Energy issues, global economics and your valuation - Part 1

Editor's note: Perhaps more than other types of property, industrial facilities are affected not only by national trends, but global ones. This month, we'll look at some of the economic issues. In the next issue, we'll share tips, tactics and strategies on how these issues can help you make a case for a reduced valuation.

Issues affecting the fair market value of industrial properties transcend local markets, argues Sebastian Rodrigano, Principal of Complex Appeals, Popp, Gray & Hutcheson, PLLC, Austin, TX, noting that determining the fair market value of industrial facilities is a complex task. At last November's IPT Property Tax Symposium, he offered insights on how global energy issues in particular can have a direct impact on the value of industrial properties in the U.S.

Large-scale industrial facilities that compete in the world market for resources and product placement are especially susceptible to changes that may take place halfway around the world, Rodrigano told his audience.

He agreed to allow PTA to share his insights with our readers.

The industrial sector depends on natural gas and oil for fuel as well as raw materials, he explains. That makes it vulnerable to a variety of external factors, including:

• Higher energy costs.
• Resource shifts. "The increasing difficulty of satisfying U.S. energy demands will likely require the dedication of additional resources," he notes. And that could mean higher-cost alternatives.
• Changing consumption patterns. Consumers faced with increasing energy costs may reduce demand for many products.
• Increased overseas consumption and availability of raw materials. "For many industries the unprecedented economic growth in China and India may present new challenges in obtaining raw materials to support their activity."

Estimating the future of manufacturing or energy-dependent assets will be increasingly diffi cult, and therefore establishing fair market values will be a challenging task, Rodrigano warns. Among the questions to ask:

• Is the property's current revenue level sustainable?
• Are these revenue levels supported by opportunistic contracts or unusual situations that are unlikely to be long-lived?
• Are other facilities of this type being built in the United States? Overseas?
• Will overseas competition become an issue for this industry? If so, when?
• Are current sales of this type of property driven by historic performance or speculative forecasts?

Of course, it's not just global energy issues affecting the value of industrial properties.

Mark E. Marceau, CMI, director of complex property solutions, Marvin Poer & Company, Dallas, paints a bleak picture - but one that can help you argue for a lower valuation.

Citing the February 2009 Texas Manufacturing Outlook Survey, published by the Federal Reserve Bank of Dallas, Marceau notes production indices fell to new lows and capital expenditures have been shrinking. Work hours are down and manufacturers reported downward price pressures across the board, he adds.

In many industries, product prices for manufactured goods have declined precipitously, agrees Lester C. Rhodes, principal, Ryan, Dallas. Moreover, he points out that according to the Federal Reserve Board's industrial production index, industrial production has declined 12.5% since August 2008.

"As the current economic downturn clearly indicates, an economic obsolescence adjustment is necessary to compensate for the fact that utilization and economic return are not uniform. This particular downturn is much more than the downside of a normal business cycle," says Rhodes.

That requires property tax professionals to look at global issues, including energy, says Rodrigano. "Property tax professionals must look at emerging issues with a critical eye and do their best to integrate future challenges facing properties into the valuations upon which those properties will be taxed."