Chapter 7 - Special Issues in Valuation | CDOLA

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Common Interest Community Ownership

Statutory References

The previous homeowners' organization statute, § 39-1-103(10), C.R.S., provided that under certain conditions, property owned by a homeowners' organization should not be separately assessed, but should be appraised and valued with the residential real property owned by the members of the organization.

With the enactment of HB 93-1070 on April 30, 1993, that statute was amended to read as follows:

Actual value determined - when.
(10) Common property or common elements within a common interest community as defined in the "Colorado Common Interest Ownership Act", article 33.3 of title 38, C.R.S., shall be appraised and valued pursuant to the provisions of section 38-33.3-105, C.R.S.
§ 39-1-103, C.R.S.

Section 38-33.3-105, C.R.S., reads, in part, as follows:

Separate titles and taxation.
(2) In a condominium or planned community with common elements, each unit that has been created, together with its interest in the common elements, constitutes for all purposes a separate parcel of real estate and must be separately assessed and taxed. The valuation of the common elements shall be assessed proportionately to each unit, in the case of a condominium in accordance with such unit's allocated interests in the common elements, and in the case of a planned community in accordance with such unit's allocated common expense liability, set forth in the declaration, and the common elements shall not be separately taxed or assessed. Upon the filing for recording of a declaration for a condominium or planned community with common elements, the declarant shall deliver a copy of such filing to the assessor of each county in which such declaration was filed.
(3) In a planned community without common elements, the real estate comprising such planned community may be taxed and assessed in any manner provided by law.
§38-33.3-105, C.R.S.

To better understand the Common Interest Ownership Act (CIOA) taxation statute, § 38-33.3- 105(2), C.R.S., it is helpful to look at the definitions of terms in the Act, which are used in the taxation statute. These definitions are listed in § 38-33.3-103, C.R.S.

Definitions.
(2) "Allocated interests" means the following interests allocated to each unit:
(a) In a condominium, the undivided interest in the common elements, the common expense liability, and votes in the association (emphasis added);
(b) In a cooperative, the common expense liability and the ownership interest and votes in the association(emphasis added); and
(c) In a planned community, the common expense liability and votes in the association (emphasis added).
(3) "Association" or "unit owners’ association" means a unit owners' association organized under section 38-33.3-301.
(5) "Common elements" means: (a) In a condominium or cooperative, all portions of the condominium or cooperative other than the units; and (b) In a planned community, any real estate within a planned community owned or leased by the association, other than a unit.
(8) "Common interest community" means all real estate described in a declaration with respect to which a person, by virtue of such person's ownership of a unit, is obligated to pay for real estate taxes, insurance premiums, maintenance, or improvement of other real estate described in a declaration. Ownership of a unit does not include holding a leasehold interest in a unit of less than forty years, including renewal options. The period of the leasehold interest, including renewal options, is measured from the date the initial term commences.
(13) "Declaration" means any recorded instruments however denominated, that create a common interest community, including any amendments to those instruments and also including, but not limited to, plats and maps.
(22) "Planned community" means a common interest community that is not a condominium or cooperative. A condominium or cooperative may be part of a planned community.
§38-33.3-103, C.R.S.

Criteria

Typically, there were few problems with these concepts relative to condominiums and cooperatives whenever they were created. However, older planned communities, created prior to July 1, 1992, may not comply with the common interest community criteria established by the statutes. These noncompliance situations will require additional work on the part of assessors until the planned communities are reorganized to comply with the common interest ownership statutes. Therefore, the first question to be asked, regarding older planned communities, is whether or not the community meets the common interest community criteria under the statutes. If the following criteria are met, a common interest community exists and no separate assessment of common interest community real property, including real property owned by the association, is to be made.

On or after July 1, 1992, a common interest community can only be created by a declaration. The declaration is to be executed in the same manner as a deed, as required by § 38-33.3-201, C.R.S., and, in a cooperative, the real estate subject to this declaration must be conveyed to the cooperative's association. The declaration is to be recorded in every county in which any portion of the common interest community is located. Except for cooperatives, a plat or map of the common interest community also must be recorded in the same manner.
On or after July 1, 1992, a copy of the recorded declaration and any amendments to the declaration shall be delivered to the assessor as required by § 38-33.3-105(2), C.R.S. Except for cooperatives, a current plat or map of the common interest community property shall also be delivered to the assessor.
Regardless of when it was created, in order for a common interest community to conform to § 38-33.3-103(8), C.R.S., each unit owner must be under an obligation, by virtue of each such person's ownership of a unit, to pay expenses for other real estate described as real property common elements in the declaration. According to § 38- 33.3-103(5)(b), C.R.S., the other real estate common elements in a planned community may be any real estate owned or leased by the unit owner's association, other than a unit.

The association must provide the assessor sufficient evidence to support the claim that all unit owners share in these obligations to pay expenses for other common element real property described in the declaration.
Membership in the unit owners' association is mandatory for each unit owner only for common interest communities created on or after July 1, 1992. The definition of "association" in § 38-33.3-103(3), C.R.S., requires the unit owners' association be organized under § 38-33.3-301, C.R.S., which in turn, provides that membership in the association at all times shall consist solely of all unit owners.

However, if the criteria listed above are not met, common elements should be separately listed and assessed to the association as described under the Valuation Procedures, Market Approach section later in this chapter.

Noncompliance problems, relative to the first three listed criteria, may exist in older organizations. Some unit owners within these older organizations may believe there are common elements, but no recorded documentation describing these common elements exists. If there is such legal documentation that has not been recorded, simply recording these documents in the appropriate county clerk and recorder's office may solve this compliance problem.

However, many noncompliance situations have multiple problems, such as the absence of recorded documents that substantiate every unit owner's obligation for the payment of expenses for common elements. There may not be a method of resolving such expense payment obligation issues, assuming that legal documents substantiating expense payment obligations do not exist, other than creating a new, legal, common interest community. The unit owners should seek legal advice in these situations.

Valuation Procedures

Once the assessor receives a recorded common interest community declaration, or documents that serve as a declaration, which include a description of common elements and a description of each unit owner's expense payment obligations for those common elements, the assessor shall assess the common interest community's common elements with the residential real property owned by the unit owners. The assessor shall not assess it separately, § 38-33.3- 105(2), C.R.S.

After reviewing the declaration documents, the assessor should add a notation on the property record immediately below the legal description of each unit that states "Includes ____ percent interest in common elements."

Market Approach

The procedures outlined in this manual must be used in valuing the unit owner's residential real property. As required by § 20(8)(c) of article X of the Colorado Constitution, the assessor can only consider the market approach in determining the actual value of a unit owner's residential property.

Common interest community real property described in the declaration, including property actually owned by the association, will be reflected in the actual (market) value of the individual units. If real property owned by a legal common interest community is not described in the declaration, or in amendments to the declaration, it must be separately assessed to the association.

In the case of noncompliance with the Common Interest Ownership Community Criteria listed previously, the market value of the property should be listed and assessed to the association. However, the actual value assigned to this property must include market adjustments necessary to account for any legal land use and building restrictions.

If the common elements include, or the association actually owns, nonresidential improved property, this property is to be valued by consideration of the cost, market, and income approaches as applicable. After valuation, the assessor should use the administrative procedures under Nonresidential Common Elements Valuation.

Nonresidential Common Elements Valuation

When the common interest community criteria are met, residential common elements are not to be assessed separately from the living units even if the residential common elements are not exclusively used by members of the common interest community.

In the case of nonresidential use of the common elements, the land and improvements associated with this nonresidential use must be valued separately. After apportionment of the nonresidential value is made to the units within the common interest community, the proper assessment percentage is applied. For instance, if there is commercial use, the assessment rate applied to such common element actual value must be the commercial rate. Commercial use must be an ongoing use such as a restaurant or health club which is open to the general public. Incidental commercial use, such as occasional community garage sales or craft sales, does not preclude the residential use of the property.

The actual value determined for such nonresidential common elements must first be apportioned among the units, then extracted from the total actual value of each unit. Although § 39-5-121(1)(a), C.R.S., requires the notice of value to state only the total actual value of land and improvements, the Division recommends that the individual unit’s allocation of the value of nonresidential common elements also be separately stated on each NOV and tax bill. The purpose of this inclusion is to help taxpayers better understand how their tax liability is developed.

The apportionment of this nonresidential value shall be made on an equal pro rata basis, unless the apportionment of nonresidential property value is specifically controlled by the declaration.

The actual value determined for the owner's property will include land, improvements, if any, and the owner's interest in the common elements. An example of this situation, including commercial property owned by a homeowners' association, follows.

Example:

Meadowlark Subdivision is a sold out development of 50 lots. The homeowners’ association owns residential common elements that consist of tennis courts and a swimming pool. The homeowners’ association also owns a commercial common element that consists of a clubhouse that has been converted to a restaurant. This restaurant is leased to an operator and is open to the public. As the assessor, you are valuing the house on Lot 21. The legal description of this property includes a notation that the owner also owns an undivided 1/50th share of the common elements.

Since the commercial common element has a different assessment rate, its contribution to the total property value must be accounted for separately.

You must first estimate the total market value by comparison with sales of similar residences in this same subdivision. You have estimated this total value to be $100,000. (The total value includes the owner’s interest in the common elements.) Your next step is to estimate the land value by comparison with sales of similar lots in this subdivision. The value of the land is estimated to be $25,000 (part of this value reflects the value contribution of the common elements to the land). The difference between the total property value of $100,000 and the $25,000 land value is the value of the improvements, or $75,000.

The next step is to estimate the value of the commercial common element. This value should be developed by traditional appraisal methods considering the three approaches to value. In this case, a value of $500,000 has been estimated. Since the apportionment of this value has not been specified in the declaration, it should be allocated on an equal pro rata basis to each of the fifty lots in this subdivision. Each lot would then have a 1/50th share of this value or $10,000 ($500,000 ÷ 50). You know that the improvement only value of $75,000 includes $10,000 that is attributed to the commercial common element, the restaurant.

The property appraisal record would read as follows:

Meadowlark Subdivision, Lot 21, including a 1/50th interest in the common elements.

Improvement value: $75,000
Land: + 25,000
Total: $100,000 Actual Value

Equals: $65,000 Residential Imps Value

+ 25,000 Land Value
+ 10,000 Improved Commercial Value
Total: $100,000 Actual Value

There will be 50 such entries for the subdivision and it will represent the value of the entire subdivision. Although § 39-5-121(1)(a), C.R.S., requires the notice of value to state only the total actual value of land and improvements, the Division recommends that the individual unit’s allocation of the value of nonresidential common elements also be separately stated on each NOV and tax bill. The purpose of this inclusion is to help taxpayers better understand how their tax liability is developed.

The assessor must keep a record of any nonresidential common element property, including nonresidential common elements actually owned by the association. This record should list the description of any nonresidential property, the methods used to value the nonresidential property, the final correlated (reconciled) value, and the method used to apportion this value to the individual units.

As mentioned before, the assessor should add a notation on the property record immediately below the legal description of each unit that states “Includes ____ % interest in common elements.”

The assessment ratios are the residential assessment rate if the common elements are improved residential property and the commercial rate if the common elements are commercial land and improvements.

Level of Value

The value of all real property owned by a common interest community must reflect the appropriate level of value in effect for the applicable assessment year. The valuation date is the June 30 appraisal date preceding the year of general reappraisal.

Water Rights Valuation

Colorado statutes require that water rights used to support any item of real property, including agricultural real property, must be valued as a unit with the property served. Following are the statutes covering the definition, classification and unit assessment of water rights.

Water Rights Statutory References

Title 39 of the Colorado Revised Statutes includes water rights in the statutory definition of the term "improvements."

Definitions.
As used in articles 1 to 13 of this title, unless the context otherwise requires:
....
(6.3) "Improvements" means all structures, buildings, fixtures, fences, and water rights erected upon or affixed to land, whether or not title to such land has been acquired.
§ 39-1-102, C.R.S.

In the instance where water rights furnish water for residential purposes, water rights are
included in the statutory definition of the term "residential improvements."

Definitions.
As used in articles 1 to 13 of this title, unless the context otherwise requires:
....
(14.3) "Residential improvements" means a building, or that portion of a building, designed for use predominantly as a place of residency by a person, a family, or families. The term includes buildings, structures, fixtures, fences, amenities, and water rights that are an integral part of the residential use. The term also includes a manufactured home as defined in subsection (7.8) of this section, a mobile home as defined in subsection (8) of this section, and a modular home as defined in subsection (8.3) of this section.
§ 39-1-102, C.R.S.

According to Colorado statutes, water rights used to support the use of any item of real property, including agricultural use, must be appraised and valued with the land as a unit.

Improvements - water rights - valuation.
(1) Improvements shall be appraised and valued separately from land, except improvements other than buildings on land which is used solely and exclusively for agricultural purposes, in which case the land, water rights, and improvements other than buildings shall be appraised and valued as a unit.
(1.1)(a)(I) Water rights, together with any dam, ditch, canal, flume, reservoir, bypass, pipeline, conduit, well, pump, or other associated structure or device as defined in article 92 of title 37, C.R.S., being used to produce water or held to produce or exchange water to support uses of any item of real property specified in section 39-1-102(14), other than for agricultural purposes, shall not be appraised and valued separately but shall be appraised and valued with the item of real property served as a unit.
(II) For purposes of this section, valuing the water rights and the item of real property served by the water rights "as a unit" means that any increase in value of the property served with water made available directly, or by exchange, by the use of any dam, ditch, pipeline, canal, flume, reservoir, bypass, conduit, well, pump, or other associated structure or device, as defined in article 92 of title 37, C.R.S., shall be included in the valuation of the real property served by the water rights.
(b) The general assembly finds and declares that the value of water rights, and any dam, ditch, pipeline, canal, flume, reservoir, bypass, conduit, well, pump, or other associated structure or device, as defined in article 92, of title 37, C.R.S., used or held to produce or exchange water, for taxation purposes, should be recognized as a contribution to the value of all of the interests in the entire property served thereby and that the separate valuation of such water rights could result in double taxation. The provision of this subsection (1.1) shall not be construed to exempt any water rights from taxation but shall be construed as setting forth procedures for the valuation thereof.
§ 39-5-105, C.R.S.

From a review of these statutes, it is clear that the Colorado legislature did not intend for water rights, and associated structures and devices, to be separately assessable in any situation where the rights are used to provide or exchange water. In all cases where water rights are used, the rights must be appraised and valued with the land on which the rights are used.

Water Rights Assessment

The following examples and respective responses should provide an adequate understanding of how water rights are assessed.

The land and water rights and associated structures and devices are owned by the same entity. The rights are used by the owner on the land.

Colorado statutes clearly state that water rights and associated structures and devices must be valued as a unit with the land upon which the rights are used. This unitary valuation applies to all types of property, including agricultural.

For all classes of property except agricultural, water rights are considered an improvement to the land. In valuing nonagricultural property with water rights and associated structures and devices, the appraiser should use comparable properties that have water and similar structures and devices for determining property value. Use of these comparables will allow the appraiser to account for the additional value attributable to the rights, structures, and devices in the applicable approaches used to value the subject.

In valuing agricultural property, water rights and associated structures and devices must be assessed with the land as a unit. Generally, use of water rights, structures, and devices affect crop yields and thus the agricultural sub-classification of the land.
Water rights have been severed from the land and are being used agriculturally under lease by either the original landowner or by a different landowner.

The assessor must determine the parcel that currently has the benefit of the water rights and classify and value that parcel with the rights as a unit. The classification of the land will be irrigated or meadow hay.

If the rights are leased back to the original agricultural land owner, the assessment of the water rights will be as it was prior to severance, i.e., included in the valuation of the land as a unit.

If the rights are leased to another landowner and used agriculturally, the water rights must be included as a unit in valuing the other landowner's land. The original landowner’s land must then be classified and valued according to its use.

If the land is determined to still be agricultural, classification and valuation must be based on current use, either as dry farm, meadow hay, or as grazing land.

If the land ceases to have agricultural use, the assessor must classify it based on the land's use as of January 1 and consider all applicable approaches in the land's valuation.
Water rights have been severed from the land and are being used on nonagricultural land, e.g., a residential subdivision. Colorado statutes clearly state that water rights must be valued with nonagricultural property in the same manner as with agricultural property, as a unit with the real property being served. In a nonagricultural situation, the water is determined to be an amenity to the land. Valuation must be accomplished by using comparable properties that have existing water.

The original land from which the rights were severed is still subject to agricultural assessment as long as the land qualifies as agricultural. If the assessor determines that the land still qualifies for agricultural assessment, the valuation of the land is based on its agricultural classification. The classification must be based on the current agricultural use, either as dry farm, meadow hay, or as grazing land. If the land ceases to have agricultural use, the assessor must reclassify it at the land's most probable use and consider all applicable approaches in the land's valuation.
Water rights are severed from the land and sold to a company doing business in Colorado as a public utility.

Under §§ 39-4-101 through 109, C.R.S., public utility property is valued by the Property Tax Administrator and apportioned to the counties. In the administrator's valuation, the value of any water rights owned by the public utility will be included.

As long as the water rights are used or held for use with land owned by the public utility, any additional value due to the rights will be included in the valuation of the public utility land. If the land is determined to be public utility operating property, any value attributable to the land and water rights will be apportioned to the county by the administrator as part of that county's state assessed valuation.

If the land with the water rights is designated as non-operating public utility property, it must be locally assessed. The assessor must determine whether the land is agricultural or not. If agricultural, the land must be classified and valued as all other agricultural land. If the land does not qualify as agricultural, the assessor must determine the use as of January 1 and value accordingly.

If the rights are not used in conjunction with other public utility property, the assessor must determine where the rights are being used. If the rights are being used in conjunction with agricultural land, the assessor must identify that land and make sure that the valuation of the land includes the water rights as a unit.
Water rights have been severed and are not currently being used with any parcel of land.

It is highly unlikely that severed water rights would be held unused for any appreciable amount of time. The threat of the loss of water rights through abandonment, i.e., nonuse, as well as the loss of rental income to the water right holder, make this situation unlikely.

For further information on the valuation of agricultural land with water rights, please refer to Chapter 5, Valuation of Agricultural Land.

For further information on the taxable status of domestic water companies, please refer to ARL Volume 2, ADMINISTRATIVE AND ASSESSMENT PROCEDURES MANUAL, Chapter 10, Exemptions.

Long-Term Non-Market Lease Valuation

Long-term, non-market lease situations usually occur when:

Rental income per unit of comparison (usually $/sf), is outside the range that is typical of similar properties;
The lease is of long enough duration to have a significant impact on value.

When appraising real property encumbered by a long-term non-market lease, these procedures should be observed to ensure accuracy of the assessment. The following procedures comply with the 1993 Colorado Supreme Court ruling, which allows non-market rents to be considered while achieving a unity of value for assessment, City and County of Denver v. BAA and Regis Jesuit Holding, Inc., 848 P.2d 355, (Colo. 1993).

Consideration of the following criteria will be helpful in determining the applicability of long-term, non-market lease valuation procedures:

Long-term lease refers to a lease that has a significant impact on value. Lease options are not relevant in this determination, unless there is strong evidence that the option(s) will be exercised. (Examples of this type of evidence may include: a letter of intent to renew, a lease renewal agreement, or a solid history of exercising renewal options.)
Lease terms are not renegotiable upon sale of the property.
Lease terms are not renegotiable upon exercise of a renewal option.
The tenant’s interest (leasehold estate) must be transferable for there to be any leasehold value.

Leased Fee and Leasehold Defined

Leased Fee Interest – A leased fee interest is the lessor’s, or landlord’s interest. It is an ownership interest held by a landlord with the rights of use and occupancy conveyed by a lease to others.

Leasehold Interest – A leasehold estate is the lessee’s, or tenant’s estate. It is the interest held by the lessee (tenant or renter) through a lease conveying the rights of use and occupancy for a stated term under certain conditions.

Valuation Method

Colorado statute § 39-1-103(5)(a), C.R.S., requires that the fee simple estate be valued for property tax purposes. This requirement is confirmed by § 39-1-106, C.R.S., - the Unit Assessment Rule. The valuation process should reflect a market value, using market assumptions, including market rent, market expenses, and market occupancy. There are a few specific exceptions to this requirement. The valuation of property subject to a long-term, nonmarket lease is one of those exceptions.

Colorado statutes, court decisions, and Uniform Standards of Professional Appraisal Practice (USPAP) require that all three approaches to value be considered when valuing this property type.

Cost Approach

The cost approach is most helpful when the lease rate and terms are at market levels, i.e., leased fee and fee simple values are the same. Contract rent that is below market may reflect a type of external obsolescence that could be estimated and deducted as a part of total depreciation. If such obsolescence exists, the calculation used to develop the estimate is simply an exercise of the Income Approach.

Market (Sales Comparison) Approach

The sale of a property subject to a long-term, non-market lease cannot reflect the value of both the leased fee and leasehold estates; therefore, each component of value should be considered separately by this method.

Leased Fee Interest:

The market approach may be helpful in valuing the leased fee interest in this property type if:

The sale property is leased;
The sale property has a lease term that is similar to the subject’s lease term;
The sale property has a lease rate that is similar to the subject’s lease rate;
The sale property has rent escalations that are similar to the subject’s rent escalations;
The creditworthiness of the tenant in the sale property is similar to the creditworthiness of the tenant in the subject.

As the number of items of comparability decreases, the reliability of this method diminishes.

Leasehold Interest:

Sales of leasehold interests in buildings rarely occur. It is unlikely that the market approach will be helpful in valuing this component of the fee simple interest.

Income Approach

The income approach is the most useful method when providing an opinion of the value of a property encumbered by a long-term, non-market lease.

Long-term, non-market leases frequently include other sources of income in addition to base rent, such as percentage rent. It is important to include income from all sources when analyzing the relationship of contract rent to market rent.

Frequently, large national tenants are able to negotiate below market rental rates. Because of the good creditworthiness of this type of tenant, these properties may sell at a lower overall rate. Where this situation exists, the value of the leased fee interest may be equal to the value of the fee simple interest, even if the contract rent would otherwise be considered below market.

Unit Assessment Rule

Partial interests not subject to separate tax.
For purposes of property taxation, it shall make no difference that the use, possession, or ownership of any taxable property is qualified, limited, not the subject of alienation, or the subject of levy or distraint separately from the particular tax derivable therefrom. Severed mineral interests shall also be taxed.
Annotation:
This section establishes a unity rule for the assessment of property rather than requiring assessment of the various interests in the property.
§ 39-1-106, C.R.S.

In the Regis case, 848 P.2d 355 (Colo. 1993), the court cited § 39-1-106, C.R.S. as applying the Unit Assessment Rule in Colorado. The court defines this as “a rule of property taxation which requires that all estates in a unit of real property be assessed together.” This is an important concept in the valuation of a property encumbered by a below market rent on a longterm basis. For example, a leased property includes both the rights of the landlord (leased fee estate) and the rights of the tenant (leasehold estate). As noted in The Appraisal of Real Estate, 14th ed., p. 72, “A leasehold interest may have value if contract rent is less than the market rent.”

The problem the court had in the Regis case was that by capitalizing the market rent into value, the assessor ignored the value impact of the existing lease. The court ruled that “the BOAA is free to place whatever weight it deems appropriate” on the lease, (Regis, p. 361). In the facts of that case the court noted that the BOAA concluded a value well above the leased fee interest in the property, and further stated “it is clear that the BOAA considered the lessee’s interest in determining the actual value of the subject property,” (Regis, p. 361). The court concluded: “We do not hold that actual rent is the only factor to be considered in valuing property, nor is it necessarily the predominate factor, only that theoretic market rent is not the exclusive factor to be considered,” (Regis, p. 362).

Recommended Procedure

In order to be in compliance with the statutory requirement of § 39-1-106, C.R.S. (Unit Assessment Rule) and the Supreme Court ruling in Regis, the Division recommends the following procedure for developing an opinion of value for properties leased on a long-term basis at below market rent:

Calculate the value of the leased fee position by capitalizing net income based on contract rent;
Calculate the value of the leasehold position by estimating the present worth of the difference between market rent and contract rent over the remaining term of the lease, and
Conclude the value of all estates in the “unit of property.” (The appraiser should recognize that the market value of a property is not necessarily the sum of the value of the individual estates.)

Some of the factors to be considered are:

The general concept is that lower risk positions should be capitalized into value at lower overall rates;
Items to be considered in assessing the level of risk with non-market leased properties include:
- duration of the lease,
- variance compared to market rent,
- rent escalation clauses during the base lease term,
- percentage rent clauses.
The leased fee interest is a lower risk position, therefore, a lower overall rate is appropriate;
Conversely, the leasehold interest is a higher risk position and requires use of a higher overall rate;
Sources to be considered in developing the appropriate overall rates:
- market sales data,
- comparison of actual rates for financing instruments with varying degrees of risk, e.g., comparison of treasury bills (very low risk), corporate bonds (moderate risk), and junk bonds (higher risk).

Example:

The following example may be helpful in developing the required values:

Given Lease Information

Contract Rent: $108,519/year
Market Rent: $128,519/year
Remaining Lease Term: 10 years

Leased Fee Value

Potential Gross Income (at contract rent): $ 108,519
Less Vacancy & Collection Loss @ 5% ( $5,426)
Effective Gross Income: $ 103,093
Less Expenses: ( $3,093)
Net Operating Income: $ 100,000
Leased Fee Capitalization Rate: 10%
Value of Leased Fee Interest Equals: $1,000,000

Leasehold Value

Difference between Contract and Market Rent: $ 20,000/year
Leasehold Discount Rate: 15%
Present Value of Rent Difference for Remaining
Lease Term, (Column 5, PW of $1 Per Period): 5.018769
Value of Leasehold Interest Equals: $ 100,375*
Rounded To: $ 100,000
*(Present Worth of Rent Difference: $20,000 x 5.018769)

Unit Value of the Property for Assessment Purposes

Leased Fee Value: $1,000,000
Leasehold Value: 100,000
Unit Value: $1,100,000

Definitions

The following definitions have been generally taken from The Dictionary of Real Estate Appraisal, 7^th Edition, Appraisal Institute, 2022.

Base Rent: the minimum rent stipulated in a lease.

Contract Rent: the actual rental income specified in the lease. DPT note: it may be the same, lower, or higher than market rent.

Excess Rent: the amount by which contract rent exceeds market rent at the time of the appraisal; created by a lease favorable to the landlord (lessor) and may reflect unusual management, unknowledgeable or unusually motivated parties, a lease execution in an earlier, stronger rental market, or an agreement of the parties. DPT note: Due to the higher risk inherent in the receipt of excess rent, it may be calculated separately and capitalized at a higher rate in the income capitalization approach.

Fee Simple Estate: absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.

Lease: a contract in which the rights to use and occupy land, space, or structures are transferred by the owner to another for a specified period of time in return for a specified rent.

Leased Fee Estate (Leased Fee Interest): the ownership interest held by the lessor, which includes the right to receive the contract rent specified in the lease plus the reversionary right when the lease expires.

Leasehold Estate (Leasehold Interest): the right held by the lessee to use and occupy real
estate for a stated term and under the conditions specified in the lease.

Leasehold Value: the value of a leasehold interest. Usually applies to a long-term lease when market rental for similar space is higher than rent paid under the lease.

Lessee: one who has the right to occupancy and use of the property of another for a period of time according to a lease agreement.

Lessor: one who conveys the rights of occupancy and use to others under a lease agreement.

Long-Term Lease: generally a lease agreement extending for 5 years or more, though it may be less in some markets. DPT note: the definition varies slightly; assessors should understand how leases impact value in their markets.

Market Rent: the most probable rent that a property should bring in a competitive and open market under all conditions requisite to a fair lease transaction, the lessee and lessor each acting prudently and knowledgeably, and assuming the rent is not affected by undue stimulus. Implicit in this definition is the execution of a lease as of a specified date under conditions whereby

Lessee and lessor are typically motivated;
Both parties are well informed or well advised, and acting in what they consider their best interests;
Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and
The rent reflects specified terms and conditions, such as permitted uses, use restrictions, expense obligations, duration, concessions, rental adjustments and revaluations, renewal and purchase options, and tenant improvements (TIs). DPT note: the rate prevailing in the market for comparable properties and is used in calculating market value by the income approach; sometimes called economic rent.

Overage Rent: the percentage rent paid over and above the guaranteed minimum rent or base rent; calculated as a percentage of sales in excess of a specified breakpoint sales volume. DPT note: overage rent is a contract rent.

Percentage Lease: a lease in which the rent or some portion of the rent represents a specified percentage of the volume of business, productivity, or use achieved by the tenant.

Government-Assisted Housing Valuation

In 1937, Congress passed the Federal Housing Act that provided for the construction of low-income, affordable multi-family housing. Since then, the Act has been modified several times to include state and local low- and moderate-income housing programs as well. In the 1970s, the federal Housing and Urban Development (HUD) agency initiated low-interest rate programs along with federal Farmer’s Home Administration loan programs for rural areas.

In 1986, Congress added the Low-Income Housing Tax Credit (LIHTC) program to encourage private industry to invest in and construct low income housing or rehabilitate existing housing projects. Federal income tax credits are given to investors in qualified projects in exchange for equity participation and to offset property restrictions that all or part of the project be leased at below-market rents to qualified low-income tenants. Beginning in 1989, an irrevocable recorded Land Use Restriction Agreement (LURA) was placed against each new LIHTC property in Colorado requiring the continuation of low-income housing use for a minimum of 30 years.

These procedures have been developed for use by all county assessors in identifying government-assisted housing. For those properties that have restricted rents and that are subject to property use restrictions that limit the use of the property, specific market value adjustment procedures have been developed to allow assessors to make adjustments to value to take into account the effects of the restricted rents and land use restrictions on market value. If any question arises as to whether a property is subject to these procedures, contact the Division of Property Taxation.

Definition of Government-Assisted Housing

For use with this procedure, the following definition from the Uniform Standards of Professional Appraisal Practice (USPAP) will apply:

“Subsidized housing may be defined as single- or multifamily residential real estate targeted for ownership or occupancy by low- or moderate-income households as a result of public programs and other financial tools that assist or subsidize the developer, purchaser, or tenant in exchange for restrictions on use and occupancy.”
Advisory Opinion AO-14, USPAP

Government-assisted or “subsidized” housing includes both rent-restricted and rent-subsidized housing. Rent-restricted housing reflects the fact that the property owner receives less than market rent, but receives other benefits such as federal income tax credits and/or preferential loan terms and guarantees. Rent-subsidized means the property owner receives rent subsidies from a government agency to bring rental income up to market levels.

Types of Programs

The United States Department of Housing and Urban Development (HUD) provides the primary definition of income and asset eligibility standards for low and moderate income households. Other federal, state, and local agencies define income eligibility standards for specific programs and developments under their jurisdictions.

There are three main categories of government-assisted (low-income) housing:

Public housing operated by a public housing authority (PHA),
Affordable housing projects developed by non-profit 501(c)(3) corporations, and
Private, for-profit government-assisted housing projects that meet requirements of the United States Department of Housing and Urban Development (HUD) or Rural Development – Rural Housing Service (RHS) for low- and moderate-income families. The RHS was formerly known as the Farmers Home Administration. In addition, both the project and investors must meet IRS requirements with regard to receiving low-income housing income tax credits.

Public Housing Authority (PHA) Programs

PHA programs are usually associated with and administered by a local public housing authority. These entities provide housing to qualifying families based on a percentage of their gross or adjusted gross income.

A City Housing Authority, § 29-4-203, C.R.S., a County Housing Authority, § 29-4-502, C.R.S., a Multijurisdictional Housing Authority, § 29-1-204.5, C.R.S., or a Middle-Income Housing Authority, § 29-4-1103, C.R.S., are exempt from general taxation pursuant to the statutes pertaining to each type of authority. For more information on Housing Authorities, refer to ARL Volume 2, ADMINISTRATIVE AND ASSESSMENT PROCEDURES MANUAL, Chapter 10, Exemptions.

Non-Profit, 501(C)(3) Corporations

In metropolitan areas, local government-assisted housing corporations may be established to provide housing assistance for low- and moderate-income families. These corporations provide direct rent subsidies or low-income loans for the development of new affordable housing units or rehabilitation of existing affordable housing. In addition, loans may be provided to purchase existing affordable housing units to keep them from being converted to traditional multi-family housing and apartment projects.

Unless the project has specifically been designated as a charitable property pursuant to a determination of the Division of Property Taxation – Exemptions Section, it is taxable and should be valued under these procedures. If you have questions whether a specific property is exempt as a charitable property, contact the Exemptions Section of Division of Property Taxation.

Sections 39-2-117, 39-3-113, and 39-3-127, C.R.S., provide charitable housing developers community land trusts with a property tax exemption on land that they own and intend for affordable housing development; and on land that they have already developed, but retain ownership of the site, which they then lease back to the purchaser of the structure.

For-Profit Programs

In private, for-profit subsidized housing programs, the Federal Government (HUD & RHS) and the Colorado Housing and Finance Authority (CHFA) provide regulatory, financial, and administrative services. HUD does not own or manage housing projects but does insure mortgage loans and oversees compliance with federal guidelines, laws, and rules.

Housing and Urban Development Programs

In 1965, the United States Department of Housing and Urban Development (HUD) was created as a cabinet-level agency. Since then, amendments to the 1937 Federal Housing Act and other changes in various federal acts in 1970, 1974, 1983, and 1990 established the need for programs that address the nation’s housing needs by encouraging economic growth in distressed neighborhoods, providing housing assistance for the poor, helping rehabilitate and develop moderate and low-cost housing, and enforcing the nation’s fair housing laws.

Specific programs administered by HUD in Colorado are:

Section 8 - Rental Subsidy program is the most popular. Existing Section 8 participants provide qualified renters with a voucher. The renter locates a suitable unit and, with the assistance of the public housing authority, will negotiate a contract with the owner.
Section 8 - Moderate Rehabilitation is similar to the Rental Subsidy program except the subsidy is tied to the unit and not to the tenant.
Section 8 - New Construction/Substantial Rehabilitation program is tied to the project. Under this program, HUD has a contract with the property owner, HUD paying the owner the difference between market rent and the tenant’s calculated rent.

Since market rent is being received by the owner of a property under the Section 8 program, the specific market adjustment procedures utilizing restricted rents are not applicable. However, any adjustment in value that is necessary due to location or physical condition of the property should be considered by the appraisers when determining actual value for Section 8 properties.

Rural Housing Service Programs

Since 1916, the Federal Government has created and re-created various agencies to administer financial and technical assistance to rural families and communities. Currently, the United States Department of Agriculture-Rural Development Agency administers various programs to provide loans and grants for construction of rural housing and community facilities as well as to provide rental assistance for low-income rural people.

RHS programs are available to eligible applicants in rural areas, typically defined as open country or rural towns with no more than 20,000 in population. Programs currently in operation in Colorado are:

Under the Multi-Family Housing Direct Loan (aka Section 515) program, the RHS primarily makes direct, low interest loans to developers of affordable multi-family housing properties. The RHS may subsidize a portion of the rent up to a “basic rent level.” The term “basic rent level” applies to the level of rent necessary to achieve an 8 percent return on investment for the property owner. In nearly all cases, the basic rent level is below fair market rents for the area.
The Rural Rental Housing Guaranteed Loan Program (aka Section 538) provides for loan guarantees of up to 90 percent of the amount of a loan from a private lender to a developer of low-income housing. There are currently no Section 538 properties in Colorado.
The Farm Labor Housing and Grant Program provides capital financing for the development of housing for domestic farm laborers. One part of the program, Section 514, provides loan funds to buy, build, improve, or repair housing for farm laborers in rural and, in some cases, urban areas for nearby farm labor. Another part, Section 516, provides grants that may be used to cover 90 percent of farm housing development cost.

In RHS programs, rents are restricted to a percentage of the renter’s income. Since the developer receives a below-market loan or high percentage loan-to-value guarantee, the actual rents, even though restricted, allow for a reasonable rate of return for the project.

According to the RHS, only Section 515 properties would be “rent-restricted” because their rents would likely be less than fair market level. As such, the specific market adjustment procedure for properties with restricted rents would be applicable.

Colorado Housing and Finance Authority

The Colorado Housing and Finance Authority (CHFA) is a quasi-governmental organization created in 1973 by the Colorado General Assembly to assist in financing housing for low- and moderate-income families. Through statutory amendments in 1983 and 1987, CHFA was allowed to provide financing for small businesses and economic development in specified locations. CHFA is solely funded from revenue generated by the programs it administers.

Today, CHFA programs encompass three areas of interest: Home Finance programs for qualified low and moderate income families, Rental Finance programs providing housing loans for construction and/or rehabilitation of existing rental housing, and Business Finance programs providing commercial loans to locally-owned businesses in Colorado.

To fund its programs, CHFA issues notes and bonds and uses the proceeds to provide financing to developers of low and moderate income rental housing. In addition, CHFA administers the financial aspects of both the federal and state assisted-housing programs that receive CHFA loans or LIHTC tax credits in Colorado.

Specific federal programs administered by CHFA are:

Tax-Exempt or Private Activity Bond (PAB) Loans – FHA/CHFA “shared-risk” permanent or construction loans are provided to qualified developers who receive below market financing and flexible repayment options. For 501(c)(3) non-profit corporations and public housing authorities, loans are provided through the issuance of tax-exempt bonds.
Low Income Housing Tax Credits (LIHTC) – CHFA allocates federal income tax credits to investors in low-income housing. Developers must apply through a competitive process to CFHA for allocations of credits based on eligibility and rankings related to a state tax credit allocation plan.

Programs developed by CHFA include:

SMART Program – Similar to the Tax Exempt/PAB Loan program, CHFA provides permanent loans of up to $1,000,000 for up to 20 unit projects for new construction or acquisition and rehabilitation. Developers may be either for-profit or non-profit and may receive flexible repayment terms and a streamlined loan process.
Taxable Loans for Low Income Housing Tax Credit Projects (LIHTC) – Provides for debt financing of LIHTC projects for both construction and permanent loans.
CHFA Housing Fund – Provides short-term (up to 2 years) loans to qualified developers to cover pre-development costs, acquisition, or construction of low-income housing.
CHFA Housing Opportunity Fund – Provides first mortgage or subordinate loans at flexible terms to leverage other funding for non-profit developers and public housing authorities to create housing for very-low-income households.

Since 1989, most taxable government-assisted housing projects in Colorado involve allocation of LIHTC tax credits by CHFA. Most of these properties are rent-restricted as well. As such, the specific market adjustment procedure for properties with restricted rents would be applicable.

Sources of Information on Housing Projects

Government-Assisted Housing Questionnaire

The Division developed a questionnaire for collecting information on total rental unit counts and gross contract rental amounts to determine a market adjustment. Some projects may have several levels of restricted rents. The different levels are based on the percentage of median income level that designates the maximum allowed rent level for that unit. Rent levels can vary from 30% to 60% of median income levels. CHFA median income levels and maximum allowed restricted-rents by income level can be obtained by accessing CHFA’s website or by contacting CHFA directly.

Each project owner or manager should be provided with a copy of the Division-developed questionnaire for completion. A copy of the questionnaire is provided as Addendum 7-B, Government-Assisted Housing Questionnaire.

Property owners or managers should be advised that failure to complete this questionnaire or to provide adequate information to the assessor regarding the rent-restricted housing project may result in not receiving the market adjustment for the current assessment year.

Verifying Contract Rent Information

In determining the restricted rent amount to be used in calculating the economically derived market adjustment (EDMA), actual contract rents in place as of the June 30 appraisal date should be used. However, if actual contract rent is not available, counties may use the CHFA maximum allowed rents. CHFA median income levels and maximum allowed rents by income level can be obtained by accessing CHFA’s website or by contacting CHFA directly.

Actual contract rents should be obtained through the use of Addendum 7-B, Government- Assisted Housing Questionnaire.

Colorado Housing and Finance Authority (CHFA)

Annually, property owners or managers complete an Occupancy Report (Form G-1) or Mixed Income Occupancy Report (Form G-2) that lists the number of bedrooms and gross tenant rent by apartment unit. The report is filed with CHFA. If verification of unit count and/or contract rent information is needed, a copy of the applicable report that is nearest to, but not later than the June 30 appraisal date should be obtained from the property owner or manager.

Additional information about CHFA projects can also be found at the CHFA website. CHFA offices can be contacted at:

Colorado Housing and Finance Authority
1981 Blake Street
Denver, CO 80202-1272
(303) 297-2432 (CHFA)

Rural Housing Service (RHS)

A multi-family housing project property owner is required to file a planned budget (Form RD 1930-7) no later than 45 days prior to the beginning of the property owner’s fiscal year. Part IV of the budget document contains a schedule of rents received from tenants in the project. The contract rent information is listed in the column headed RENTAL RATES – BASIC. If verification of unit count and/or contract rent information is needed, a copy of Part IV of the budget document that is nearest to, but not later than the June 30 appraisal date should be obtained from the property owner or manager.

Additional information about RHS projects can be obtained by contacting:

United States Department of Agriculture – Rural Housing Service
Denver Federal Center Building 56, Room 2300
PO Box 25426
Denver, CO 80225
1-800-424-6214

Specific project information may also be obtained from the local Rural Housing Service offices.

Fair Market Rental Information

For properties with rent restrictions, Fair Market Rents (FMR) as compiled and published by the United States Department of Housing and Urban Development (HUD) are used in the calculation of the economically derived market adjustment (EDMA). Schedule B containing the listing of FMRs by county can be obtained from the HUD website.

For the purpose of uniformity, the market rents listed in the FMR table should be used in determining the market adjustment for rent-restricted government-assisted housing projects. For those counties for which the HUD Fair Market Rent schedule is not reflective of local market rent levels, local market rent studies may be developed to establish market rents. These studies should be sufficiently detailed to the extent that economic rent levels by bedroom count can be established. Locally-developed rent studies must reflect market rent levels as of the June 30 appraisal date.

Government-Assisted Housing Valuation

General Market Analysis Considerations

Colorado assessors are restricted by § 20(8)(c) of article X of the Colorado Constitution, and § 39-1-103(5)(a), C.R.S., to sole consideration of the market (sales comparison) approach when valuing residential real property including government-assisted housing. Analysis of gross rental levels between rent-restricted and non-rent restricted properties is an accepted unit of comparison in the market approach. In addition, a formal Colorado Attorney General’s Opinion dated June 13, 2000, states that the Property Tax Administrator may consider the effects of government-mandated economic restrictions and government-mandated property use restrictions, including restricted rents, when publishing procedures concerning the market approach to appraisal. A copy of the Attorney General’s Opinion is located as Addendum 7- C, Formal Opinion of the Attorney General, at the end of this section.

The market for government-assisted housing is different from other residential investment property because of inherent restrictions on income (restricted rents) realized by the property owner and the inability of the property owner to sell the housing projects without meeting regulatory requirements imposed on them by federal and state authorities.

Discussions with CHFA indicate that sale of government-assisted housing for conversion to regular, market level multi-family housing would be unlikely before the mandated 30+ year restricted use period expires. Both the IRS and CHFA would enact severe penalties and commence legal action to recapture tax credits and any subsidized loans given to the developer of the project.

If sales of government-assisted housing do exist, assessors should fully analyze the market to determine whether or not there is a market-recognized value difference between rent-restricted and non- rent restricted properties. If a value difference can be demonstrated, appropriate adjustments must be made.

If no difference can be demonstrated by the market or if there are insufficient sales to make an accurate determination, non-government assisted housing sales, with appropriate adjustments for any differences (location and physical characteristics) between the sales and the subject property, can be used to determine actual value. However, if the subject government-assisted property has restricted rents, a market adjustment must be considered to account for the reduced income stream and the long-term (30+ years) land use restriction agreement (LURA).

Rent-Restricted Government-Assisted Housing

Valuation of taxable rent-restricted housing properties that receive below-market rents should reflect an economically derived market adjustment (EDMA) due to the reduced revenue stream. Restricted rents are mandated through land use restrictions (LURAs) recorded by CHFA against the property.

The steps to calculate this adjustment are listed below:

Step #1 Determine the valuation of the property assuming that it has no rental or property use restrictions.

Using time-adjusted sale prices of comparable non-rent-restricted housing properties, a value is determined using the sales comparison approach:

45,000 sq. ft. X $65.00/sq ft* = $2,925,000 actual value

* A base value per rental unit can also be used.

Because of the constitutional provision mandating exclusive use of the market (sales comparison) approach, assessors should review as many sales as possible. If sufficient sales are not available within the statutory eighteen-month data collection period, the data collection period should be expanded, in six-month intervals as needed up to the full sixty-month period. If an adequate number of sales are still not available, sales within neighboring counties having similar economic conditions should be examined. Sales prices must be trended to the appraisal date and adjusted to reflect any comparable locational and physical characteristic differences.

Step #2 From the property owner and/or manager, obtain the number of rent-restricted and non-rent-restricted rental units and number of bedrooms
contained within each unit.

The Division has developed Addendum 7-B, Government-Assisted Housing Questionnaire, to aid in obtaining this information.

Step #3 Using the actual (contract) rent amounts for each rental unit in the property, calculate the gross actual revenue per month that would be received if the property was 100 percent occupied. An example of this calculation is shown below:

20 1 bedroom units @ $350/month = $ 7,000/mo
30 2 bedroom units @ $400/month = $12,000/mo
50 Total rentable units $19,000/mo

Actual rents used in this step must reflect the actual rents that were in place as of the statutory June 30 appraisal date. Use of actual contract rent is preferred, but CHFA maximum-allowed rents can be used as a “proxy” if actual contract rent is not available. CHFA median income levels and maximum allowed rents by income level can be obtained by accessing CHFA’s website or by contacting CHFA directly.

Step #4 Using Fair Market Rents (FMRs) listed on Schedule B, Rules and Regulations of the Department of Housing and Urban Development (HUD), 24 CFR 888, calculate the gross FMR revenue per month assuming the property was not rent restricted and was 100 percent occupied. An example of this calculation is shown below:

20 1 bedroom units @ $500/month = $10,000/mo
30 2 bedroom units @ $600/month = $18,000/mo
50 Total rentable units $28,000/mo

If desired, local market rent studies can be substituted as a source for Fair
Market Rents.

Step #5 Calculate the economically derived market adjustment (EDMA) percentage by dividing total actual revenue from STEP #3 by the gross FMR from STEP #4. An example of this calculation is shown below:

$19,000 ÷ $28,000 = 0.679

1.000 - 0.679 =0.321 which is a 32.1% market adjustment as a rent-restricted property

Step #6 Apply the EDMA to the base value established under Step #1

$2,925,000 Actual Value X 0.679 (1.000 - 0.321) EDMA adjustment = $1,986,075 Adjusted Actual Value

The adjusted value of $1,986,075 reflects a 32.1% market adjustment for restricted rents.

If the total actual revenue is equal to or exceeds the gross FMR revenue for the property, no EDMA adjustment is necessary or should be made.

Use Of Gross Rent Multipliers (GRMs) As A Check for EDMA Calculation

Pursuant to § 39-1-103(5)(a), C.R.S., a gross rent multiplier (GRM) may be used as a unit of comparison in the market approach to appraisal. Counties may use GRMs as a “check” against the EDMA calculation.

Level of Value and Assessment Considerations

All government-assisted housing, including rent-restricted affordable housing, is real property and must be valued at the specified year’s level of value as required by § 39-1-104(10.2), C.R.S. When using the sales comparison approach, all sales must be adjusted to reflect estimated sales prices as of the June 30 appraisal date preceding the year of general reappraisal.

When calculating the economically derived market adjustment (EDMA), contract rents as of the June 30 appraisal date must be considered along with the published HUD fair market rent (FMR) table applicable to the general year of reappraisal. Additionally, all government-assisted housing is classified as residential property and must be assessed at the residential assessment rate.

Mixed-Use Property Valuation

Hotels/Motels as Mixed-Use Properties

This procedure has been developed to assist assessors in the determination of whether a hotel/motel property is subject to mixed-use classification and to provide procedures for the valuation and allocation of hotel and motel property value between residential and nonresidential (commercial) classifications.

Hotels and motels are to be classified, valued, and assessed as commercial property unless documentation exists to support a classification as mixed-use property. To be classified as a mixed-use property, the hotel or motel property owner and/or operator must be able to document the use of any portion of the property as residential property. Specifically, evidence of an overnight accommodation that is leased or rented for thirty (30) consecutive days or longer by the same person or business entity must be provided. Additional information and definitions regarding mixed-use and other terms used in these procedures are listed in the section of these procedures entitled Terminology Definitions.

Hotel or motel properties, including hotels and motels having mixed-use, must be valued through consideration of the cost, market, and income approaches to appraisal.

In addition, § 20 (8)(c) of article X of the Colorado Constitution requires that residential property must be valued through the use of the market approach to appraisal exclusively. This requirement applies to all types of residential property including the residential portion of mixed-use property.

To value mixed-use hotels and motels in accordance with this requirement, the following valuation steps should be used:

Step #1 Determine the actual value of the mixed-use hotel or motel including both land and improvements through consideration of the cost, market, and income approach to value.

Step #2 Determine the percentage of the hotel or motel property that is residential by using the Revenue Analysis Methodology and/or Room Night Analysis Methodology that is explained under the topic, Allocation of Mixed-Use Hotel/Motel Property.

Step #3 Allocate the actual value determined in Step #1 to residential and nonresidential portions by multiplying the actual value of the total property by the residential and non-residential percentages determined from Step #2.

Step #4 Convert the actual value allocated to the residential portion of the hotel or motel improvement from Step #3 to actual value per square foot. For this conversion, only the square footage of the motel or hotel structure housing the residential portion should be used.

This step requires two calculations:

Calculation #1

Total sq. ft. of the mixed-use property X the residential allocation percentage (from step #2) = Allocated residential square footage

Calculation #2

Allocated Residential actual value (from step #3) ÷ Allocated residential square footage (from calculation #1) = Actual value per square foot for residential portion

Step #5 Convert the sales of comparable improved properties to time-adjusted sales prices per square foot (TASP/sf). Select the TASP/sf most comparable to the mixed-use subject property. In determining sales comparability, the following priority should be used:

Sales of mixed-use hotels and motels
Sales of commercially-classified hotels and motels
Sales of apartments
Sales of other residential property, e.g., condominiums

Compare the TASP/sf of the comparable sale(s) to the actual value per square foot of the residential portion of the mixed-use subject property.

If the actual value per square foot of the residential portion of the subject property is equal to or lower than the TASP/sf rate determined from the comparable sales, do not change the total actual value of the hotel or motel property.
If the actual value per square foot of the residential portion of the hotel or motel is higher that the TASP/sf indicated from comparable sales, reduce the value of the residential portion to reflect the value indicated from the comparable sale(s). This is done by multiplying the TASP/sf of the comparable by the allocated square footage of the residential portion. Add back the reduced value of the residential portion to the actual value of the commercial portion of the property to determine the total actual value of the entire mixed-use property.

An example of this valuation procedure is shown below:

The 30-unit Shady Rest motel is classified as a mixed-use property. The motel operated at 70% occupancy in the prior year. The motel structure contains 11,000 square feet.

Step #1
The county has valued the motel for the current assessment year using the following approaches to value:

Cost Approach	$1,200,000
Income Approach	$950,000
Market Approach	$1,100,000
Reconciled Actual Value	$1,000,000

Step #2
The motel provided information on room revenue and room night usage as follows:

Residential Allocation Percentage = Extended Stay Revenue $ 27,000 ÷ Total All Room Revenue $100,000 = 0.27 or 27% Residential Use

Residential Allocation Percentage = Extended Stay Room Nights 2,410 ÷ Total Room Nights 7,665* = 0.31 or 31% Residential Use

* Calculated as 30 units x 365 days x 0.70 (70% occupancy)

Based on the reliability and completeness of the revenue information supplied by the motel owner, the room revenue methodology was used to determine the 27% residential and 73% commercial mixed-use allocation of the motel’s actual value.

Step #3
Using the 27% residential allocation percentage determined in Step #2, a residential and non-residential allocation of the subject property’s actual value was calculated:

$1,000,000 x 0.27 = $270,000 (actual value allocated to residential portion)

$1,000,000 x 0.73 = $730,000 (actual value allocated to non-residential portion)

Step #4
Using the total square footage of the mixed-use property and the residential allocation percentage from Step #2, calculate the allocated square footage attributable to residential use for the property:

11,000 square feet x 0.27 = 2,970 square feet (residential portion)

Calculate the actual value per square foot for the residential portion by dividing them allocated residential actual value from Step #3 by the allocated residential square footage from the Step #4 calculation shown above.

$270,000 ÷ 2,970 sf = $90.91 per square foot (residential actual value)

Step #5
Review of hotel and motel sales including mixed-use hotel and motel properties indicates a range of TASP between $75.00/sf and $85.00/sf inclusive of both land and improvements. Based on the size and amenities of the subject property, a TASP of $80.00/sf was indicated for the subject property.

Comparison of the indicated rate derived from the comparable sales analysis ($80.00/sf) to the allocated original actual value for the residential portion ($90.91/sf) indicates that the TASP/sf value from the comparable sales is below the allocated value indicated for the residential portion of the subject property. As such, the actual value of the residential portion of the motel should be adjusted as shown below:

~~$270,00~~ $237,600 Residential portion (2,970 sf x $80.00/sf)
~~$730,000~~ 730,007 Commercial portion (8,030 sf x $90.91/sf)
~~$1,000,000~~ $967,607 Total actual value of mixed-use property

Allocation of Mixed-Use Assessment

Allocation of mixed-use property values to residential and non-residential classifications is required under § 39-1-103(9), C.R.S. The preceding example, illustrating the mixed-use allocation methodology, applies to hotel or motel mixed-use properties. Allocation of the actual value of Bed and Breakfast properties can be found under the topic, Bed and Breakfast Properties, within this chapter. For general information regarding the allocation of mixed-use property refer to § 39-1-103(9), C.R.S.

Colorado Statutory References

The following statutes should be considered when using this procedure:

Definitions.
As used in articles 1 to 13 of this title, unless the context otherwise requires:
(5.5) (a) "Hotels and motels" means improvements and the land associated with such improvements that are used by a business establishment primarily to provide lodging, camping, or personal care or health facilities to the general public and that are predominantly used on an overnight or weekly basis;
. . . .
(14.3) "Residential improvements" means a building, or that portion of a building, designed for use predominantly as a place of residency by a person, a family, or families. The term includes buildings, structures, fixtures, fences, amenities, and water rights that are an integral part of the residential use. The term also includes a manufactured home as defined in subsection (7.8) of this section, a mobile home as defined in subsection (8) of this section, and a modular home as defined in subsection (8.3) of this section.
(14.4)(a)
(I) “Residential land” means a parcel of land upon which residential improvements are located. The term also includes:
(A) Land upon which residential improvements were destroyed by natural cause after the date of the last assessment as established in section 39-1-104 (10.2);
(B) Two acres or less of land on which a residential improvement is located where the improvement is not integral to an agricultural operation conducted on such land; and
(C) A parcel of land without a residential improvement located thereon, if the parcel is contiguous to a parcel of residential land that has identical ownership based on the record title and contains a related improvement that is essential to the use of the residential improvement located on the identically owned contiguous residential land.
(II) “Residential land” does not include any portion of the land that is used for any purpose that would cause the land to be otherwise classified, except as provided for in section 39-1-103 (10.5).
(III) As used in this subsection (14.4):
(A) “Contiguous” means that the parcels physically touch; except that contiguity is not interrupted by an intervening local street, alley, or common element in a common-interest community.
(B) “Related improvement” means a driveway, parking space, or improvement other than a building, or that portion of a building designed for use predominantly as a place of residency by a person, a family, or families.
(14.5) "Residential real property" means residential land and residential improvements but does not include hotels and motels as defined in subsection (5.5) of this section.
§ 39-1-102, C.R.S.

Assessment of a mixed-use property having a single improvement is referenced in Colorado Revised Statutes.

Actual value determined - when.
(9)(a) In the case of an improvement which is used as a residential dwelling unit and is also used for any other purpose, the actual value and valuation for assessment of such improvement shall be determined as provided in this paragraph (a). The actual value of each portion of the improvement shall be determined by application of the appropriate approaches to appraisal specified in subsection (5) of this section. The actual value of the land containing such an improvement shall be determined by application of the appropriate approaches to appraisal specified in subsection (5) of this section. The land containing such an improvement shall be allocated to the appropriate classes based upon the proportion that the actual value of each of the classes to which the improvement is allocated bears to the total actual value of the improvement. The appropriate valuation for assessment ratio shall then be applied to the actual value of each portion of the land and of the improvement.
§ 39-1-103, C.R.S.

Assessment of a mixed-use property consisting of more than one improvement is also referenced in the Colorado Revised Statutes.

Actual value determined - when.
(9)(b) In the case of land containing more than one improvement, one of which is a residential dwelling unit, the determination of which class the land shall be allocated to shall be based upon the predominant or primary use to which the land is put in compliance with land use regulations. If multiuse is permitted by land use regulations, the land shall be allocated to the appropriate classes based upon the proportion that the actual value of each of the classes to which the improvements are allocated bears to the combined actual value of the improvements; the appropriate valuation for assessment ratio shall then be applied to the actual value of each portion of the land.
§ 39-1-103, C.R.S.

Colorado Case Law Involving Mixed-Use Property

E.R. Southtech, Ltd., et al., v. Arapahoe County Board of Equalization, 972 P.2d 1057 (Colo. App. 1998).

At issue in this case was whether the hotel property should be classified as mixed-use because it provided “long term extended stays” (unit occupancy of 30 days or more) for some of its units as well as “short term stays” (unit occupancy of less than 30 days). Using Colorado sales tax statutes and regulations as criteria, the Colorado Court of Appeals agreed with the Colorado Board of Assessment Appeals (BAA) that long term extended stays constituted a residential use and that a mixed-use classification and allocation of actual value to residential and nonresidential assessment classifications is appropriate.

Manor Vail Condominium Assoc. v. Board of Equalization of the County of Eagle, et al., 956 P.2d 654 (Colo. App. 1998).

In its decision, the court stated that “The statutory scheme [expressed in §§ 39-1-102(14.3) and 103(9)(a), C.R.S.,] contemplates that a single building may have multiple uses, and in such cases, the building is to be apportioned and its portions classified according to their respective uses.”

Terminology Definitions

Mixed Use Property: a property that has an improvement that is used as a residential dwelling unit and is also used for any other purpose.

Hotel or Motel Property: for the purpose of these procedures, a hotel or motel property is defined as land and improvement(s) that are primarily used in providing lodging and which are predominantly used on an overnight or weekly basis.

Long Term or “Extended Stay”: a hotel or motel room designed for overnight accommodation that is leased or rented for thirty (30) consecutive days or longer by the same person or business entity. For the purpose of this procedure, the term “extended stay” will be used to reflect the lease or rental of sleeping room(s) for 30 days or longer.

Long Term or “Extended Stay” Revenue: revenue received by the hotel or motel that is paid for overnight accommodations that are leased or rented for 30 consecutive days or longer by the same person or business entity and that is exempt from the payment of sales tax to the Colorado Department of Revenue pursuant to § 39-26-704(3), C.R.S.

Short Term Stay: a hotel or motel room that is used for overnight accommodations and that is leased or rented for less than 30 consecutive days by the same person or business entity.

Short Term Stay Revenue: revenue received by the hotel or motel that is paid solely for overnight accommodations that are leased or rented for less than 30 consecutive days and that is subject to payment of Colorado sales tax to the Colorado Department of Revenue pursuant to § 39-26-704(3) , C.R.S.

Room Night: this term is defined in The Dictionary of Real Estate Appraisal, 2022, 7^th Edition, Appraisal Institute, as “In the lodging industry, a unit of demand that denotes one room occupied for one night by one or more individuals.” For these procedures, a room night constitutes a room or unit that is leased, rented, or occupied for one night.

Hotel/Motel Mixed-Use Allocation: the hotel or motel improvement that encompasses the overnight sleeping rooms and all other structures, improvements, and amenities directly related to the hotel or motel that are located on the same parcel as the hotel or motel improvement are subject to mixed-use classification.

Specifically excluded from mixed-use classification are buildings, structures, and amenities located on separate parcels that are not directly related to providing overnight accommodations, e.g., golf courses, tennis courts, riding stables.

The parcel of land underlying the mixed-use hotel or motel improvement is also subject to allocation. However, land underlying any excluded structures or improvements is not subject to mixed-use allocation.

Residential or Commercial Allocation Percentages: the percentage to be applied to the total value of the land and improvements of the hotel or motel property to arrive at the percentage of value to be classified as residential or commercial property and assessed at the appropriate assessment rate.

Allocation of Mixed-Use Hotel/Motel Property

Allocation of hotel or motel property values can be done in one of two ways:

Revenue Analysis Methodology
Room Night Analysis Methodology

Each of these methodologies is discussed below.

Revenue Analysis Methodology

This technique determines an allocation percentage as follows:

Residential Revenue Percentage = Attributable to Long Term “Extended” Stays ÷ Total Revenue Attributable to Room Accommodations

To use this formula, revenue attributable to both short term and long term (extended stays) occupancy for the previous calendar year must be obtained from the taxpayer.

An example of the rooms revenue analysis methodology is shown below:

Total revenue received from all sleeping rooms $500,000
Total revenue received from extended stay rooms* $100,000

* Extended stay rooms defined as overnight accommodations that are leased or rented for 30 consecutive days or longer by the same person or business entity.

Residential Revenue Percentage = Extended Stay Revenue $100,000 ÷ Total All Room Revenue $500,000 = 0.20 or 20%

Taxpayers are encouraged to isolate actual revenue amounts attributable to room accommodations from other revenue sources. For example, a hotel or motel may have one or more revenue sources or “categories”:

Rooms revenue
Food and Beverage revenue
Telephone revenue
Equipment rental revenue (e.g., audio-visual equipment, fax machines)
Other Miscellaneous revenue and lease income
Revenue from recreational amenities (e.g., golf courses, tennis courts)

Under the Revenue Analysis Methodology, only revenue attributable to sleeping room accommodations can be used to calculate mixed-use assessment percentages.

Room Night Analysis Methodology

The Room Night Analysis Methodology is available for use when revenue information attributable to room accommodations is not available or when the taxpayer is unable to isolate extended stay room revenue from total revenue received by the hotel or motel. Information necessary to use this methodology is listed below:

Total number of room nights
The total number of room nights attributable to extended stays rooms

It is likely that all of the above numbers will have to be calculated by the taxpayer before being given to the assessor.

Total Number of Room Nights

For the preceding calendar year, the hotel or motel must calculate the total number of room nights, i.e., the total number of rooms that were rented or leased during the year.

Total Number of Room Nights Attributable to Extended Stay Use

The hotel or motel management must determine this number. It is calculated by adding together the number of room nights each room was leased or rented for extended stay purposes. The total of all nights used for extended stay purposes is termed extended stay room nights.

The allocation percentage is calculated as shown below:

Residential Revenue Percentage = Extended Stay Room nights 1,540 ÷ Total Room nights 7,700 = 0.20 or 20%

Appropriate Allocation Methodology

It is recommended that the assessor use that methodology wherein the most complete and reliable data exists.

Application of Mixed-Use Percentage

Pursuant to § 39-1-103(9), C.R.S., the actual value of both the land and improvement components of a parcel of mixed-use property are subject to allocation.

Application of the mixed-use percentage should be done in the following manner:

Land Value	$200,000
Hotel or Motel Improvement Value	$1,800,000
Total Value of Property	$2,000,000

Residential Allocation Percentage = Extended Stay Room nights $50,000 ÷ Total All Room Revenue $250,000 = 0.20 or 20%

	Land	Improvement
	$200,000	$1,800,000
Residential allocation %	x 0.20	x 0.20
Residential AV allocation	$40,000	$360,000

	Land	Improvement
	$200,000	$1,800,000
Comm’l allocation % (1.00 -0.20)	x 0.80	x 0.80
Commercial AV allocation	$160,000	$1,440,000

Hotel and Motel Mixed-Use Questionnaire

The Division has developed a Hotel and Motel Mixed-use Questionnaire to enable assessors to obtain necessary information to calculate the mixed-use allocation percentage. Information regarding its use has been included at the top of questionnaire. See Addendum 7-A, Hotel or Motel Mixed-Use Questionnaire.

In lieu of completing the questionnaire, the hotel or motel owner and/or operator may attach spreadsheets or other documentation in support of the numbers and revenue amounts requested by the questionnaire.

The Division recommends that the assessor identify all hotel and motel properties that are likely to be subject to mixed-use classification and annually provide them a questionnaire as soon as practicable after January 1.

Auditing of Taxpayer Documentation

Pursuant to § 39-5-115, C.R.S., the assessor may request additional documentation regarding the extent of extended stay room usage experienced during the preceding calendar year.

Persons and businesses that lease or rent one or more rooms for an extended period generally will execute a long-term rental agreement with the hotel or motel to “set-aside” rooms for periodic use over an extended period of time. Regardless of actual occupancy, rooms leased or rented for 30 days or more qualify as extended stay rooms and revenue received pursuant to this lease should be considered extended stay revenue.

To document room night calculations, assessors may have to physically review completed room registrations and compare them against room occupancy documentation supplied by the hotel or motel operator.

In addition, the hotel or motel may have internal documentation and/or spreadsheets available for inspection that support revenue information or room nights claimed.

Mixed-Use Classification Analysis

Review of the mixed-use classification for hotels and motels must be done on an annual basis to ascertain the extent of residential use. Each year, a hotel or motel property should be classified as commercial property unless documentation exists to support classification as mixed-use property.

Mixed-Use Allocation of a Hotel/Motel Property

Example #1 – Hotel Property:

Eaglecrest Suites is a suburban hotel that operates as both an overnight and extended stay lodging facility. Also located on the same parcel is an adjacent parking structure that is used in conjunction with the hotel.

The assessor has determined the following value for the current assessment year:

Land Value	$500,000
Hotel Improvement Value	5,500,000
Parking Structure	1,400,000
Total Actual Value	$7,400,000

Allocation Information Supplied by Taxpayer

Revenue and room night information supplied by the taxpayer for the previous calendar year is listed below:

Total revenue (accommodations only) $8,000,000
Short term revenue $6,000,000
Extended stay revenue $2,000,000

The above amounts were obtained from the Hotel and Motel Mixed-Use Questionnaire and/or supporting documentation.

Obtained from the questionnaire and supporting documentation were room night counts as shown below:

Total number of rooms 150
Total room nights 41,062 (150 rooms x 365 nights/room x 0.75*)
Total extended stay room nights 12,775 (35** rooms x 365 nights/room)

* The hotel operated at 75% occupancy during the previous calendar year.

** The hotel designated 35 rooms for extended stay use and they were 100% leased or rented during the previous calendar year.

Mixed-use Percentage Calculation and Allocation of Actual Value

Calculation of the mixed-use allocation percentage using both the Revenue Analysis Methodology and Room Night Analysis Methodology is shown below:

Long Term (Extended Stay) Revenue $2,000,000 ÷ Total Revenue from Accommodations $8,000,000 = 0.25 or 25%

Total Extended Stay Room nights 12,775 ÷ Total Room nights 41,062 = 0.31 or 31%

Because actual revenue attributable to both total and extended stay accommodations was available from taxpayer’s records, the Revenue Allocation Methodology was relied upon by the assessor to determine the applicable mixed-use value allocation percentage.

Land Value	$500,000
Hotel Improvement Value	$5,500,000
Parking Structure	$1,400,000
Total Actual Value	$7,400,000

Actual Value (AV) Allocation

	Land	Improvement
	$500,000	$6,900,000*
Residential allocation %	x 0.25	x 0.25
Residential AV allocation	$125,000	$1,725,000

	Land	Improvement
	$500,000	$6,900,000*
Comm’l allocation % (1.00 -0.25)	x 0.75	x 0.75
Commercial AV allocation	$375,000	$5,175,000

*In the judgment of the assessor, the parking garage is directly related to providing overnight room accommodations and, as such, should have its value included for mixed-use allocation.

Example #2 – Resort Property (with tennis courts, stables, and a golf course)

Indian Peaks Resort is a destination resort facility that caters both to summer and winter tourists. The resort and associated amenities are located on three parcels:

Parcel #1 - Hotel facility w/ restaurant and conference meeting rooms on two (2) acres of land

Parcel #2 - Stables, tennis courts, and 20 acres open space

Parcel #3 - 27 hole Golf Course with 10 acres open space

The assessor has determined actual values for the parcels as follows:

Parcel #1

Land Value	$575,000
Hotel Building	3,252,000
Associated Improvements	100,000
Total Value of Parcel #1	$3,927,000

Parcel #2

Land Value	$1,500,000
Stable Improvements	350,000
Land Improvements	200,000
Total Value of Parcel #2	$2,050,000

Parcel #3

Land Value	$1,800,000
Gold Course Land Imps.	2,100,000
Golf Course Imps.	300,000
Total Value of Parcel #3	$4,200,000

Information Supplied by Taxpayer

Revenue Analysis: Working with the accounting staff for the resort, the assessor and taxpayer were able to develop the following previous calendar year’s revenue listed by revenue category:

Hotel Facility - Accommodations

Revenue from Long Term (Extended) Stays	$580,000
Revenue from Short Term Stays	1,980,000
Total Accommodations Revenue	$2,560,000

Hotel Facility – Other Revenue

Restaurant Revenue	$240,000
Meeting Room Revenue	180,000
Total Hotel Revenue	$2,980,000

Stable & Tennis Courts
Total Revenue $ 150,000

Golf Course
Total Revenue $ 980,000

Room Night Analysis: The taxpayer was unable to provide room night amounts due to lack of specific room occupancy information for the entire calendar year.

Calculation and Allocation of Actual Value

Based on a review of the resort operations by the assessor, only the hotel improvements that encompass the overnight sleeping rooms and the other associated improvements on Parcel #1 are directly related to providing overnight accommodations. As such, only the value of Parcel #1 is subject to mixed-use allocation. The land and improvements on parcels #2 and #3 should be classified as commercial property and assessed accordingly.

Calculation of the mixed-use percentage and allocation of total actual value of Parcel #1 to
residential and commercial classifications is shown below:

Long Term (Extended Stay) Revenue $580,000 ÷ Total Revenue from Accommodations $2,560,000 = 0.23 or 23%

Actual Value (AV) Allocation

	Land	Improvement
	$575,000	$3,352,000*
Residential allocation %	x 0.23	x 0.23
Residential AV allocation	$132,250	$770,960

	Land	Improvement
	$575,000	$3,352,000*
Comm’l allocation % (1.00 -0.20)	x 0.77	x 0.77
Commercial AV allocation	$442,750	$2,581,040

* In the judgment of the assessor, the Associated Improvements are directly related to providing overnight room accommodations and, as such, should have its value included for mixed-use allocation.

Bed and Breakfast Properties

A bed and breakfast (B&B) is a unique, mixed-use property that is classified, valued and assessed under specific statutes. Statutes also specify how the actual value of a bed and breakfast property is allocated between residential and commercial property classifications for application of the appropriate assessment rate.

Colorado Statutory References

The following statutory definitions are considered when appraising bed and breakfast
properties.

Definitions.
As used in articles 1 to 13 of this title, unless the context otherwise requires:
(2.5) "Bed and breakfast" means an overnight lodging establishment, whether owned by a natural person or any legal entity, that is a residential dwelling unit or an appurtenance thereto, in which the innkeeper resides, or that is a building designed but not necessarily occupied as a single family residence that is next to, or directly across the street from, the innkeeper’s residence, and in either circumstance, in which:
(a) Lodging accommodations are provided for a fee;
(b) At least one meal per day is provided at no charge other than the fee for the lodging accommodations; and
(c) There are not more than thirteen sleeping rooms available for transient guests.
(3.1) "Commercial lodging area" means a guest room or a private or shared bathroom within a bed and breakfast that is offered for the exclusive use of paying guests on a nightly or weekly basis. Classification of a guest room or a bathroom as a "commercial lodging area" shall be based on whether at any time during a year such rooms are offered by an innkeeper as nightly or weekly lodging to guests for a fee. Classification shall not be based on the number of days that such rooms are actually occupied by paying guests.
(5.6) "Hotels and motels" as defined in subsection (5.5) of this section shall not include bed and breakfasts.
(7.1) “Innkeeper” means the owner, operator, or manager of a bed and breakfast.
(14.4)(a)
(I) “Residential land” means a parcel of land upon which residential improvements are located. The term also includes:
(A) Land upon which residential improvements were destroyed by natural cause after the date of the last assessment as established in section 39-1-104 (10.2);
(B) Two acres or less of land on which a residential improvement is located where the improvement is not integral to an agricultural operation conducted on such land; and
(C) A parcel of land without a residential improvement located thereon, if the parcel is contiguous to a parcel of residential land that has identical ownership based on the record title and contains a related improvement that is essential to the use of the residential improvement located on the identically owned contiguous residential land.
(II) “Residential land” does not include any portion of the land that is used for any purpose that would cause the land to be otherwise classified, except as provided for in section 39-1-103 (10.5).
(III) As used in this subsection (14.4):
(A) “Contiguous” means that the parcels physically touch; except that contiguity is not interrupted by an intervening local street, alley, or common element in a common-interest community.
(B) “Related improvement” means a driveway, parking space, or improvement other than a building, or that portion of a building designed for use predominantly as a place of residency by a person, a family, or families.
§ 39-1-102, C.R.S.

Actual value determined - when.
(10.5) (a) The general assembly hereby finds and declares that bed and breakfasts are unique mixed-use properties; that all areas of a bed and breakfast, except for the commercial lodging area, are shared and common areas that allow innkeepers and guests to interact in a residential setting; that the land on which a bed and breakfast is located and that is used in conjunction with the
bed and breakfast is primarily residential in nature; and that there appears to exist a wide disparity in how assessors classify the different portions of bed and breakfasts.
(b) Therefore, notwithstanding any other provision of this article, a bed and breakfast shall be assessed as provided in this subsection (10.5). The commercial lodging area of a bed and breakfast shall be assessed at the rate for nonagricultural or nonresidential improvements. Any part of the bed and breakfast that is not a commercial lodging area shall be considered a residential improvement and assessed accordingly. The actual value of each portion of the bed and breakfast shall be determined by the application of the appropriate approaches to appraisal specified in subsection (5) of this section. The actual value of the land containing a bed and breakfast shall be determined by the application of the appropriate approaches to appraisal specified in subsection (5) of this section. The land containing a bed and breakfast shall be assessed as follows:
(I) The portion of land directly underneath a bed and breakfast shall be assessed pursuant to the procedures pertaining to land set forth in subsection (9) of this section.
(II) There shall be a rebuttable presumption that all remaining land shall be assessed as residential land. Such presumption shall only be overcome if there is a nonresidential use not reasonably associated with the operation of the bed and breakfast on some portion of the remaining land, in which case, such portion of the remaining land shall be assessed as nonresidential land.
(III) Subparagraphs (I) or (II) of this paragraph (b) shall not apply to agricultural land.
§ 39-1-103, C.R.S.

Actual value determined - when
(9)(a) In the case of an improvement which is used as a residential dwelling unit and is also used for any other purpose, the actual value and valuation for assessment of such improvement shall be determined as provided in this paragraph (a). The actual value of each portion of the improvement shall be determined by application of the appropriate approaches to appraisal specified in subsection (5) of this section. The actual value of the land containing such improvement shall be determined by application of the appropriate approaches to appraisal specified in subsection (5) of this section. The land containing such an improvement shall be allocated to the appropriate classes based upon the proportion that the actual value of each of the classes to which the improvement is allocated bears to the total actual value of the improvement. The appropriate valuation for assessment ratio shall then be applied to the actual value of each portion of the land and of the improvement.
(b) In the case of land containing more than one improvement, one of which is a residential dwelling unit, the determination of which class the land shall be allocated to shall be based upon the predominant or primary use to which the land is put in compliance with land use regulations. If multiuse is permitted by land use regulations, the land shall be allocated to the appropriate classes based upon the proportion that the actual value of each of the classes to which the improvements are allocated bears to the combined actual value of the improvements; the appropriate valuation for assessment ratio shall then be applied to the actual value of each portion of the land.
§ 39-1-103, C.R.S.

Definitions

The following definitions were developed to implement the provisions of §§ 39-1-102(2.5) and 39-1-103(10.5), C.R.S., regarding classification and valuation of bed and breakfast properties.

A bed and breakfast economic unit includes all land, improvements, and personal property that are used to provide overnight or weekly lodging accommodations. However, to be classified as a “bed and breakfast,” the operation must meet the statutory definition of a bed and breakfast property under § 39-1-102, C.R.S.

There may be separate ownership of property located next to, or directly across a street from, the bed and breakfast property that is used in conjunction with the operation of the bed and breakfast that are also included as part of the bed and breakfast economic unit.

Example of a bed and breakfast economic unit:

There are two properties located across the street from one another that are operated together as a bed and breakfast facility. The bed and breakfast operator owns one property and has a lease to use the other in conjunction with the bed and breakfast. The combined properties serve as one economic unit and comply with the statutory definition of a bed and breakfast property under § 39-1-102(2.5), C.R.S. The facility qualifies for bed and breakfast allocation of its residential and commercial portions. For assessment purposes, the appropriate residential and commercial allocations are applied to each property.

Commercial lodging area means a guest room or a private or shared bathroom within a bed and breakfast that is offered for the exclusive use of paying guests on a nightly or weekly basis. Classification of a guest room or a bathroom as a “commercial lodging area” shall be based on whether at any time during a year such rooms are offered by an innkeeper as nightly or weekly lodging to guests for a fee. Classification shall not be based on the number of days that such rooms are actually occupied by paying guests.

An innkeeper means the owner, operator, or manager of a bed and breakfast property.

A mixed-use property means a property that has portions of the property with a residential
and nonresidential use.

Footprint refers to the land underlying the bed and breakfast improvement. The size of the footprint is based on the exterior measurement of the area of the mixed-use structure(s). The actual value of the footprint is allocated based on the same allocation percentages used to allocate the bed and breakfast improvement. For bed and breakfast improvements on land classified as part of a farm or ranch, as defined in § 39-1-102(3.5) or (13.5), C.R.S., both the footprint and any remaining land is classified and valued as agricultural land as defined in § 39-1-102(1.6), C.R.S.

Residential area for bed and breakfast property classification and valuation purposes means the remaining finished area in the bed and breakfast improvement(s) after subtracting the total commercial lodging area. Residential area may include finished below grade area that is not included as commercial lodging area. Support structures such as garages and sheds are also assessed as residential property.

Assessment Process

In the assessment of bed and breakfast properties, the assessors must use the following three (3) step process:

Classification
Valuation
Allocation

Bed and Breakfast Classification

A bed and breakfast is a type of overnight lodging establishment as defined by Colorado law § 39-1-102(2.5), C.R.S., (quoted previously).

To be considered for this class, the property must first qualify based on one of the following two scenarios:

A property can be considered for B&B classification if it is used for overnight lodging AND the innkeeper resides on the property, regardless of whether or not the property was originally designed as a single family home. An example of this would be a small apartment house that has been converted to overnight lodging. The key criterion in this situation is that the innkeeper must reside on the property, or
A property can be considered for B&B classification if it was designed as a single family residence, such as an old mansion or large house that was once a family home and it is now being used for lodging. In this situation, the innkeeper may reside in the property, or may reside next door or directly across the street.

The difference between these two situations is as follows:

If the property was NOT originally designed as a residence, the innkeeper must reside on the property.
If the property was originally designed as a residence, the innkeeper may reside there but also may reside either next door or directly across the street.

In addition to the occupancy requirements described above, a property must meet ALL of the
following criteria to be classified as a B&B:

Lodging accommodations are provided for a fee; and
At least one meal per day is provided at no charge other than the fee for the lodging accommodations; and
There are not more than thirteen (13) sleeping rooms available for transient guests.

See ARL Volume 2, Administrative and Assessment Procedures, Chapter 6, Property Classification Guidelines and Assessment Percentages, for corresponding information regarding the classification of these properties.

Valuation of Bed and Breakfast Properties

Valuation of a bed and breakfast property requires that all three (market, cost, and income) approaches to value be considered.

Market (Sales Comparison) Approach

The primary method of valuation for bed and breakfast properties is the market approach to appraisal. Comparable sales are analyzed and adjusted to arrive at an estimate of value for the subject property.

Sales of bed and breakfast properties should be analyzed using a unit of comparison such as square footage or number of rooms.

Example:

The subject bed and breakfast property has 2,800 square feet of finished area and six (6) guest rooms.

Sales of bed and breakfasts within the county are listed as follows:

Sale #	Sale Price	Size	# of Guest Rooms
1	$120,000	2,000 SF	4
2	$225,500	4,100 SF	9
3	$320,000	6,100 SF	11

Both the price per square foot and price per guest room are calculated and analyzed.

Sale #	Sale Price per SF	Sales Price per Guest Room
1	$120,000/2,000=$60/SF	$120,000/4 =$30,000
2	$225,500/4,100=$55/SF	$225,500/9 =$25,056
3	$320,000/6,100=$52/SF	$320,000/11=$29,091

In this example the subject is most similar to sales 1 and 2. Based on the above data, a per square foot rate of $57 is indicated and a per guest room rate of approximately $27,000/room is indicated. As illustrated below, the estimates lead to similar values for the subject.

2,800 SF x $57 per SF = $159,600
6 guest rooms x $27,000 = $162,000

Indicated Value for the Subject = $161,000

If an insufficient number of arms-length bed and breakfast property sales exist within the county, two other sources of sales data are considered:

For single-improvement bed and breakfast properties, analysis of single-family residential sales having comparable location and physical characteristics is suggested. Adjustments to the comparable sales are made to account for any additional bedrooms, bathrooms, and other physical characteristics that are normally found in a typical bed and breakfast property.
Sales of bed and breakfast properties located within other Colorado counties that have comparable location and physical amenities may be considered. The overall economic conditions between the county with the subject bed and breakfast and the counties selected with comparable bed and breakfasts should be comparable.

When using the market (sales comparison) approach, the appraiser should be aware that most bed and breakfast properties routinely sell with personal property in place. Included in the sales price may be items such as furniture, fixtures, and equipment (FF&E). The market value of the items is estimated and necessary adjustments are made to the comparables sale prices prior to analysis. The process removes the value of the non-realty items from the comparables sale prices.

The following appraisal sources contain information regarding the basic steps of the market approach.

Chapter 8 - “The Sales Comparison Approach to Value,” Property Assessment Valuation, Third Edition, published by the International Association of Assessing Officers, Kansas City, Missouri, 2010

Chapters 18 through 20 - “The Sales Comparison Approach,” “Comparative Analysis,” and “Applications of the Sales Comparison Approach,” The Appraisal of Real Estate, Fourteenth Edition, published by the Appraisal Institute, Chicago, Illinois, 2013

Cost Approach

The cost approach may be considered for the valuation of the non-residential portions of the bed and breakfast property.

The following appraisal sources contain information regarding the basic steps of the cost approach.

Chapter 9 and 10 - “The Cost Approach to Value: Cost Estimation” and “The Cost Approach to Value: Depreciation,” Property Assessment Valuation, Third Edition, published by the International Association of Assessing Officers, Kansas City, Missouri, 2010

Chapters 27 through 29 – “ Land and Site Valuation,” “The Cost Approach,” “Building Cost Estimates,” and “Depreciation Estimates,” The Appraisal of Real Estate, Fourteenth Edition, published by the Appraisal Institute, Chicago, Illinois, 2013

Income Approach

The income approach may be considered for the valuation of the non-residential portion of the bed and breakfast property. However, this approach may have limited applicability due to any of the following reasons:

There is usually scarce bed and breakfast income data available from the marketplace for the appraiser to analyze and derive market rates or economic net income estimates.
Although the appraiser may be able to calculate the potential gross income and vacancy rates for a bed and breakfast property, the expenses attributable to the non-residential portion are difficult to determine. This is due, in part, to the fact that many of the expenses are incurred for the entire property. For example, the utilities (heat, water, electric, and phone), laundry costs, repairs and maintenance, insurance, etc. are expenses that apply to both the residential and the non-residential portions of the property.
In many cases, purchasers of bed and breakfast properties do not purchase the property solely for its “return” (income-generating ability) on the investment.
Many bed and breakfast properties are only open part of the year and revert to private residential use when they are not available for rental. Another factor in the operation of bed and breakfast properties is the significant amount of personal property, including furniture and equipment that is required for its operation.

Although analysis of income and expense levels between bed and breakfast properties might be a useful technique to measure comparability in the market approach, the traditional capitalization of income approach is the least reliable method of valuation for the nonresidential portion of bed and breakfast properties.

Allocation of Bed and Breakfast Properties
After the actual value of the bed and breakfast property is determined, the value is allocated, based on a percentage, into residential and commercial property classifications for application of the appropriate assessment rates. The three components of the total property actual value that are considered include: improvement(s), footprint, and all other land considered part of the bed and breakfast economic unit.

Allocation of the Actual Value of the Improvement(s)
The allocation for the commercial lodging classification is based on the amount of total commercial lodging area available divided by the total finished improvement area. Only the bedrooms and bathrooms available for lodging guests are designated as commercial lodging area. All other finished area in the improvement(s) is classified as residential.

Example:

10,000 SF Total Finished Improvement Area – 2,000 SF Total Commercial Lodging Area = 8,000 SF ÷ 10,000 SF Total Finished Improvement Area = 0.80 Residential Allocation in Decimal Form

2,000 SF Total Commercial Lodging Area ÷ 10,000 SF Total Finished Improvement Area = 0.20 Commercial Lodging Allocation in Decimal Form

Allocation of the Actual Value of the Footprint (Land Directly Underneath the Bed and Breakfast Improvement or Improvements) Allocation of the actual value of the footprint to commercial and residential classifications is based on the same percentage that is applied to the bed and breakfast improvement(s). An exception is land underlying an agricultural residence. In this case, the land classification and valuation is based on the predominant agricultural land class.

Allocation of Other Land Considered as Part of the Bed and Breakfast Economic Unit By statute, there is a rebuttable presumption that all remaining land other than the footprint is assessed as residential. Such presumption can be overcome only if there is a nonresidential use not reasonably associated with the operation of the bed and breakfast on some portion of the remaining land. In this case, the land that is considered part of the use unrelated to the bed and breakfast operation is assessed as nonresidential property.

Examples of Bed and Breakfast Allocation

The following examples illustrate the step-by-step procedures for allocating values of bed and breakfast properties that have either only a single bed and breakfast improvement or more than one bed and breakfast improvement. The properties used in the examples have been classified as bed and breakfast properties and valued considering the appropriate approaches to value.

Example 1 - Single Bed and Breakfast Improvement

The subject property is a two-story residence converted and expanded to operate as a bed and breakfast. The total finished area on each floor is 2,500 square feet. There are a total of seven sleeping rooms and associated bathrooms that are offered for the use of paying guests. On each above grade level there are three guest bedrooms, each with its own private bathroom. There is also a 500 square foot finished basement that contains a guest room and bathroom. The bed and breakfast is located on a two acre parcel of land. All measurements reflected below are based on exterior dimensions.

Areas in the Bed and Breakfast Improvement by Classification:

Residential Area:

Finished 1st floor 1,300 SF
Finished 2nd floor 1,300 SF

Commercial Lodging Area:

Finished 1st floor; 3 bedrooms and 3 bathrooms	1,200 SF
Finished 2nd floor; 3 bedrooms and 3 bathrooms	1,200 SF
Finished Basement; 1 bedroom and 1 bathroom	+ 500 SF
Total Finished Improvement Area	5,500 SF

Property Values:

Footprint Value of the Land	$2,875
Value of the Other Land	97,313
Total Improvement Value	+ 550,000
Total Actual Value of Bed and Breakfast Property	$650,188

Steps for Allocation

Step #1 Use the total finished area from the bed and breakfast improvement to determine the residential versus commercial lodging allocation to apply to the property values.

Total Finished Improvement Area 5,500 SF – Total Commercial Lodging Area 2,900 SF = Total Area Allocated as Residential 2,600 SF ÷ Total Finished Improvement Area 5,500 SF = Residential Allocation in Decimal Form 0.47

Total Commercial Lodging Area 2,900 SF ÷ Total Finished Improvement Area 5,500 SF = Commercial Lodging Allocation in Decimal Form 0.53

The sum of the residential and commercial lodging allocations in decimal form must total 1.0 (100 percent).

Determination of residential versus commercial lodging use is based on information provided by the owner and verified by the assessor. Classification of a guest room or a bathroom as a “commercial lodging area” is based on whether at any time during a year such rooms are offered by an innkeeper as nightly or weekly lodging to guests for a fee, as defined by § 39-1-102(3.1), C.R.S. In the absence of information provided by the owner, the assessor may use best information available, comparable property information, and reasonable judgment in assigning classifications to the improvement.

Step #2 Use the area allocations (in decimal form) to derive the class allocation for the bed and breakfast improvement. Allocate the value of the footprint to the appropriate classification based upon the same allocation percentages as the improvement. Add the residential footprint value of the land to the value of the other land to calculate the total residential land value.

Allocation of the $550,000 Improvement Value

Total Improvement Value $550,000 x Residential Allocation in Decimal Form 0.47 = Total Residential Improvement Value $258,500

Total Improvement Value $550,000 x Commercial Lodging Allocation in Decimal Form 0.53 = Total Commercial Improvement Value $291,500

Allocation of the $100,188 Land Value

Footprint Value of the Land $2,875 x Residential Allocation in Decimal Form 0.47 = Residential Footprint Value of the Land $1,351 + Value of the Other Land 97,313 = Total Residential Land Value $ 98,664

Footprint Value of the Land $2,875 x Commercial Lodging Allocation in Decimal Form 0.53 = Total Commercial Land Value $1,524

The sum of the residential and commercial improvement values equals the total value assigned to the bed and breakfast improvement. The sum of the residential and commercial land values equals the total value assigned to the land.

Step #3 Sum the land and improvement values for each classification so that the appropriate assessment rate may be applied.

Total Residential Improvement Value $258,500 + Total Residential Land Value 98,664 = Total Residential Actual Value $357,164

Total Commercial Improvement Value $291,500 + Total Commercial Land Value 1,524 = Total Commercial Actual Value $293,024

Step #4 Sum the total residential and total commercial actual values to ensure that the total actual value of the bed and breakfast property has been allocated.

Total Residential Actual Value $357,164 + Total Commercial Actual Value 293,024 = Total Actual Value of the Property $650,188

Example 2 - More Than One Bed and Breakfast

The subject is a bed and breakfast property with two separate two-story improvements that are located on the same three acre parcel of land. Each of the two-story improvements contains three bedrooms and three bathrooms that are used for paying guests.

Areas in Each Bed and Breakfast Improvement by Classification:

Improvement #1

Residential Area:

Finished 1st floor; 1 bathroom, kitchen, and dining area 1,200 SF
Finished 2nd floor; 1 bedroom and 1 bathroom, hall, and study 1,000 SF
Finished basement 600 SF

Commercial Lodging Area:

Finished 1st floor; 2 bedrooms and 2 bathrooms 800 SF + Finished 2nd floor; 1 bedroom and 1 bathroom 500 SF = Total Finished Area for Improvement #1 4,100 SF

* Note: The 400 SF enclosed unfinished sunroom is not included in the calculation.

Improvement #2

Residential Area:

Finished 1st floor; 1 bathroom, library, and den area 1,200 SF
Finished 2nd floor; hallway 200 SF

Commercial Lodging Area:

Finished 1st floor; 1 bedroom and 1 bathroom 400 SF + Finished 2nd floor; 2 bedrooms and 2 bathrooms 700 SF = Total Finished Area for Improvement #2 2,500 SF

* Note: The 450 SF unfinished basement and 300 SF enclosed unfinished deck are not included in the calculation.

Total Finished Area for Improvement #1 4,100 SF + Total Finished Area for Improvement #2 2,500 SF = Total Finished Improvement Area 6,600 SF

Property Values:

Footprint Value of the Land under Improvement #1	$2,300
Footprint Value of the Land under Improvement #2	1,840
Value of the Other Land	146,142
Total Improvement #1 Value	410,000
Total Improvement #2 Value	+ 250,000
Total Actual Value of Bed and Breakfast Property	$810,282

Steps for Allocation

When a bed and breakfast property utilizes more than one improvement as a part of the bed and breakfast economic unit, the total finished area in all bed and breakfast improvements is considered in the allocation process. The improvement allocation is made based upon the amount of finished area used for each classification, and it is applied to the total improvement value and the value of the footprint. The value of the remaining land is then added back into the residential land allocation.

For bed and breakfast properties that have more than one parcel used in conjunction as a part of the bed and breakfast economic unit, similar allocation steps are applied.

Step #1 Use the total finished area from all bed and breakfast improvements that are used as a part of the bed and breakfast economic unit to determine the residential versus commercial lodging allocation to apply to the property values.

Total Finished Improvement Area 6,600 SF – Total Commercial Lodging Area 2,400 SF = Total Area Allocated as Residential 4,200 SF ÷ Total Finished Improvement Area 6,600 SF = Residential Allocation in Decimal Form 0.64

Total Commercial Lodging Area 2,400 SF ÷ Total Finished Improvement Area 6,600 SF = Commercial Lodging Allocation in Decimal Form 0.36

The sum of the residential and commercial lodging allocations in decimal form must total 1.0 (100 percent).

Only finished improvement areas from each bed and breakfast improvement that are used as a part of the bed and breakfast economic unit is considered in the allocation formula.

Determination of residential versus commercial lodging use is based on information provided by the owner and verified by the assessor. Classification of a guest room or a bathroom as a “commercial lodging area” shall be based on whether at any time during a year such rooms are offered by an innkeeper as nightly or weekly lodging to guests for a fee, as defined by § 39-1-102(3.1) C.R.S. In the absence of information provided by the owner, the assessor may use best information available, comparable property information, and reasonable judgment in assigning classifications to the improvement.

Step #2 Use the area allocations (in decimal form) to derive the class allocation for the bed and breakfast improvements. Allocate the footprint’s value of the land to the appropriate classification based upon the same allocation percentages as the improvements. Add the residential footprints value of the land to the value of the other land to calculate the total residential land value.

Allocation of the $660,000 Improvement Value

Total Improvement Value $660,000 x Residential Allocation in Decimal Form 0.64 = Total Residential Improvement Value $422,400

Total Improvement Value $660,000 x Commercial Lodging Allocation in Decimal Form 0.36 = Total Commercial Improvement Value $237,600

Allocation of the $150,282 Land Value

Footprint’s Value of the Land $4,140 x Residential Allocation in Decimal Form 0.64 = Residential Footprint’s Value of the Land $ 2,650 + Value of the Other Land 146,142 = Total Residential Land Value $148,792

Footprint’s Value of the Land $ 4,140 x Commercial Allocation in Decimal Form 0.36 = Total Commercial Land Value $ 1,490

The sum of the residential and commercial improvement values equals the total value assigned to the improvement. The sum of the residential and commercial land values equals the total value assigned to the land.

Step #3 Sum the land and improvement values for each classification so that the appropriate assessment rate may be applied.

Total Residential Improvement Value $422,400 + Total Residential Land Value 148,792 = Total Residential Actual Value $571,192

Total Commercial Improvement Value $237,600 + Total Commercial Land Value 1,490 = Total Commercial Actual Value $239,090

Step #4 Sum the total residential and total commercial actual values to ensure that the total actual value of the bed and breakfast property has been allocated.

Total Residential Actual Value $571,192 + Total Commercial Actual Value 239,090 = Total Actual Value of the Property $810,282

Condominiums, Timeshares, and Undivided Interest Properties

Statutory References

Definitions.
As used in articles 1 to 13 of this title, unless the context otherwise requires:
(5.5)(a) "Hotels and motels" means improvements and the land associated with such improvements that are used by a business establishment primarily to provide lodging, camping, or personal care or health facilities to the general public and that are predominantly used on an overnight or weekly basis; except that "hotels and motels" does not include:
(I) A residential unit, except for a residential unit that is a hotel unit;
(II) A residential unit that would otherwise be classified as a hotel unit if the residential unit is held as inventory by a developer primarily for sale to customers in the ordinary course of the developer's trade or business, is marketed for sale by the developer, and either has been held by the developer
for less than two years since the certificate of occupancy for the residential unit has been issued or is not depreciated under the internal revenue code, as defined in section 39-22-103 (5.3), while owned by the developer; or
(III) A residential unit that would otherwise be classified as a hotel unit if the residential unit has been acquired by a lender or an owners' association through foreclosure, a deed in lieu of foreclosure, or a similar transaction, is marketed for sale by the lender or owners' association and is not depreciated under the internal revenue code, as defined in section 39-22-103 (5.3), while owned by the lender or owners' association.
(b) If any time share estate, time share use period, undivided interest, or other partial ownership interest in any hotel unit is owned by any non-hotel unit owner, then, unless a declaration or other express agreement binding on the non-hotel unit owners and the hotel unit owners provides otherwise:
(I) The hotel unit owners shall pay the taxes on the hotel unit not required to be paid by the non-hotel unit owners pursuant to subparagraph (II) of this paragraph (b).
(II) Each non-hotel unit owner shall pay that portion of the taxes on the hotel unit equal to the non-hotel unit owner's ownership or usage percentage of the hotel unit multiplied by the property tax that would have been levied on the hotel unit if the actual value and valuation for assessment of the hotel unit had been determined as if the hotel unit was residential real property.
(III) For purposes of determining the amount due from any hotel unit owner or non-hotel unit owner pursuant to subparagraph (II) of this paragraph (b), the assessor shall, upon the request of any hotel unit owner or non-hotel unit owner, calculate the property tax that would have been levied on the hotel unit if the actual value and valuation for assessment of the hotel unit had been determined as if the hotel unit were residential real property. A hotel unit owner or non-hotel unit owner may petition the county board of equalization for review of the assessor's calculation pursuant to the procedures set forth in section 39-10- 114. Any appeal from the decision of the county board shall be governed by section 39-10-114.5.
(c) As used in this subsection (5.5):
(I) "Condominium unit" means a unit, as defined in section 38-33.3-103 (30), C.R.S., and also includes a time share unit.
(II) "Hotel unit owners" means any person or member of a group of related persons whose ownership and use of a residential unit cause the residential unit to be classified as a hotel unit.
(III) "Hotel units" means more than four residential unit ownership equivalents in a project that are owned, in whole or in part, directly, or indirectly through one or more intermediate entities, by one person or by a group of related persons if the person or group of related persons uses the residential units or parts thereof in connection with a business establishment primarily to provide lodging, camping, or personal care or health facilities to the general public predominantly on an overnight or weekly basis. "Hotel unit" means any residential unit included in hotel units. For purposes of this subparagraph (III):
(A) "Control" means the power to direct the business or affairs of an entity through direct or indirect ownership of stock, partnership interests, membership interests, or other forms of beneficial interests.
(B) "Related persons" means individuals who are members of the same family, including only spouses and minor children, or persons who control, are controlled by, or are under common control with each other. Persons are not related persons solely because they engage a common agent to manage or rent their residential units, they are members of an owners' association or similar
group, they enter into a tenancy in common or a similar agreement with respect to undivided interests in a residential unit, or any combination of the foregoing.
(IV) "Project" means one or more improvements that contain residential units if the boundaries of the residential units are described in or determined by the same declaration, as defined in section 38-33.3-103 (13), C.R.S.
(V) "Residential unit" means a condominium unit, a single family residence, or a townhome.
(VI) "Non-hotel unit owner" means any owner of a time share estate, time share use period, undivided interest, or other partial ownership interest in any hotel unit who is not a hotel unit owner with respect to the hotel unit.
(VII) "Residential unit ownership equivalent" means:
(A) In the case of time share units, time share interests or time share use periods in one or more time share units that in the aggregate entitle the owner of such time share interests or time share use periods to three hundred sixty-five days of use in any calendar year or three hundred sixty-six days of use in any calendar year that is a leap year; and
(B) In the case of residential units other than time share units, undivided interests or other ownership interests in one or more such residential units that total one hundred percent. For purposes of this sub-subparagraph (B), any undivided interest or other ownership interest not stated in terms of a percentage of total ownership shall be converted to a percentage of total ownership based on the rights accorded to the holder of the undivided interest or other ownership interest.
(VIII) "Time share unit" means a condominium unit that is divided into time share estates as defined in section 38-33-110 (5), C.R.S., or that is subject to a time share use as defined in section 12-10-501(4), C.R.S.
§ 39-1-102, C.R.S.

Definitions – construction of terms.
As used in this article, unless context otherwise requires:
(5.3) “Internal revenue code” means the provisions of the federal “Internal Revenue Code of 1986”, as amended, and other provisions of the laws of the United States relating to federal income taxes, as the same may become effective at any time or from time to time, for the taxable year.
§ 39-22-103, C.R.S.

Residential Criteria

Hotel and motels are defined to exclude condominiums, timeshares, and undivided interests in units used for lodging purposes if any of the following criteria exists:

The property is a residential unit, except if the residential unit is a hotel unit.
The property is a residential unit that would otherwise be classified as a hotel unit except that:
1. The unit is held as inventory by a developer primarily for sale in the ordinary course of the developer’s trade or business,
2. Is marketed for sale by the developer, and
3. Either has been held for less than two years since the certificate of occupancy (CO) was issued, OR is not depreciated under the Internal Revenue Code, as defined in § 39-22-103(5.3), C.R.S., while owned by the developer.
The property is a residential unit that would otherwise be classified as a hotel unit except that:
1. The unit has been acquired by a lender or an owners’ association through foreclosure, a deed in lieu of foreclosure, or a similar transaction,
2. The unit is marketed for sale by the lender or owners’ association AND is not depreciated under the internal revenue code, as defined in § 39-22-103(5.3), C.R.S., while owned by the lender or owners’ association.

When determining whether the residential classification is applied, there is no restriction on the number of residential units, as defined under § 39-1-102(5.5)(c)(V), C.R.S., or residential unit ownership equivalents, as defined under § 39-1-102(5.5)(c)(VII), C.R.S., that are owned by a developer, lender, or homeowner’s association even if they are used for lodging purposes so long as they meet any one of the three criteria listed above.

However, units that are used for lodging purposes and that are owned by any other parties, excluding developers, lenders, or homeowner’s associations, in whole or in part, directly, or indirectly through one or more intermediate entities, by one person or by a group of related persons may not exceed four (4) residential unit ownership equivalents in order to receive the residential classification.

Additional research to substantiate whether the property meets any of the above criteria could include:

Determination of the date when the certificate of occupancy was issued

If the units are in the developer’s inventory of properties to be sold for a period of less than two years since the certificate of occupancy was issued, they qualify as residential property.

The assessor must contact the local building department or appropriate city or county regulatory authority to determine the date final building inspections were completed and a certificate of occupancy (CO) for the unit(s) was issued. For counties that do not have a city or county building department, the Colorado Division of Housing, through its Hotel, Motel, and Multi-Family Dwelling Program, will complete necessary building inspections and issue a final certificate of occupancy.

In some instances, there may be a Temporary Certificate of Occupancy (TCO) issued allowing occupancy and use of the unit until remaining building inspection issues are remedied. TCOs may cover all or just selected units under development. If the unit is in the developer’s inventory and occupied pursuant to a TCO, the date the TCO is issued determines the start of the two-year time period that allows for residential classification of the specified units.
Determination as to whether the property is being marketed

The assessor should contact the developer, lender, or owners’ association to ascertain if the property is being marketed for sale to the general public. Copies of sales brochures, advertisements and/or listing agreements are evidence that the property is being marketed for sale.
Determination as to whether the property is being depreciated

Property(s) owned and marketed for sale by the developer, or if owned by a lender or owners’ association due to foreclosure or other similar transaction, is entitled to be assessed as residential property as long as the property(s) is not being depreciated in the books and records of the developer, lender, or owners’ association. The requirement does not apply to units that have been in a dealer’s inventory for a period less than two years after the certificate of occupancy or temporary certificate of occupancy was issued.

To ascertain whether a developer, lender, or owners’ association is depreciating a property or properties, the assessor may request a copy of the developer’s, lender’s, or owners’ association’s federal income tax return. Schedule L, found on Form 1065, U.S. Return of Partnership Income, or Form 1120, U.S. Corporation Income Tax Return, will list the value of the properties on line 3 – Inventories. In addition, the value of the properties cannot be included as depreciable assets in Schedule L, Line10a, Form 1065 or Form 1120.

The assessor may also request supporting documentation from the taxpayer’s internal books and records that describes and itemizes the asset costs included on line 3 and/or line 9 or 10a of the applicable tax return used by the developer, lender, or owners’ association.

At the discretion of the county assessor, the assessor may accept a signed affidavit from the developer, lender, or owners’ association stating that no depreciation has been taken on the properties that are marketed for sale.

For any time share estate, time share use period, undivided interest, or other partial ownership interest in any hotel unit that is owned by any non-hotel unit owner, Colorado statutes require the assessor, upon the request of any hotel unit owner or non-hotel unit owner, to calculate the property tax that would have been levied on the hotel unit if the actual value of the hotel unit was determined to be residential real property.

Because both land and improvement(s) of a condominium, timeshare, or undivided interest project are valued as a unit using the three approaches to value, the calculation is based on the projected taxes paid if the residential assessment rate is applied to the unit versus if the nonresidential assessment rate is applied.

For additional information regarding this requirement, refer to ARL Volume 2, Administrative and Assessment Procedures, Chapter 6, Property Classification Guidelines and Assessment Percentages.

Condominium Conversion Procedures

The Dictionary of Real Estate Appraisal, 7^th Edition, Appraisal Institute, 2022, defines “Condominium Conversion” as “Conversion of rental units (e.g., in residential, commercial, office, or industrial buildings) into condominium ownership.”

If a condominium conversion is created during an even numbered year (intervening) so that it is in existence on January 1 of an odd numbered year (revaluation), it is listed, appraised and valued for assessment the same as a new condominium ownership under § 39-1-105, C.R.S. (assessment date) and § 38-33-104, C.R.S. (assessment of condominium ownership). That is, the units are listed separately on the records of the assessor, and, the individual units are valued to the applicable level of value by the appropriate consideration of the cost, market, and income approaches to value.

If a condominium conversion is created during a revaluation year, so that it is in existence on January 1 of the intervening year, Colorado has specific law relating to the valuation of a conversion of a multiple-unit building into condominium ownership. It is included in the “unusual condition” portion of statute.

Valuation for assessment – definitions.
(11)(b)(II) The creation of a condominium ownership of real property by the conversion of an existing structure shall be taken into account as an unusual condition as provided for in subparagraph (I) of this paragraph (b) by the assessor, when at least fifty-one percent of the condominium units, as defined in section 38-33-103 (1), C.R.S., in a multiunit property subject to condominium ownership have been sold and conveyed to bona fide purchasers and deeds have been recorded therefore.
§ 39-1-104, C.R.S.

The statute specifies that in order to change the valuation method from the previous single ownership fee simple to valuing the condominium units on an individual basis, the following conditions must be met:

Fifty-one percent (51%) or more of the units must be sold
The units must be conveyed to bona-fide purchasers
The deeds must be recorded

It may be helpful to note that:

The units do not have to be in a single structure;
Use is not part of the criteria; it may be single or mixed use;
There is no distinction as to what type of building may be converted. It could be residential, office, commercial, industrial, or mixed use, or any other type of condominium conversion that may exist.

Because the above citation is from the unusual condition portion of statute, its application is only in an intervening year as shown below:

Example #1
A building was converted to condominium use during a revaluation year but had not achieved the 51% sellout threshold on January 1st of the intervening year. In order that any sold units would receive a proper tax billing, the individual units would be listed separately on the assessor’s records and tax warrant roll. However, it would continue to be valued as an apartment, office, or industrial use, at its bulk value for the intervening year. That value would be apportioned to the individual units.

On January 1st of the subsequent year, and for every year thereafter, the property would be valued on an individual condominium basis with no discount, regardless of how many units had been sold.

Example #2:
A fifty-unit apartment complex was converted to condominium use on August 30th of a revaluation year. The apartment complex has an overall value of $2,500,000 for the single tax schedule number. Twenty-four units have been sold to bona-fide purchasers and their deeds recorded by January 1st.

Because the 51% threshold has not been met, the $2,500,000 must be allocated among the fifty units.

In the subsequent year, and every year thereafter, the assessor should value the units on an individual condominium basis.

Example #3:
The same fifty unit apartment building mentioned above was able to sell, close and record the twenty-fifth and twenty-sixth units. It now exceeds the 51% threshold. All fifty units must be valued as individual condominiums.

General Valuation Procedures

Condominiums, timeshares, and undivided property interest units that are excluded from the definition of hotel or motel properties pursuant to § 39-1-102(5.5), C.R.S., are valued through appropriate consideration of the cost, market, and income approaches to appraisal. All land and improvement(s) of a condominium, timeshare, or undivided interest project are valued as a unit. Once the overall value of the project is established, determination of residential and nonresidential property classification occurs.

If the project has one or more units or other portions of the project that cannot be classified as residential, then the project is classified as a mixed-use property. The residential portion of the mixed-use property includes the units owned by the developer, lender, or owner’s association if acquired pursuant to foreclosure or other similar transaction, and any part of the project dedicated solely for the use of the residential unit owner. The commercial portion is all other property in the project not classified as residential.

If the condominium or timeshare declaration specifies that the commercial area is included as general common elements of the project, the total value of the project is extended to the residential units with a portion of the value being allocated to the commercial area and assessed at the commercial rate. If the condominium or timeshare declaration has separately described commercial unit(s), a portion of the project’s value is assigned to each commercial unit and the commercial assessment rate applied. For allocation procedures refer to Valuation Of Nonresidential Common Elements, in this chapter.

Nongaming Property in a Limited Gaming District

The use of sales and other valuation data from limited gaming real properties to value residential and other non-gaming real properties located within a limited gaming district is prohibited by § 39-1-103(18), C.R.S. Limited gaming real property, as paraphrased from § 39-1-103(18)(d), C.R.S., is defined as real property owned or leased by a holder of a retail gaming license pursuant to part 5 of article 47.1 of title 12, C.R.S., that is actually used for, or in conjunction with, limited gaming on the assessment date. Sales of limited gaming real property are only to be used to value other limited gaming real property.

In order to ensure an adequate number of sales and other valuation data to value residential and other non-gaming properties located within a limited gaming district, sales of reasonably comparable properties located inside and outside of any gaming district shall be considered in the valuation analysis.

Assessment of Possessory Interests

Purpose of the Procedures

The purpose of the procedures is to provide definitions of what constitutes a taxable possessory interest and how possessory interests are valued in accordance with Colorado Revised Statutes and Colorado case law. Although specific steps and valuation techniques are included as part of the procedures, proper use of the procedures is predicated on the county’s knowledge of how the property is being used and whether the user has significant incidents of private ownership to be taxable.

For the purpose of the procedures, the term “agreement” is presumed to mean any lease, permit, license, concession, contract, or other agreement between a governmental entity and a private party for the use and occupancy of the real and/or personal property owned by the government. Refer to the Discovery of Possessory Interests section of this chapter for suggested government entities.

The procedures do not apply to possessory interests in oil and gas leaseholds and lands, producing mines, mineral and quarry operations, equities in state lands, and public utility operations. Oil and gas leaseholds and lands are valued pursuant to article 7, title 39 of the Colorado Revised Statutes. Producing mines and excepted mineral and quarry operations of all types are valued pursuant to article 6 of title 39, C.R.S. and Chapter 6, Valuation of Natural Resources. Equities in state land are valued and subject to taxation pursuant to §§ 39-5-106 and 36-1-132, C.R.S. Public utility property is valued pursuant to article 4 of title 39, C.R.S.

Legal References

Colorado Supreme Court

The issue regarding the taxability of possessory interests evolved through a series of court decisions and legislation, culminating in the February 26, 2001, Colorado Supreme Court decision in Board of County Commissioners, County of Eagle, State of Colorado v. Vail Associates, Inc. et al and the Board of Assessment Appeals and Allen S. Black et al, v. Colorado State Board of Equalization, 19 P.3d 1263 (Colo. 2001). For the purpose of the procedures, the case will be referred to as the Vail Associates case.

By a 4 to 3 vote, the Colorado Supreme Court reversed the decision of the Colorado Court of Appeals in two cases, Vail Associates, Inc. v. Eagle County Board of County Commissioners, 983 P.2d 49 (Colo. App. 1998) and Black v. Colorado State Board of Equalization, No. 97CA1642 (Colo. App. December 24, 1998) (not selected for publication) and affirmed the taxable status of possessory interests.

Synopsis of the Colorado Supreme Court’s Ruling:

Vail Associates, Inc. operates the Vail Ski area under a special use permit from the U.S. Forest Service. Vail challenged Eagle County’s taxation of its interests in the federal property arguing that it could not be taxed because legislation (SB96-218) passed in 1996 by the Colorado Legislature prohibited taxation of possessory interests in property that is itself exempt from taxation. Because the United States’ ownership interest could not be taxed, Vail contended that its “possessory” ownership interests could not be taxed.

The Colorado Court of Appeals upheld the constitutionality of the 1996 legislation and ordered Eagle County to remove the assessment. Eagle County appealed, and the Colorado Supreme Court accepted certiorari to review the Court of Appeals’ decision consolidating its review with a separate case involving an order of the Colorado State Board of Equalization to remove possessory interest valuations in ten counties.

After reviewing the facts of both cases, the Colorado Supreme Court declared that the portions of the 1996 legislation that exempted possessory interests were unconstitutional because they created an exemption that did not fall within any of the exemption categories specified in the Colorado Constitution. In support of its ruling, the Colorado Supreme Court also held that exemption of possessory interests to be unconstitutional because the legislature selected some possessory interests for exemption, while continuing taxation for other possessory interests, such as mineral leases, in federal land.

The Colorado Supreme Court determined that Vail’s possessory interest in the federal property for its ski area is taxable real property under the general provisions of Colorado’s tax code. The court reversed the Court of Appeals’ decision and remanded it with instructions to return the case to the lower levels for further proceedings consistent with the court’s opinion.

In addition, the court stated on page 1279 of the reported decision, “For taxation to occur, the possessory interest in tax-exempt property must exhibit significant incidents of private ownership that distinguish it from the underlying tax-exempt ownership.” Also on page 1279, the court listed three factors for determining whether significant incidents of private ownership exist:

“These three factors are (1) an interest that provides a revenue-generating capability to the private owner independent of the government property owner; (2) the ability of the possessory interest owner to exclude others from making the same use of the interest; (3) sufficient duration of the possessory interest to realize a private benefit therefrom.”

Although § 39-3-136, C.R.S., was declared unconstitutional by the Colorado Supreme Court, the remaining section governing the valuation of possessory interests, § 39-1-103(17), C.R.S., is still intact.

The following additional court cases involve the classification, valuation and assessment of possessory interests.

Colorado Court Cases

Mesa Verde Company v. Montezuma County Board of Commissioners, et al., (aka Mesa Verde I), 178 Colo. 49, 495 P.2d 229 (Colo. 1972)

The court ruled that improvements within a national park are not exempt from possessory interest assessments when sufficient incidents of ownership exist that vest title in the taxpayer's name. Bare legal title vested to the United States for collateral security purposes is not conclusive evidence that the United States owns the property and is therefore exempt.

Mesa Verde Company v. Montezuma County Board of Equalization, et al., (aka Mesa Verde II), 831 P.2d 482 (Colo. App. 1992)

The court ruled that the county board of equalization and the county assessor lacked standing to challenge the constitutionality of exemptions established under property tax statutes, whatever interests they had in increasing tax revenues.

Mesa Verde Company v. Montezuma CBOE, et al., (Property Tax Administrator, Intervenor) (aka Mesa Verde III), 898 P.2d 1 (Colo. 1995)

The court ruled that Mesa Verde Company's use and possessory interest in the federal land where its concession is located is considered real property and is subject to the tax imposed by Montezuma County. The case also declared as unconstitutional the second sentence in § 39- 3-135(1) and all of (4)(c), C.R.S., because the limitations create an exemption from taxation that is not authorized by article X of the Colorado Constitution and is, therefore, illegal under section 6 of article X of the Colorado Constitution. In its decision, the Colorado Supreme Court noted that Mesa Verde's interest falls into none of the categories of exemptions from taxation authorized under the Colorado Constitution nor is it exempt from taxation pursuant to the supremacy clause of the United States Constitution.

Cantina Grill, JV, et al v. City and County of Denver Board of Equalization, 344 P.3d 870 (Colo. 2015)

Petitioners operated a food and beverage business at Denver International Airport. They were assessed a possessory interest value by Denver County. Petitioners argued that they did not have sufficient exclusivity because other concessionaires could sell similar food and beverages in other locations. The court disagreed stating that exclusivity is based on the ability of the interest holder to exclude others from the same use of the particular area it occupies. Furthermore, absolute control or exclusivity is not required nor does exclusivity entail the ability to exclude competition from other locations.

Petitioners also contended their possessory interests are not taxable because they do not provide a revenue generating capability that is independent of the government. In the Vail Associates case, the court said that a possessory interest is taxable only if “it provides a revenue-generating capability to the private owner independent of the government property owner.” The Court of Appeals had focused on the source of concessionaire’s revenue and concluded that because their revenue comes from the traveling public and not from the government this test of taxability is met. The Supreme Court then laid out a five step test for determining whether an interest holder’s revenue-generating capability is independent from the government. The court said you must look at “the totality of the circumstances” including: (1) whether the government pays a fee to the interest holder for its operating of the property in question; (2) whether the government controls the prices the interest holder can charge or restricts the profits the interest holder can generate; (3) whether the interest holder provides the supplies, equipment, and improvements necessary for the operation of the property; (4) whether the interest holder is responsible for the expense of maintaining and repairing the property; and (5) whether the interest holder has sufficient control and supervision of its operation.

The Court concluded: “Courts should apply the multi-factor test we lay out here to determine whether, under the totality of the circumstances, an interest holder’s revenue-generating capability is truly independent from the government.”

City and County of Denver v. Security Life & Accident Co., 173 Colo. 248 (December 1970)

The court ruled that the contemplated possessory interest assessment by the county must be authorized by a specific statute and not under the general authority of the Colorado Constitution.

Gillett, et al., v. Gafney, et al., 3 Colo. 351, (1877)

The court noted that from the first territorial legislature, Colorado defined any right to possess and enjoy the public domain to be “a chattel real possessing the legal character of real estate.”

United States v. Colorado (aka Rockwell case), 627 F.2d 217, (10th Cir.1980)

The court ruled that where a private company had a management contract with the United States for operating and managing a plant owned in fee simple by the United States, and had no lease, permit or license to the property in question, the tax imposed by the state of Colorado on the private company as “user” of the tax exempt property was in reality a tax on the property itself and, as such, barred under the doctrine of implied immunity.

Southern Cafeteria, Inc. v. Property Tax Administrator, et al., 677 P.2d 362, (Colo. App. 1983)

The court ruled in part that where a taxpayer operated a cafeteria business on federal government property under contract with the federal government, and the taxpayer exercised no incidents of ownership as to the property, levy of an ad valorem property tax was illegal, and the taxpayer was entitled to a refund. The fact that the federal government maintained control over the amount of profit taxpayer could realize, reserved the right to use the property when not being used by the taxpayer, and maintained and repaired the property used by the taxpayer supported the finding that the taxpayer had no incidents of ownership of the property.

Rummel v. Musgrave, 142 Colo. 249, 350 P.2d 825 (1960)

The court ruled that under Colorado Revised Statutes 137-5-4, (1953), the possessory and leasehold rights of private citizens in uranium claims on lands of the United States may be legally assessed by the state as long as no burden is placed on the United States by the tax in question.

Estes Park Toll Road Co. v. Edwards, 3 Colo. App. 74, 32 P. 549, (1893)

The court ruled that a toll company’s roadbed and right-of-way over public land is property and subject to taxation.

Out of State Court Cases

Service America Corp. v. County of San Diego, 15 Cal.App. 4th 1232, 19 Cal.Rptr. 2d 165, (Cal. App. 1993)

The court ruled that the right of a concessionaire to sell food and beverages at a sport stadium owned by a municipality is a taxable possessory interest. In the valuation of the possessory interest, the assessor must consider some form of imputed value to recognize a fair rental value of the property that excludes the non-taxable, enterprise business value portion of taxpayer’s possessory interest assessment.

Scott-Free River Expeditions, Inc., et al., v. County of El Dorado, et al., 203 Cal.App. 896, 250 Cal.Rptr. 504 (Cal. App. 3 Dist 1988)

The court ruled that the outfitters’ exclusive use of the river for commercial purposes constituted a valid property right subject to taxation; that the use of the river was not a constitutionally protected right free from taxation; that the article of the State Constitution guaranteeing public access as to the navigable waters of the state did not preclude assessment of the possessory interest tax; that the outfitters’ use of the river included requisite elements of exclusivity, durability and independence to constitute a taxable possessory interest; that the county was not required to inform outfitters that their exclusive commercial use of the river pursuant to the permit might constitute a taxable possessory interest; and that the imposition of the possessory interest tax on the outfitters’ use of the river did not constitute double taxation.

City of San Jose v. Carlson, 57 Cal.App. 4th, 1348, 67 Cal.Rptr.2d 719, (1997)

The court ruled that the user of public facilities does not always obtain a valuable private benefit whenever the general public does not share its use, but rather, the existence of a private benefit factor must be determined on a case-by-case basis when determining if the use of the public facilities is a taxable possessory interest.

Kaiser Co., Inc., v. Reid, County Tax Collector, et al., (United States, Intervenor), 30 Cal.2d 610, 184 P.2d 879 (Cal. 1947)

The court ruled that where the taxpayer was using shipbuilding facilities under contracts calling for construction of vessels in war time for a period of more than a year, provisions in the contracts for cancellation under certain circumstances did not establish that the taxpayer’s interest was a mere “permit” or “license” which would not be subject to a property tax on possessory interest in the land or the improvements.

Power Resources Cooperative v. Oregon Department of Revenue, 330 Or. 24, 996 P.2d 969 (Or. 2000)

The court ruled that the interest of an electrical cooperative in long distance power lines controlled by a federal agency was a possessory interest subject to taxation. The real and personal property of the United States was held for use by the cooperative allowing the property to come within the exception to the exemption of federal property from taxation. The court noted that property held for use is always marked by some degree of control and some degree of exclusivity but neither absolute control or absolute exclusivity is required.

United States of America, et al., v. City of Detroit, 355 U.S. 466, 78 S.Ct. 474

The U.S. Supreme Court held that a Michigan statute providing that when tax-exempt real property is used by a private party in a business conducted for profit, the private party is subject to taxation to the same extent as though he owns the property is not unconstitutional and does not discriminate against those using such property.

United States of America, et al., v. Township of Muskegon, et al., 355 U.S. 484, 78 S.Ct. 483

The U.S. Supreme Court held that a Michigan statute providing for the taxation of lessees and users of tax-exempt property was not unconstitutional as applied to a corporation that was permitted to use government property in performance of contracts with the government. The court ruled that in proper circumstances, state taxes might be imposed on activities of contractors performing services for the United States even though the contractors are closely supervised by the government. This case is cited in United States v. Colorado (aka Rockwell case), 627 F.2d 217, (10th Cir.1980), and was considered by the Colorado Supreme Court in differentiating between a management contract and a taxable possessory interest.

City of Detroit, et al., v. Murray Corporation of America, et al., 355 U.S. 489, 78 S.Ct. 458

The U.S. Supreme Court ruled that even though the taxing statute did not expressly state that the person in possession was taxed for the privilege of using or possessing the personal property, there had been no infringement of the federal government’s constitutional immunity since, as applied, the tax was imposed on the party possessing government property, rather than on the property itself.

C.R.S. Regarding Possessory Interests

Actual value determined - when.
(17) (a) The general assembly declares that the valuation of possessory interests in exempt properties is uncertain and highly speculative and that the following specific standards for the appropriate consideration of the cost approach, the market approach, and the income approach to appraisal in the valuation of possessory interests must be provided by statute and applied in the valuation of possessory interests to eliminate the unjust and unequalized valuations that would result in the absence of specific standards:
(I) The actual value of any possessory interest of the lessee or permittee of lands owned by the United States and leased or permitted for use for ski area recreational purposes in connection with a business conducted for profit shall be determined by capitalizing at an appropriate rate the annual fee paid to the United States by the lessee or permittee of such land for the use thereof in the immediately preceding calendar year, adjusted to the level of value using a factor or factors to be published by the administrator pursuant to the same procedures and principles as are provided for property in section 39-1-104 (12.3) (a) (I). The rate used to capitalize any fee pursuant to this subparagraph (I) shall include an appropriate rate of return, an appropriate adjustment for the applicable property tax rate, and an appropriate adjustment to reflect the portion of the fee, if any, required to be paid over by the United States to the state of Colorado and its political subdivisions.
(II) (A) Except for possessory interests in land leased or permitted for use for ski area recreational purposes valued in accordance with sub-subparagraph (I) of this paragraph (a) and except as otherwise provided in subparagraph (III) of this paragraph (a), the actual value of a possessory interest in land, improvements, or personal property shall be determined by appropriate consideration of the cost approach, the market approach, and the income approach to appraisal. When the cost or income approach to appraisal is applicable, the actual value of the possessory interest shall be determined by the present value of the reasonably estimated future annual rents or fees required to be paid by the holder of the possessory interest to the owner of the underlying real or personal property through the stated initial term of the lease or other instrument granting the possessory interest; except that the actual value of a possessory interest in agricultural land, including land leased by the state board of land commissioners other than land leased pursuant to section 36-1-120.5, C.R.S., shall be the actual amount of the annual rent paid for the property tax
year. The rents or fees used to determine the actual value of a possessory interest under the cost or income approach to appraisal shall be the actual contract rents or fees reasonably expected to be paid to the owner of the underlying real or personal property unless it is shown that the actual contract rents or fees to be paid for the possessory interest being valued are not representative of the market rents or fees paid for that type of real or personal property, in which case the market rents or fees shall be substituted for the actual contract rents or fees. (B) The rents or fees taken into account under the cost or income approach to appraisal under sub-subparagraph (A) of this subparagraph (II) shall exclude that portion of the rents and fees required to be paid for all rights other than the exclusive right to use and possess the land, improvements, or personal property. Such rents or fees to be excluded shall include, but shall not be limited to, any portion of such rents or fees attributable to any of the following: Nonexclusive rights to use and possess public property, such as roads, rights-of-way, easements, and common areas; rights to conduct a business, as determined in accordance with guidelines to be published by the administrator; income of the holder of the possessory interest that is not directly derived from and directly related to the use or occupancy of the possessory interest; any amount paid under a timber sales contract or similar agreement for the purchase of timber or for the right to acquire and remove timber; and reimbursement to the owner of the underlying real or personal property of the reasonable costs of operating, maintaining, and repairing the land, improvements, or personal property to which the possessory interest pertains, regardless of whether such costs are separately stated, provided that the types of such costs can be identified with reasonable certainty from the documents granting the possessory interest. The actual value of the possessory interest so determined shall be adjusted
to the taxable level of value using a factor or factors to be published by the administrator pursuant to the same procedures and principles as are provided for personal property in section 39-1-104 (12.3) (a) (I). (III) Subparagraphs (I) and (II) of this paragraph (a) shall not apply to any management contract. In the case of a management contract, the possessory interest shall be presumed to have no actual value. For purposes of this subparagraph (III), "management contract" means a contract that meets all of the following criteria:
(A) The government owner of the real or personal property subject to the contract directly or indirectly provides the management contractor all funds to operate the real or personal property;
(B) The government owns all of the real or personal property used in the operation of the real or personal property subject to the contract;
(C) The government maintains control over the amount of profit the management contractor can realize or sets the prices charged by the management contractor, or the management contractor's exclusive obligation is to operate and manage the real or personal property for which the management contractor receives a fee;
(D) The government reserves the right to use the real or personal property when it is not being managed or operated by the management contractor;
(E) The management contractor has no leasehold or similar interest in the real or personal property;
(F) To the extent the management contractor manages a manufacturing process for the government on the real property subject to the contract, the government owns all or substantially all of the personal property used in the process; and
(G) The real or personal property is maintained and repaired at the expense of the government.
(b) This subsection (17) shall not apply to and shall not be construed to affect or change the valuation of public utilities pursuant to article 4 of this title, the valuation of equities in state lands pursuant to section 39-5-106, the valuation of mines pursuant to article 6 or any other article of this title, or the valuation of oil and gas leaseholds and lands pursuant to article 7 of this title.
§ 39-1-103, C.R.S.

Definition and Classification Criteria

Possessory Interest Definition

For purposes of the procedures, the Division of Property Taxation (Division) defines possessory interest as:

A private property interest in government-owned property or the right to the occupancy and use of any benefit in government-owned property that has been granted under lease, permit, license, concession, contract, or other agreement.

Generally, possessory interests constitute a right to the possession and use of government property for a period of time less than perpetuity. It represents a portion of the bundle of rights that would normally be included in a fee ownership; and its value, therefore, is typically something less than the value in perpetuity of the whole bundle of rights.

Possessory Interest Classification

As stated in the Vail Associates case, government property that may be subject to possessory interest assessment includes:

Land
Improvements (buildings, structures, fixtures, fences, and water rights)
Personal property

Determining Taxable Possessory Interests

Typically, taxable possessory interests are created when government property exempt from property taxation is leased, loaned, or made available to and used by a private individual, association or corporation in connection with a business conducted for profit. However, the Colorado Supreme Court in the Vail Associates case further defined taxable possessory interests as those possessory interests that exhibit significant incidents of private ownership to the user of the property. In its decision, the court listed three factors in determining whether significant incidents of private ownership exist; and, therefore, whether the possessory interest can be considered taxable.

In addition, the court cited two Colorado cases, United States v. Colorado, 627 F.2d 217, 219 10th Cir. 1980 aka “Rockwell” case, and Mesa Verde Co. v. Board of County Commissioners, 178 Colo. 49, 495 P.2d 229 (1972) aka “Mesa Verde I” case, as well as several out of state cases in support of the following three factors.

An interest that provides a revenue-generating capability to the private owner independent of the government property owner;

The language in the Vail Associates case supports the determination that agreements for the use of government property by private parties in a business may be subject to ad valorem taxation. For the purposes of the procedures only, the Division of Property Taxation defines “business” as it relates to possessory interest properties as:

Any use or occupancy of government property by any person, partnership, corporation, limited-liability corporation (LLC) or other legal entity for the purposes of generating revenue from a business or operation.
The ability of the possessory interest owner to exclude others from making the same use of the interest;

Footnote 20 on page 1279 of the Vail Associates case states:
As the California cases demonstrate, concurrent uses of property are not necessarily inconsistent with exclusivity.

In that same footnote, also stated:
Oregon recognizes a “flexible” concept of possession: “[A]lthough a ‘possessory’ interest always is marked by some degree of control and some degree of exclusivity, neither absolute control nor absolute exclusivity is required.”
Sufficient duration of the possessory interest to realize a private benefit there from.

All possessory interests that are operating on a revenue-generating basis, even though seasonal, are subject to taxation.

The assessor determines whether a possessory interest exhibits all three factors relating to significant incidents of private ownership.

Taxable Possessory Interests v. Management Contracts

Colorado statute § 39-1-103(17)(a)(III), C.R.S., states that when tax-exempt property is used by a private party pursuant to a management contract, the possessory interest is presumed to have no value. However, for the possessory interest to have no value, seven (7) criteria must be met:

The government owner directly or indirectly provides all funds to operate the property.
The government owns all of the real or personal property used in the operation.
The government maintains control over the amount of profit or sets the prices charged, or the contractor’s exclusive obligation is to operate and manage the real or personal property for which the contractor receives a fee.
The government reserves the right to use the property when it is not being managed or operated by the contractor.
The management contractor has no leasehold or similar interest in the real or personal property.
To the extent the contractor manages a manufacturing process on the real property subject to the contract, the government owns all or substantially all of the personal property used in the process.
The real and personal property is maintained and repaired at the expense of the government.

All criteria must be met for a “management contract,” as defined by statute, to exist and, therefore, for the possessory interest to have no value.

Examples of Taxable Possessory Interests

Possessory interests may or may not be taxable depending on whether significant incidents of private ownership exist pursuant to the language of the agreement with the user of the property.

Taxable possessory interests may include, but are not limited to:

Private concessionaires utilizing government owned land, improvements, or personal property that are not operating pursuant to a management contract as defined in § 39-1-103(17)(a)(III), C.R.S.
Government land and improvements used in the operation of a farm or ranch.
Government land, improvements, and/or personal property used in the operation of ski or recreational areas.
Land underlying privately owned cabins or other residential property located on government land that are rented.
Recreational use of lakes, reservoirs, and rivers in a revenue-generating capacity.
Land, improvements, and personal property at a tax-exempt airport.
Other government property leased to private parties. However, the property may be otherwise exempt pursuant to Colorado Revised Statutes.

Examples of Non-Taxable Possessory Interests

Pursuant to the Vail Associates case and statutory language contained in § 39-1-103(17), C.R.S., non-taxable possessory interests may include, but are not limited to:

Use of government real and/or personal property for non revenue-generating purposes.
Use of government land, improvements, or personal property pursuant to a management contract as defined pursuant to § 39-1-103(17)(a)(III), C.R.S.

Discovery of Possessory Interests

The following have been identified as entities or agencies whose agreements provide use of government properties by private parties. Names, addresses and phone numbers of each agency are included.

The Division is working with each of these agencies to obtain a list of agreements statewide for dissemination to each county. The Division will provide the lists annually to county assessors in an electronic format.

Governmental Entities and Related Agencies

Colorado State Board of Land Commissioners

The Colorado State Board of Land Commissioners (SLB), a division of the Department of Natural Resources, manages three million surface acres of state trust lands. The state trust lands were given to the state by the federal government in 1876 for specific purposes, such as the support of public schools. State trust lands are managed through agreements to private individuals; companies and government agencies that pay for the privilege of using state trust lands in specific ways. Proceeds are used to support eight trusts, the largest of which benefits kindergarten through 12th grade education in the state.

In the early 1990’s, the SLB also began leasing land for recreation. So far, the biggest customer is the Colorado Division of Wildlife, which leases more than 400,000 acres of SLB trust land throughout the state for hunting, fishing and other wildlife recreation. The agreements represent concurrent use of the property along with other existing agreements for grazing and other activities. The SLB requires that all of the lessees work together to create an access plan that ensures that they can peacefully co-exist and that the natural values of the state land are conserved.

Address and phone number:

Colorado State Board of Land Commissioners
1127 Sherman Street, Room 300
Denver, Colorado 80203
303.866.3454

The SLB administers its programs by geographic region. A full list of regional contacts is available on the SLB website.

Agreements with the SLB that could create a taxable possessory interest covered by the procedures include agricultural grazing, farming, and commercial vacant and improved properties in Denver and other urban areas.

Colorado Parks and Wildlife

Colorado Parks and Wildlife manages over 215,000 land and water acres. Colorado Parks and Wildlife offers a variety of landscape to match the state’s geography, from urban playgrounds to backcountry retreats, from mountain lakes to whitewater adventure. Parks and Wildlife also manages the state’s 960 wildlife species. It regulates hunting and fishing activities by issuing licenses and enforcing regulations. It also manages more than 230 wildlife areas for public recreation, conducts research to improve wildlife management activities, provides technical assistance to private and other public landowners concerning wildlife and habitat management, and develops programs to protect and recover threatened and endangered species.

Address and phone number:

Colorado Parks and Wildlife
6060 Broadway
Denver, Colorado 80216
303.297.1192

Agreements with Colorado State Parks that could create a taxable possessory interest covered by the procedures include river rafting, outfitting, marinas and agricultural grazing.

U.S. Department of Agriculture – National Forest Service

Congress established the National Forest Service (USFS) in 1905 to provide quality water and timber for the Nation’s benefit. Over the years, the public has expanded the list of what they want from national forests and grasslands. Congress responded by directing the USFS to manage national forests for additional multiple uses and benefits and for the sustained yield of renewable resources such as water, forage, wildlife, wood, and recreation.

Colorado has twelve national forests and two national grassland designations encompassing approximately 14.5 million acres.

Address and phone number:

USDA Forest Service
Rocky Mountain Regional Office
1617 Cole Blvd., Building 17
Lakewood, CO 80401
303.275.5350

Agreements with the USFS that could create a taxable possessory interest covered by the procedures include recreational uses of land and water, agricultural grazing, and ski areas.

U.S. Department of Interior – Bureau of Land Management

The Bureau of Land Management (BLM) ) is responsible for managing 264 million acres of land—about one-eighth of the land in the United States – and about 300 million additional acres of subsurface mineral resources. The BLM manages a wide variety of resources and uses, including energy and minerals; timber; forage; wild horse and burro populations; fish and wildlife habitat; wilderness areas; archaeological, paleontological, and historical sites; and other natural heritage areas.

In Colorado, there are approximately 8.4 million acres with 1,500 operators using 2,500 allotments or permits. The regulations establishing procedures for the processing of the agreements are found in 43 CFR 2920. CFR is the acronym for Code of Federal Regulations.

Address and phone number:

Bureau of Land Management – Colorado State Office
PO Box 151029
Lakewood, Colorado 80215
303.239.3600

Agreements with the BLM that could create a taxable possessory interest covered by the procedures include recreational uses of land and water and agricultural grazing.

U.S. Department of Interior – National Parks Service

The National Parks Service administers 400 plus areas in the National Park System. There are three principal categories used in classification; natural areas, historical areas, and recreational areas. There are 15 properties in Colorado with National Park designations based on these categories. Agreements with the National Parks Service that could create a taxable possessory interest covered by the procedures include concessionaire operations at the park site.

Address and phone number:

U.S. Department of Interior - National Parks Service
Denver Service Center
12795 West Alameda Parkway
Lakewood, Colorado 80228
303.969.2100

Collection of National Park information is the responsibility of each county.

Other Governmental Entities

(Counties, cities, municipalities, special taxing districts, state colleges and universities, etc.)

Taxable possessory interests may arise from agreements issued to parties that use property owned by counties, cities, special taxing districts, state universities and colleges, and other governmental entities for private, revenue generating purposes.

To obtain a list of agreements, each county identifies the governmental entity that allows uses for private purposes.

Documentation Requirements

The following information is necessary:

Name and address of the holder of the agreement
Legal description of property being used
If the legal description is not available, a description of the general location of the property covered by the agreement
Use of the property
Actual payment in the agreement
Original date and duration of the agreement
Contractual rent or fee payment adjustments and their expected rates of change
Costs and exclusions to income documented in the agreement that are borne by the user of the property and where payment of the costs are included as a part of the payment charged.

Federal and state agencies having property subject to possessory interest assessment will file the above information in spreadsheet format with the Division for distribution to counties after January 1. If the information contained on the spreadsheet distributed by the Division is insufficient, a copy of the lease may be necessary.

Valuation of Possessory Interests

Valuing Commercial Possessory Interests

As required by § 39-1-103(17)(a)(II), C.R.S., possessory interests in real and personal property, other than land permitted for use as ski area recreational land, must be valued considering the cost, market, and income approaches to appraisal. When using the cost or income approach to appraisal, the statutes direct that the present value of the reasonably estimated future annual rents or fees, less statutory exclusions, paid by the possessory interest holder to the government over the initial term of the lease be determined. To implement the statutory requirement, the procedures employ a “modified” Net Present Value (NPV) calculation technique for the valuation of commercial and agricultural possessory interests. The modification was necessary to include an effective tax rate (ETR) as a component of the NPV conversion rate.

Definition of Net Present Value (NPV)

For purposes of the procedures, NPV is defined as:

A value determined by discounting all future benefits, either in the form of a lump sum or a series of periodic installments such as rent or a combination of both, based on the assumption that benefits received in the future are worth less than the same benefits received today.

The Division established the above definition for use in determining the actual value of commercial possessory interests. The valuation of ski area recreational land is specifically addressed in § 39-1-103(17)(a)(I), C.R.S. Refer to Valuing Ski Area Possessory Interests.

NPV analysis applies to either regular or irregular “patterns of income.” The payments are adjusted, if necessary, to account for any amount that is attributable to roads, right-of-ways, easements, common areas, business licenses, franchise fees, and any other item covered under the terms of the agreement but do not relate to the use or occupancy of the possessory interest. Refer to the Exclusions of Actual Rents and Fees Paid by the Possessory Interest Holder.

Data Needed to do the NPV Calculation

Actual rental rate in agreement
Current market rental rates for similar properties and similar use
Duration of the agreement (for agreements that have a duration of one year or less, annualized rent is the NPV)
Contractual rent adjustments and their expected rates of change
Costs and exclusions documented in the agreement
Discount rate as of the assessment date
Effective tax rate as of the assessment date

In some instances review of the individual agreement terms may disclose that the actual rents or fees paid for the interest are not representative of the market. In this situation, market rents or fees as of the assessment date shall be substituted for the rents or fees to determine the present value of the possessory interest.

Obtaining Necessary Information

For information on how to contact the respective agency for a list of necessary information for use in classification and valuation of possessory interests, refer to the Discovery of Possessory Interests portion of the procedure.

Actual Rents/Fees Paid

Pursuant to § 39-1-103(17)(a)(II)(A), C.R.S. when considering the cost or income approach to appraisal, actual contract rents or fees shall be used to determine the value of the possessory interest. However, when evidence exists that actual contract rents or fees are not representative of market rents or fees, then market rents or fees should be compared with rents or fees of similar agreements. Substitution of market rents or fees does not apply in the valuation of ski-area or agricultural possessory interests.

Duration of Agreement

The actual value of commercial possessory interests is determined as the net present value of future annual rents or fees to be paid through the stated initial term of the agreement. The objective of NPV analysis is to ascertain the annual payments made to the government over the remaining years in the initial term of the agreement and to convert the payments to an actual value as of the assessment date. Initial term means the time period for which the current agreement is established without regard to options to renew or extend the agreement. However, when an agreement is renewed or extended, the term is adjusted to reflect the years remaining in the renewed or extended agreement.

Possessory interest leases may begin at any time of the year, however the assessment of a possessory interest becomes effective based on the January 1 assessment date. If an agreement begins mid-year, the valuation process will begin the following tax year and carry through the full year of the expiration even if the expiration is mid-year.

Exclusions from Actual Rents/Fees Paid

Many government agencies that are likely to have possessory interests structure their agreements to reflect amounts after expenses and income exclusions are taken into account. When net payments and fees are made by the possessory interest holder, no income exclusion is necessary. An exception would be when the payment is based on a percentage of business revenue or income as stated in the agreement.

Section 39-1-103(17)(a)(II)(B), C.R.S., requires that the assessor exclude from consideration any portion of the fees or payments made by the possessory interest holder to the government that involves:

Nonexclusive rights to use and possess public property, such as roads, rights-of-way, easements, and common areas;
1. Roads: Any thoroughfare or public way that is open to the use of the public as a matter of right for the general purpose of motor vehicle travel.
2. Right-of-ways: A strip of land that is used as a roadbed, either for a street or railway. The land is set aside as an easement or in fee, either by agreement or condemnation. May also be used to describe the right itself to pass over the land of another.
3. Easements: An interest in land of another entitling the owner of that interest to a limited use of the land in which it exists. The interest is less than the fee estate, with the landowner retaining full dominion over the real estate subject only to the easement, and the landowner may make any use of the property that does not interfere with the easement holder’s reasonable use of the easement. Examples are: pipeline, electric transmission line, wildlife conservation, sewer line, and safety zone easements.
4. Common Areas: The total area within a property that is available for common use. Examples include sidewalks, landscaped areas, public toilets, walkways and other non-restricted public areas.
Rights to conduct a business, as determined in accordance with guidelines published by the administrator, and
Income of the holder of the possessory interest that is not directly derived from and directly related to the use or occupancy of the possessory interest;
1. Typically, payments to governmental entities reflect an amount that is “net” of any income exclusions. However, in some cases, payments to the government are based on a percent of revenue or income generated from the business using the property. In this case, payments are analyzed to determine if a deduction for “enterprise” or business value is required. When the agreement does not directly provide for apportionment of revenue between business activity and the property itself, then a method is employed which imputes an appropriate income to the property.
2. he method requires the assessor to research and compile market rent levels for properties comparable to the possessory interest. The market rent levels are compared to the percentage rent amounts. When percentage rent amounts are higher, the difference between market rents and the percentage rent amounts may be attributable to business value and should be excluded; the market rent is used to determine the value of possessory interest.
Any amount paid under a timber sales contract or similar agreement for the purchase of timber or for the right to acquire and remove timber.
Reimbursement to the owner of the underlying real or personal property of the reasonable costs of operating, maintaining, and repairing the land, improvements, or personal property to which the possessory interest pertains provided that the types of such costs can be identified with reasonable certainty from the documents.

Before an exclusion is made for reimbursement for operation, maintenance, or repair costs, the assessor must ascertain that the requirement to reimburse the governmental entity is incorporated as part of the agreement and that the payment, as defined in the agreement, includes the reimbursement amount.

Common Area Maintenance (CAM) charges are reimbursements for landscaping, interior maintenance, trash removal, etc.
Periodic repairs and maintenance of existing tax-exempt structures or personal property

In summary, if a claim for exclusion is made, the assessor should request sufficient documentation from the possessory interest holder and/or the governmental entity from which the agreement originates. The taxpayer may also provide the assessor with sufficient details from the business’s income and expense statement to verify all claims of excludable income.

Discount Rate Development

For commercial possessory interests, conversion of the series of estimated payments over the term of the agreement to net present value requires the use of a rate which is made up of a discount rate and an effective tax rate. The conversion or “discounting” procedure is based on the assumption that benefits received in the future are worth less than the same benefits received today.

A discount rate is defined as:

A rate of return on capital used to convert future payments or receipts into present value; usually considered to be a synonym for yield rate.
The Dictionary of Real Estate Appraisal, 7th Edition, Appraisal Institute, 2022.

Each county should analyze the market and develop the appropriate discount rate for their location. Because possessory interests do not trade in the market and are not financed on a stand-alone basis, other information sources must be analyzed to assist in developing the appropriate discount rate. Risk is typically the largest component of any discount rate. Factors to be considered include market conditions for the property type being valued and the lack of any reversion risk. A starting point for this analysis could be interest rates charged by local lenders for the property type being valued. It may also be helpful to survey similar, nearby markets for this information. Discount rate information from published sources can also be considered.

Development of the Effective Tax Rate

The effective tax rate (ETR) is developed by the county to account for property taxes paid by the possessory interest owner as a result of the use of the property. In the calculation, the county uses the mill levy prior to the assessment date for the tax area where the business is located.

Mill Levy (as a decimal; based on the location of the possessory interest) x Applicable Assessment Rate (assessment rate as a decimal) = Effective Tax Rate (expressed as a decimal equivalent)

Calculation of the NPV Conversion Rate

For purposes of the procedures, a NPV conversion rate is used to determine the appropriate present worth of one factor that is applied to the estimated payments for each year remaining in the agreement to arrive at a present value of the possessory interest. The NPV conversion rate consists of an appropriate discount rate and the effective tax rate.

Discount Rate (calculated by the county) + Effective Tax Rate (calculated by the county) = NPV conversion rate

The assessor may round up the NPV conversion rate to the next highest half percent. For example, a discount rate of 12.32 percent may be rounded to 12.5 percent. Rounding the discount rate will allow counties without access to a financial calculator or spreadsheet program to use published present worth of one (or present worth of one per period) tables to determine the appropriate conversion factor or factors.

Present Worth of One Factor Application

After the NPV conversion rate is determined, the applicable Present Worth of One factor from the compound interests tables is applied.

The calculation must be done for each year remaining in the initial term of the lease.

The formula for calculating the Present Worth of One factor is:

PW$1 equals 1 divided by (1 + i) to the power of n where i=Periodic interest rate and n=Number of periods

However, it is generally unnecessary to manually calculate the Present Worth of One factor using the above formula. The calculation can easily be done on a financial calculator or as a formula in a computer spreadsheet program. The Present Worth of One factor can also be obtained from compound interest tables.

If review of the payment amounts over the remaining term of the agreement indicates that the payment will be identical for each year, use of a present worth of one per period factor based on the conversion rate and remaining years may be used in place of the present worth of one factor.

Level of Value Adjustment Factor

Pursuant to § 39-1-103(17)(a)(I) and (II)(B), C.R.S., the administrator is required to establish the level of value (LOV) adjustment factor(s) for possessory interests using the same procedures and principles as are provided for property in § 39-1-104(12.3)(a)(I), C.R.S. For each assessment year, the Division of Property Taxation publishes a separate LOV adjustment factor for real and personal property possessory interests.

For each tax year, the Division utilizes the U.S. Department of Labor, Bureau of Labor Statistics data changes to the CPI-U: Denver- Boulder-Greeley from appraisal date to assessment date to calculate the LOV factor. Please refer to Addendum 7-D, Possessory Interest Valuation Rates for the adjustment factor to be used for the current assessment year.

Steps to Value Commercial Possessory Interest

As required by § 39-1-103(17)(a)(II), C.R.S., the actual value of commercial possessory interests is determined by the present value of the reasonably estimated future annual rents or fees required to be paid by the holder of the possessory interest to the owner of the underlying real or personal property through the stated initial term of the agreement.

Steps in the valuation process:

Step #1 Contact the appropriate federal, state, or local agency or entity to obtain information regarding the agreement.

Use the list provided by the Division for the federal and state agencies. The items on the list include names, mailing addresses, annual payments, terms and the original date and/or the expiration date of the agreement. If you have any questions regarding information contained on the list, refer to Discovery of Possessory Interests for the name, address, and phone number of the applicable
agency.

In the event that property owned by a governmental entity other than federal or state land is used for commercial purposes by a private party, the county is responsible for obtaining the necessary documentation.

Step #2 Develop the applicable NPV conversion rate.

Calculating the applicable net present value conversion rate:

Discount Rate (calculated by the county) + Effective Tax Rate (calculated by the county) = NPV Conversion Rate

For additional information regarding how discount rates for commercial possessory interest properties are developed, refer to Development of the Discount Rate for Commercial Possessory Interests. For the formula used in calculating an effective tax rate, refer to Development of the Effective Tax Rate.

Step #3 Determine the present worth of one factor.

For each year remaining in the agreement, determine the appropriate present worth of one factor in the compound interest tables based on the net present value conversion rate previously established by the county.

For possessory interests that have a duration of one year or less, the payment is the present worth. If this is the case, proceed to Step #5.

Step #4 Calculate the present value of the payments over the remaining years in the initial term of the agreement.

Conversion of the annual payments to present value is calculated by multiplying each year’s payment by the applicable present worth of one factor based on the previously determined NPV conversion rate. The calculation is completed for each of the remaining years in the initial term of the agreement. Add each year’s present value together for the total NPV of the possessory interest.

Example calculation of a commercial possessory interest:

Assumptions:

Remaining years of income stream 4 years
Net present value conversion rate including ETR 14%
Annual payment (less exclusions) for remaining years in the agreement
- Year #1 $10,000
- Year #2 $11,000
- Year #3 $12,000
- Year #4 $13,000

Calculation of NPV:

	Year #1	Year #2	Year #3	Year #4
Annual payment (less exclusions)	$10,000	$11,000	$12,000	$13,000
PW of 1 Factor for 14%	0.877193	0.769468	0.674972	0.592080
Net Present Value of payment	$8,772	$8,464	$8,100	$7,697

The net present value for each remaining year in the agreement is totaled to arrive at the NPV of the possessory interest. Simply stated, $33,033 is the value today of the total payments over the remaining years in the agreement.

Step #5 Apply the level of value adjustment factor published by the Division.

The calculation of the actual value of the possessory interest is:

NPV of the possessory interest x Level of value adjustment factor (published by the Division) = Actual value of the possessory interest

Agricultural Possessory Interest Valuation

Land owned by a governmental entity and used through an agreement for farming or ranching by a private individual is a taxable possessory interest. Agricultural possessory interests are valued in accordance with § 39-1-103(17)(a)(II), C.R.S. Senate Bill 04-059 established, as of January 1, 2005, that the actual value of a possessory interest in agricultural land, including land leased by the state board of land commissioners other than land leased pursuant to § 36-1- 120.5, C.R.S., shall be the actual amount of the annual rent paid for the property tax year.

Data Needed

Actual rent paid in the agreement
Current year level of value adjustment

Obtaining Necessary Information

For information on how to contact the respective agency for a list of necessary information for use in classification and valuation of possessory interests, refer to Discovery of Possessory Interests.

Level of Value Adjustment Factor

Pursuant to § 39-1-103(17)(a)(I) and (II)(B), C.R.S., the administrator is required to establish the level of value adjustment (LOV) factor(s) for possessory interests using the same procedures and principles as are provided for property in § 39-1-104(12.3)(a)(I), C.R.S. For each assessment year, the Division of Property Taxation publishes a separate LOV adjustment factor for real and personal property possessory interests.

For each tax year, the Division utilizes the U.S. Department of Labor, Bureau of Labor Statistics data changes to the CPI-U: Denver-Aurora-Lakewood from appraisal date to assessment date to calculate the LOV factor. Please refer to Addendum 7-D, Possessory Interest Valuation Rates for the adjustment factor to be used for the current assessment year.

Steps to Value Agricultural Possessory Interests

As required by § 39-1-103(17)(a)(II), C.R.S., the actual value of a possessory interest in agricultural land, including land leased by the state board of land commissioners other than land leased pursuant to § 36-1-120.5, C.R.S., shall be the actual amount of the annual rent paid for the property tax year.

Steps in the valuation process:

Step #1 Contact the appropriate federal, state, or local agency or entity to obtain information regarding the agreement.

Use the list provided by the Division for the federal and state agencies. The items on the list include names, mailing addresses, annual payments, terms and the expiration date of the agreement. If you have any questions regarding information contained on the list, refer to Discovery of Possessory Interests for the name, address, and phone number of the applicable agency.

In the event that property owned by a governmental entity other than federal or state land is used for agricultural purposes by a private party, the county is responsible for obtaining the necessary documentation.

Step #2 Determine the actual value.

The actual rent paid for each agreement is the actual value.

Step #3 Apply the level of value adjustment factor published by the Division.

The calculation of the actual value of the possessory interest is:

Actual value of the possessory interest (rent paid) x Level of value adjustment factor (published by the Division) = Actual Value of the Agricultural Possessory Interest

Ski Area Possessory Interest Valuation

Section 39-1-103(17)(a)(I), C.R.S., specifically requires that the valuation of ski area possessory interest is determined by capitalizing at an appropriate rate the annual fee paid by the lessee or permittee. The rate used to capitalize any fee paid by the ski area includes an appropriate capitalization rate, an appropriate effective tax rate and an appropriate adjustment to reflect the portion of the fee, if any, required to be paid over by the United States to the state of Colorado and its political subdivisions.

The possessory interest valuation method is applied only to the real and personal property under agreement from the United States. Privately owned land, improvements, and personal property located on the property are separately valued considering the cost, market and income approaches to appraisal.

Capitalization of Income Definition

The previous year’s fees paid for the use of the USFS land for a ski area is capitalized into a value of the possessory interest.

Data Needed

Previous year’s permit fees
Capitalization rate
Pass-through rate
Effective tax rate as of the assessment date
Current year level of value adjustment

Obtaining Ski Area Permit Fees from USFS

The division annually collects the ski area permit fees from the USFS or counties can contact the ski area directly.

Capitalization Rate Development

The capitalization rate is developed and published by the Division every year using the Weighted Average Cost of Capital technique (WACC) and may be found in Addendum 7-D, Possessory Interest Valuation Rates. For more detailed information on the calculation of the ski area capitalization rate contact the Division.

Pass-Through Rate Development

The pass-through component of the ski area capitalization rate represents the twenty-five percent of fees returned to the state by the U.S. Forest Service (USFS) from fees paid by users of USFS land. The pass-through rate may be found in Addendum 7-D. For more detailed information on the calculation of the ski area pass-through rate contact the Division.

Effective Tax Rate Development

The effective tax rate is developed by the county to account for property taxes paid by the possessory interest owner of the ski area recreational land for the possessory interest assessment. In the calculation, the county uses the mill levy prior to the assessment date for the tax area where the ski area is located.

Mill Levy (as a decimal; based on location of the possessory interest) X 0.29 (assessment rate as a decimal) = Effective Tax Rate (expressed as a decimal equivalent)

Adjusted Capitalization Rate Calculation

The adjusted capitalization rate is composed of three components.

Capitalization rate (calculated by the Division) + Pass-through rate (calculated by the Division) + Effective tax rate (calculated by the county) = Adjusted Capitalization Rate

Adjusted Capitalization Rate Application

After the adjusted capitalization rate is calculated it is applied to the USFS previous year’s fee amount. The resulting number is the actual value of the possessory interest in the Forest Service land.

Fees paid to USFS (from USFS) ÷ Adjusted Capitalization rate (developed by the county and the Division) = Value of the possessory interest

Level of Value Adjustment Factor

Pursuant to §39-1-103(17)(a)(I) and (II)(B), C.R.S., the administrator is required to establish the level of value (LOV) adjustment factor(s) for possessory interests using the same procedures and principles as are provided for property in § 39-1-104(12.3)(a)(I), C.R.S. For each assessment year, the Division of Property Taxation publishes a separate LOV adjustment factor for real and personal property possessory interests.

Please refer to Addendum 7-D, Possessory Interest Valuation Rates for the adjustment factors to be used for the current assessment year.

Steps to Value Ski Area Possessory Interests

Section 39-1-103(17)(a)(I), C.R.S., requires that the assessor use only the capitalization of income approach to determine the value of the possessory interest of ski area recreational lands.

Steps in the valuation process:

Step #1 Obtain the amount of fees paid for the previous calendar year.

Use data collected by the Division and provided to the counties or contact the United State Forest Service (USFS) district forest supervisor’s office in which the ski area is located. If unsure as to where the local office is, refer to Discovery of Possessory Interests for the name and address of the central office.

Step #2 Develop the applicable adjusted capitalization rate.

Calculate the applicable adjusted capitalization rate:

Capitalization rate (calculated by the Division) + Pass-through rate (calculated by the Division) + Effective tax rate (calculated by the county) = Adjusted Capitalization Rate*

*The capitalization rate should be rounded to four (4) decimal places.

Additional information regarding how the discount and pass-through rates are developed may be obtained by contacting the Division of Property Taxation.

Step #3 Calculation of the actual value of the possessory interest.

Example calculation of ski area recreational land:*

Assumptions:

Previous Year’s USFS fees $50,000

Capitalization Rate (published by the Division)	+ 0.1300
Pass-through rate (published by the Division)	+ 0.0430
Effective tax rate (calculated by the county)	+ 0.0232
Adjusted capitalization rate (expressed as a decimal)	0.1962

Calculation of Value:

Previous Year’s USFS fees	$50,000
Adjusted Capitalization Rate	÷ 0.1962
Value of the possessory interest	$254,842

* Note: the above calculations are examples and do not necessarily reflect the published ski area capitalization rate and pass-through rate for the current tax year. See Chapter 7, Addendum 7-D, for the current year rates and factors.

Step #4 Apply the level of value adjustment factor published by the Division.

The calculation of the actual value of the possessory interest is:

Capitalized value of the possessory interest X Level of value adjustment factor (published by the Division) = Actual Value of the possessory interest

The Division publishes the capitalization rate and pass through rate used by all county assessors each year. For intervening assessment years (even numbered years), the Division publishes the adjustment factor used by all assessors to adjust values to the appraisal date in effect for that reappraisal cycle.

Administrative Issues

Apportionment Between Two or More Counties

In most circumstances, possessory interests are located in a single county and no apportionment is necessary. However in some instances, land under agreement lies in more than one county and thus requires an apportionment of the actual value of the possessory interest to each county.

In the case of agricultural grazing possessory interests, the federal and state agencies have been able to provide the exact acreage of each allotment within each county.

In the case of river-rafting permits the launch site location is to be used in determining the county as well as the taxing district to assign to the account.

For guide and outfitter operations or USFS special use permits located in multiple counties it would be reasonable to assign the base-site of the operation as the location. It is up to each county to communicate with the shared counties to determine the apportionment.

Each county will send a tax bill for its apportioned share of the total value.

Tax Area Assignment

Possessory interest properties will be taxed by a minimum of the county and a school district. The inclusion of property in other taxing entities must be determined using county and taxing entity records, to the best of your ability.

School district boundary information is available from the school district and/or the Department of Education.

When assigning a tax area for possessory interests such as a rafting operation, it would be reasonable to use the location of the launch-site as the determinate factor for establishing the tax area or in the case of multiple counties, the county/tax area where the launch-site is located. The same theory would be reasonable regarding guide and outfitter operations, e.g., the county where the business is based. However, all counties involved need to be in agreement with this assignment.

Minimum Value

The law does not provide for minimum assessments on real or personal property. What is allowed pursuant to § 30-1-102(3), C.R.S., is the collection of a $5 administrative fee when a real property tax amount is less than $10.

Counties considering a minimum assessment should discuss the issue with the county attorney, as the county attorney defends the assessor’s actions if a taxpayer challenges the minimum value.

Property Description

The property description for a possessory interest will vary, depending on the information available and whether the lessor is the U.S. forest Service, the State Land board, etc. Based on the information available from each lessor, the assessor should establish a standard for possessory interest descriptions. Below are suggested items that might be included, if available, in the description.

Principal meridian (if there is more than one survey area in the county)
Section, township and range
Lease/permit/authorization number
Lessor
Contract date (optional)
Expiration date (optional)
Park name/allotment name
Acreage of parcel (if known)

Examples:

Possessory interest in State Land Board land in Section 36, Township 11 North, Range 52 West of the 6th Principal Meridian, containing 640 acres, per lease number 01123.

Possessory interest in BLM land, authorization number 0505715, allotment Westridge.

Parcel Numbering

A parcel number may be assigned to a possessory interest property but because the possessory interest is tied to a permitted use and not necessarily to real property described by section, township, and range using a fourteen-digit parcel number may not be appropriate.

Therefore, to create consistency, a county could consider using arbitrary schedule numbers to identify possessory interest properties.

Abstract of Assessment

The possessory interest values are listed by class for each city and town and school district in the abstract. Specific abstract codes to be used are found in ARL Volume 2, Chapter 6, Property Classification Guidelines and Assessment Percentages, Property Class and Subclass Descriptions.

Collection of Taxes

As per § 39-1-107, C.R.S., the property tax on a possessory interest in real or personal property that is exempt from taxation must be assessed to the holder of the possessory interest and collected in the same manner as property taxes assessed to owners of real or personal property; except that such property tax cannot become a lien against the property. When due, the property tax will be a debt due from the holder of the possessory interest to the board of county commissioners where the property is located or to such other body as is authorized by law to levy property taxes, and will be recoverable by the board or body by direct action in debt on behalf of each governmental entity for which a property tax levy has been made.

The debt action would be initiated by the treasurer and would involve the county commissioners and county attorney.

Exemptions Granted by the Property Tax Administrator

The Property Tax Administrator (PTA) has the authority to grant property tax exemptions to privately owned property that is used solely and exclusively for religious purposes, for private schools, or for strictly charitable purposes. Possessory interests can be granted exemption by the PTA under these guidelines.

Applications for exemption must be submitted to the PTA. The PTA reviews each application to determine whether the exemption is justified and in accordance with the intent of the law. Statute restricts property tax collection efforts while an application is pending.

Section 39-2-117(1)(a)(II), C.R.S., states “On all properties for which an application is pending in the office of the administrator, taxes shall not be due and payable until such determination has been made. Such property shall not be listed for the tax sale, and no delinquent interest will be charged on any portion of the exemption that is denied.”

To aid counties in complying with this restriction, no later than June 1 of each year the Administrator shall provide to the assessor, treasurer, and board of county commissioners of each county a list of all applications pending within their county, § 39-2-117(1)(a)(III), C.R.S. Please see Assessors’ Reference Library Volume 2, Chapter 3, Specific Assessment Procedures for more information.

In some cases, application for exemption may not be necessary if the possessory interest does not exhibit “significant incidents of private ownership.” Please see previous discussion of Vail Associates for more information.

Transaction Adjustments

Transactional adjustments are made to account for differences in sales prices resulting from atypical terms of the sale. Transactional adjustments may include adjustments for real property rights, financing terms, conditions of sale, expenditures made immediately after purchase, and non-realty items.

In a mass appraisal sales confirmation program certain transactional adjustments are always considered, while others are rarely used. The removal of non-realty items from the sales price is regularly done. Atypical financing adjustments are rarely used unless they are identified through outlier sales ratios and are necessary for the setting of accurate values.

Outliers are defined as properties with very high or very low sales ratios. They may be caused by inaccurate appraisals, sales that were not arm’s length transactions, an inventory of a property’s characteristics that was not an accurate description of the property on the date of sale, data input errors, special incentives included with the sale, or atypical financing. Outliers usually indicate some form of atypical situation or motivation that causes a sale to be outside the typical market range of values.

Real Property Rights

An adjustment for conveyance of real property rights is not often made in Colorado ad valorem valuation. [An exception to this occurs where a property is encumbered with a long-term nonmarket lease, City and County of Denver v. BAA and Regis Jesuit Holding, Inc., 848 P.2d 355, (Colo. 1993)].

Financing Terms

The adjustment for financing terms not typical of the market is referred to as cash equivalency. The requirement for this adjustment is more prevalent in an oversupplied market where buyers, sellers, and lenders use creative financing. There are a variety of situations where a financing adjustment may be required.

Cash Equivalency

The Uniform Standards of Professional Appraisal Practice (USPAP) requires that the terms of sale (e.g., cash, cash equivalent, or other terms) must be considered when developing an opinion of value.

When the market is out of equilibrium, sellers will sometimes offer buyers incentives to facilitate the sale. It is widely accepted that seller incentives can affect the sale price. The theory of this practice is that these incentives will result in a higher sales price. When this occurs the sales price reflects the value of both the real property and the incentives. Therefore, when estimating the market value of the real property the sales price must be adjusted for value of these incentives. The result will be the price paid for the property unaffected by special or creative terms.

Types of incentives have varied over the years. In the 1980’s, when mortgage interest rates were in the mid- to high-teens, seller financing at below market rates was often provided to help facilitate a sale. In recent years, incentives have changed to include seller assisted down payments, 100 percent loans, seller paid points, owner carried second mortgages, and cash payouts. Additional items such as home upgrades, landscaping, appliances, TVs, cars, or prepaid fees have also been given.

A cash equivalency adjustment should be considered when the seller does not receive the full cash proceeds or receives excessive cash proceeds at time of sale. The preferred method for making any market adjustment to a sale is by paired sales analysis. A comprehensive sales confirmation program is essential for development of cash equivalency.
Seller Assisted Down Payments

Historically, FHA required that the down-payment come from the borrower’s own funds. Nehemiah Corporation of America first introduced the down-payment assistance concept in 1994. Nehemiah’s concept was to have the seller contribute a percent of the sales price to a nonprofit organization who would donate the down-payment to the buyer. When a buyer participates in a down-payment assistance program, the recorded sales price is adjusted upward to offset the contribution that the seller makes to a nonprofit organization.

Example:

A home was listed for $120,000 with down-payment assistance available. The buyer offers $132,000. The seller donates $12,000 ($132,000 contract price less $120,000 list price) to a nonprofit organization who then writes a check to the buyer for the $12,000 (minus fees) for “home buying assistance.” The buyer uses the $12,000 as their down payment. The seller receives their full list price of $120,000. The mortgage loan amount is based on the contract purchase price of $132,000. The obvious problem is that the market value of this property is not the contract purchase price of $132,000. The true market value of this property is the price the seller actually received of $120,000.

Even though the buyer and seller do not disclose the down payment assistance, when a sales price is higher than the original list price, this may be an indication that a seller assisted down-payment program was utilized and that further research is warranted.
Seller-Paid Points

An adjustment for seller-paid points is one cash equivalence adjustment that is relatively easy to calculate.

With respect to a mortgage loan, points are described as: “A percentage of the loan amount that a lender charges a borrower for making a loan; may represent a payment for services rendered in issuing a loan or additional interest to the lender payable in advance; also called loan fee.” The Dictionary of Real Estate Appraisal, 7^th Edition, Appraisal Institute, 2022.

It is not uncommon in some markets for home sellers to pay points. If the transaction being analyzed involved seller-paid points in an amount that is typical of the market, then no adjustment is required. The problem occurs when a seller pays an atypically large amount of points. Where this is the case, an adjustment is required.

Example:

Transaction Adjustment: Seller-Paid Points

Total Sales Price (Documentary Fee) $120,000
Down Payment (20,000)
Principal Financed $100,000
Points paid by seller: 3% = $3,000
Atypical Financing

When confirming sales for a universe of properties, outlier ratios are evidence that atypical financing may exist. Further research into this issue may be warranted and an adjustment may be appropriate if that sale is necessary for the setting of values.

Historically, loans had no relationship to the seller. Third-party financial institutions provided terms for loans that were not affected by the underlying price the seller receives. Now many of the nation’s homebuilders have their own mortgage companies that participate in the financing along with the third-party institutions. Sometimes, various creative financing terms are used to qualify buyers including high loan-to-value ratios, discounted interest rates, interest only loans, adjustable interest rates, and extended amortization periods. The sale price used to determine market value needs to be expressed in terms of cash that a typical investor or buyer would pay. Calculating the cash-equivalent price requires an appraiser to compare transactions involving atypical financing to transactions involving comparable properties financed at typical market terms.

When a financing adjustment is necessary, extreme caution should be applied in developing the adjustment. The appraiser needs to understand what typical financing terms are when deciding if the actual financing involved any special advantages or disadvantages. The most typical and easily identifiable is preferential financing. Factors to review may include: loan to value ratios, interest rates, amortization periods, terms of a balloon payment, and the frequency of payments. Nonmarket financing plans can be converted into terms that represent the cash equivalent price paid to the seller as of the date of sale.

Example:

Transaction Adjustment: Below Market Interest Rate

Total sales price (documentary fee) $200,000
Down payment (10,500)
Principal financed $189,500

Contract Mortgage Terms:
Amortization Term 30 yrs, monthly payments
Interest rate 6 %

Market Mortgage Terms:
Amortization Term 30 yrs, monthly payments
Interest rate 10%

Contract monthly payment (6%, 30 yrs, $189,500) $ 1,136.15

Total value of loan (10%, 30 yrs, $1136.15) $129,465.02
Down payment (added back in) + 10,500
Total adjusted sales price $139,965
Rounded $140,000

Note: Using monthly compound interest tables to determine figures may cause slight variations in final values due to rounding.

Another way to estimate the adjustment for the below market financing is to determine the present worth of the difference in monthly payments between the contract payment amount and the market payment amount. This difference should be discounted at the market interest rate and over the total term of the mortgage.

Contract monthly payment: $1,136.15
Market monthly payment: $1,663.00
Difference: $526.85
PW of 1/Period for 30 years at 10%: 113.950820
Financing Adjustment: $60,035

Total Sales Price (Documentary Fee)	$120,000
Down Payment	(20,000)
Principal Financed	$100,000
Points paid by seller: 3%	= $3,000

Total sales price (documentary fee)	$200,000
Down payment	(10,500)
Principal financed	$189,500

Total value of loan (10%, 30 yrs, $1136.15)	$129,465.02
Down payment (added back in)	+ 10,500
Total adjusted sales price	$139,965
Rounded	$140,000

Conditions of Sale

Conditions of sale refer to motivations and/or situations of the buyer and/or seller at the time of the transaction. Examples include; short marketing times, financial duress, related-party sales, or any atypical motivation on the part of either party. A market supported adjustment may be made based on the type of condition. However, these conditions usually cause a sale to be disqualified for ad valorem valuation and are typically never used to set values.

Expenditures Made Immediately After Purchase

Similar to conditions of sale, expenditures made immediately after a purchase usually cause a sale to be disqualified for the use in setting values for ad valorem purposes. The sale price of a property typically reflects its condition and quality at that time. When expenditures or upgrades change the condition or quality of the property, the sale price no longer reflects what was actually sold. A market supported adjustment may be made to reflect these changes. However, these sales are typically disqualified because the property characteristics in the CAMA system do not reflect the quality and condition of the property represented by the recorded sale price.

Non-Realty Items

Incentives that consist of non-realty components such as personal property, business value, or other non-realty interest should be analyzed and subtracted from the sales price to determine the price attributable only to the real property. If the seller and buyer agree on a total price that includes non-real estate items, the appraiser must determine the cash amount that the seller received for these items. Typical items of personal property that may be part of a residential transaction include: a plasma television, appliances, furniture, vehicles, vacation trips, and prepayment of homeowner fees and/or special assessments by the homeowners association.

Measuring and Testing the Accuracy of Transaction Adjustments

After developing transactional adjustments, the accuracy and validity of the adjustments should be tested. Sales that have been adjusted for cash equivalency should be separately stratified for statistical analysis and the setting of values.

Sales in which the seller receives the full sale proceeds in cash, either by way of a financial institution or directly from the buyer, are typically the best measure of accuracy. Through sales ratio analysis, these sales will support or invalidate the financing adjustments made to cash-equivalent sale prices based on their median sales ratio compared to that ratio of the non-transactional adjusted selling prices. Refer to Chapter 8, Statistical Measurements, for additional information on sales ratio and other statistical analysis techniques.

Addendum 7-A, Hotel or Motel Mixed-Use Questionnaire

Addendum 7-B, Gov’t-Assisted Housing Questionnaire

Addendum 7-B, Government-Assisted Housing Questionnaire

Addendum 7-C, Formal Opinion of the Attorney
General

Addendum 7-C, Formal Opinion of the Attorney General

Addendum 7-D, 2024 Possessory Interest Valuation Rates

Ski Area Capitalization Rate

The pass-through component of the ski area capitalization rate represents the twenty-five percent of fees returned to the state by the U.S. Forest Service (USFS) from fees paid by users of USFS land.

Capitalization Rate 14.00 percent (Determined by the Division) + Pass-Through Rate 4.70 percent (Determined by the Division) + Effective Tax Rate (Determined Locally) = Adjusted Capitalization Rate

Level of Value Adjustment Factor

Pursuant to § 39-1-103(17)(a)(II)(B), C.R.S., the actual value of a possessory interest shall be adjusted to the taxable level of value (LOV) using a factor or factors to be published by the administrator pursuant to the same procedures and principles as are provided for personal property in section 39-1-104(12.3)(a)(I), C.R.S.

Possessory Interest LOV Factor: 0.93