sale, and logs the source for each rate. The consultant or appraiser presenting the case makes the selection and weighting calls, and those calls are what the board will ask about.