Factoring: Used properly, this assessing tool can improve a community's overall assessment ratio without negatively affecting the quality rating

(from Maine Townsman, February 1994)
by Michael L. Starn, Editor

In 1985, the Old Post Office building in downtown Augusta was bought by a couple of local businessmen for $450,000. In 1989, it sold for $1.7 million to a group of investors from away. Then, in 1992, the building was foreclosed on and auctioned off for $222,000.

"The city had the building valued at $1,196,000 in 1989," says Don Cadwell, city assessor. Since then he has lowered the value three times to this year's assessment of $488,000.

"Who knows what the building is worth?" says Cadweil.

The 1980s wreaked havoc on municipal assessing in this state, according to Cadwell. The story of the Old Post Office is more than just an example of overspeculation and volatility in Maine's real estate market during the boom and bust of recent years. It also represents how difficult the job of a municipal assessor can get when there are no "arms length" transactions on which to base valuations.

"During the mid to late 1980s, a lot of the investment decisions were based on what they (investors) expected for income from rising rents for both office and retail space in downtown Augusta," says Cadwell.

Many of these investments didn't pan out and little or no sales activity has occurred; therefore, Assessor Cadwell has had a difficult time getting a real handle on the "just value" of properties in downtown Augusta.

Over the past three years, all the sales on Water Street (downtown Augusta) have been bank sales, according to Cadwell. Last year, without hard data (arms length sales) to go on, Cadwell reduced the value of commercial property along Water Street by 15%. He admits the decision was a "by the seat of my pants" judgment call, but he also thinks it was the right one.

Much of the real estate activity in downtown Augusta during the 1980's was spurred on by speculation that the $10.5 million Key Bank Plaza built in 1988-89 would have a positive economic impact. A number of investors anticipating that the Key Bank building would anchor the downtown and set the stage for an economic revival bought thinking short-term — they expected their investments could be sold at a much higher price in a few years.

But, it didn't happen that way. Recession hit and vacancies in the downtown remained high. With the writing on the wall, some investors got out with "fire sales" of their property; others were forced out by foreclosure; and a few have hung onto their properties, hoping some day to get their investment back. Cadwell has observed and determined that "economic obsolescence" has lowered the value of commercial property in the downtown.

For the 1993-94 tax year, the Augusta assessor also reduced the value of multi-family housing (only older properties). For these properties, Cadwell had 41 sales between 1990 and 1993 to go on. From the sales, he realized that this class of property was significantly overvalued. "I used a combination of uniform reductions and my personal knowledge of the property," he said.

Assessors use different terms to describe the action that Cadwell took in lowering property values without a revaluation of the entire city. Some assessors call it factoring, others call it trending, and some call it interim adjustments. For purposes of this article, the term "factoring" will be used to denote any change of valuation for other than maintenance or abatement reasons between revaluations.


Many people think of factoring as the process of applying a uniform percentage to raise the value of all property in a community and thereby improving the assessment ratio of the town (local value to fair market value). Factoring can also be used to decrease the assessments on groups of properties by a uniform percentage.

A municipal assessor has the responsibility of reviewing annually all the sales and other relevant data that's available to determine if inequities exist, and making adjustments where necessary to provide more current assessments and greater uniformity overall. When inadequate sales exist, the experience and knowledge of the local assessor becomes the only resource available to make informed judgments about the valuation of property.

The technique of factoring is most effective when properties are segregated to the greatest extent possible with respect to type or class (shorefront residential, multi-family, etc.) and neighborhood or location (on Great Pond, along Main St., etc.).

The local assessor relies mostly on sales data to detect areas of inequity in the municipal assessment. Very little sales data is generated from commercial or industrial properties and residential sales data is often very sparse in small communities. Sometimes sales must be looked at by region and over several years to detect trends.

A number of communities conducted revaluations in the late 1980s or early 1990s and with residential values remaining stagnant over the past few years in many areas of the state, many assessors have found little incentive to factor since their overall ratio has remained high.

What some assessors have missed are those markets other than single family residential that have seen dramatic fluctuations. Multi-family housing, condominiums, and commercial properties, in particular, have witnessed significant reductions in value in some areas of the state.

As previously mentioned, the city assessor in Augusta reduced values on multi-family housing and downtown commercial properties. South Portland City Assessor Elizabeth Cumback has reduced the valuations on condos, multi-family and some commercial properties.

Factoring can negatively affect the coefficient of dispersion, or quality rating, of a community. A high quality rating (state standards allow up to 20) indicates that similarly constructed and situated properties in a community are not being equally assessed. When assessment discrepancies within a property group exist, factoring all values in that property group by the same multiplier will exacerbate the inequities.

Factoring is most practical and effective when previous appraisals have established a firm base of intragroup equity.

On the other hand, failure to factor a group of properties where the assessment ratio is seriously out-of-line with the rest of the community will mean an unfair burden has been placed on that group of taxpayers. Perhaps the best that can be done is to factor the assessments by a conservative number, that is by a factor less than that indicated by the average assessment level alone. This approach represents a compromise between overall equity on the one hand, and large random overassessments accompanied by the prospect of appeals on the other.


In the past, the rationale for factoring was usually to postpone the cost of a revaluation. Sometimes it was used to bring a town up to the state's minimum assessment ratio (70%), but without penalties for failing to meet the standards, a delinquent town was more likely to wait until a revaluation could be undertaken. A recent change in the Tree Growth reimbursement statute which penalizes communities with an assessment ratio less than 70% has given some communities a financial incentive for factoring.

Under current law, for every 1% that a community drops below the 70% standard, its Tree Growth reimbursement is reduced by 10%. Thus, a community whose assessment ratio was 65% would lose 50% of its Tree Growth reimbursement.

"If a town finds itself in jeopardy of losing its Tree Growth reimbursement, in whole or in part, and factoring can be done without destroying equity, then it wouldn't make sense not to do it," says David Ledew of the Bureau of Taxation, Property Tax Division.

Ledew and others contacted for this article believe that to protect a community's tree growth reimbursement, across the board factoring may be appropriate. This type of factoring should be done only to get into a comfort zone (say 75% ratio) that will protect a community's Tree Growth monies. Segregated factoring is needed to make the adjustments to property values caused by market shifts.

Ledew says significant progress has been made over the past five years by Maine communities as a whole in bringing their ratios up. In 1988, the statewide assessment ratio (total municipal valuation divided by total state valuation) was 71%; by 1992, it had jumped to 92%.

Still, some smaller communities, which may have signficant land in Tree Growth, will come in under the 70% minimum. The Bureau of Taxation will be sending out "relevant assessment ratios" to municipalities within the next couple of weeks, according to Ledew. For communities that don't meet the 70% minimum ratio, at this point the only option to save their Tree Growth reimbursement would be to appeal the ratio to the State Board of Property Tax Review. A community has 45 days from when they are notified of their "relevant assessment ratio" to appeal it.


There are political considerations with factoring that should be thoroughly evaluated, even by the most conscientious local assessor.

With big discrepancies, says South Portland's Cumback, "you've got to do it or you'll find yourself in court all year (with appeals)," but modest adjustments usually "aren't worth the aggravation."

It is also clear that a better opportunity exists to factor segregated properties downward when they don't make up a large part of the municipalily's total assessment and when new construction has added to the overall municipal assessment.

"If you can absorb the adjustments with new construction, it makes it easier, but even without it, I would have had to make the adjustments," says Augusta's Cadwell.

Cadwell lowered multi-family and downtown commercial by $7.6 million, which represents less than 1% of the city's total valuation. New construction had added $13 million to the city's valuation, so the net difference was $4.4 million of added value.


The International Association of Assessing Officers (IAAO) says there are three basic steps in assessment trending (factoring).

The first step is stratification. For factoring purposes, the objective is to identify property groups that are likely to appreciate or depreciate in value at approximately equal rates, while at the same time preserving adequate sample size. Class and neighborhood (location) are the commonly used criteria for segregation.

In general, stratification for factoring is the same as stratification for purposes of identifying comparable sales. Sales information comes from the "declaration of value" on real estate transfers and in aggregate from the Property Tax Division of the State Bureau of Taxation (which collects sales information and also performs sales ratio studies segregated into 14 classes of property). The problem with the State's data is that it's two years old. Most municipal assessors collect their own sales information to make it more current and more reflective of the current value of property in the community.

The second step in factoring is determination of the assessment level for each segregated group. The objective here is to determine first the municipality's overall assessment ratio and then the assessment ratios of each group. Fortunately, the state sets the community's overall assessment ratio. That ratio, or if the municipality has a more reliable ratio based on more current sales data, can be used as the benchmark to compare the segregated classes to determine if inequities exist. For example, a community may have an overall assessment ratio of 95% but its shorefront residential may be at 60%, multi-family might be at 80%, and condominiums at 85%.

The final step in the factoring process is to develop the trending factors themselves. First, you need to decide where you want to be. Using the above example of variations in assessment ratios among property classes, the assessor would first set a ratio for where he wants all property to be. To simplify things, let's say the assessor wants all classes of property to be at 95% (the community's overall ratio). Shorefront residential would have to be factored by (multiplied) 1.5833 (known as the reciprocal and obtain by dividing .95 by .60); multi-family would be factored up 1.1875 (.95 divided by .80); condominiums would have a reciprocal of 1.1764 (.95 divided by .85); and assuming all other classes in the community were already at the 95% target they would be factored by 1.0, or kept same.

South Portland's Cumback believes assessors should first look at land values before doing segregated factoring of land and building combined. She suggests looking at vacant land sales in the community and comparing them to land values currently being used by the assessor. Because construction costs tend to fluctuate less than land values, Cumback says a class-by-class adjustment on land values may get you where you want to be without affecting your cost replacement and depreciation schedules.


36 M.R.S.A, section 848-A states that when an assessment is challenged, the town can defend the assessment on the basis that it is accurate within reasonable limits of practicality. "Sufficient" defense is established by statute as an assessment being within 10% of the relevant assessment ratio of the municipality. By example, if a community had an overall assessment ratio of 95% and someone appealed their assessment contending they were being assessed at 100% of fair market value, the municipality could use the "within 10%" as sufficient defense to have the appeal denied.

Taxation's Ledew believes that the "within 10%" burden of proof standard gives assessors some guidance as to when they should be considering adjustments (factoring) to classes of property.

"If a particular class deviates 10% or more from the overall assessment ratio, it would be an area I would want to address," he says, adding that all of the properties in that class would be potential abatement requests (without the "sufficient" defense for the municipality).

Another recent statute that assessors should be aware of prohibits a community from being at 110%, or greater, of fair market value.


Twenty years ago, most communities manually typed tax bills, valuation books and property cards. Today, computers can do factoring with the click of a button and video technology allows assessors to bring up property cards and a photo of the property simultaneously. The video technology also allows the assessor to bring up comparable properties on the same screen to give the complaining taxpayer more than just words to better understand how their valuation was arrived at.

"When I started in municipal assessing," says Jim Phillips, former Bangor city assessor, "it took a week to do what now can be done in a day."

Small computers (PCs) store vast amounts of assessing information on small disks; computers can analyze data in a thousand different ways; complex calculations can be made with lightning speed; and retrieval of a taxpayer's property records is at the tip of the assessor's fingers.

"More and more of the tax burden is being shouldered by property taxes," says Phillips. "And, more and more accuracy and information is being demanded by property taxpayers."

"Using the computer to store information and being able to retrieve it in an efficient manner is the only way to go ... I can't see it going any other way," says Phillips.