Developing a capitalization rate for tax assessment purposes
seems like a relatively simple task. Using the market extraction
approach, the one most commonly employed by assessors and
appraisers, a property's net operating income (NOI) is divided
by the sale price to extract a cap rate. Sounds simple, right?
While the math offers no challenge, the proper application of
this method for tax assessment purposes presents a quite complex
problem.  Property tax assessors and appraisers usually take a
few recent comparable sales and do the quick math to establish
an applicable cap rate for a property. However, just because the
comparable sales look and function similarly to the appraised
property does not necessarily mean they are financially similar.
This is where the extraction method's complexity comes into
play.  What's so complicated?  When using the extraction method,
assessors seldom, if ever, consider three critical issues. First
and foremost, there must be reliable and sufficient data on the
comparable sale