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Real Estate Valuation II
Introduction
[14] Mackmin (2008) provides a detailed review of the dual rate valuation method and suggests that this method is defunct because of the flawed "reinvestment principle", and other shortcomings summarised by [4] Baum et al. (2006). The authors of this paper fully agree with this proposition. This paper does not intend to further investigate the problems with the dual rate valuation method. It concentrates on what is believed to be the only rational reason for using the Dual Rate adjusted for tax method variant. It is submitted that this method has the logic of allowing valuers to retain the gross of tax remunerative rate for the purposes of bring cross-comparability with valuations of freehold or long leasehold interests.
The structure of this paper is:
- Valuing a freehold and a leasehold interest by the single rate gross and net of tax approaches to show the logic that works with freehold valuation interest may not work with leasehold valuation.
- Exploring the tax impacts on sinking fund.
- Resolving the taxation issue of sinking fund.
- Demonstrating the solution to the "Double Sinking Fund Problem" by the Greaves method and the Single Rate Net of Tax approach.
- Exploring the future of the dual rate theory.
- Conclusion.
It is concluded that if valuers accept that the only justification for a Dual Rate adjusted for tax valuation is the taxation difficulties that surround recoupment of capital, then the same valuation can be achieved using Single Rate valuation of the net of tax income. From that conclusion we suggest that valuers of the "UK School" might consider that not only should Dual Rate valuation be regarded as defunct, but also that the more appropriate approach might be to move to a net of taxation approach. Such an approach would unite the "UK School" with the "US School" and would be a more appropriate method in a globalised valuation environment.
Gross v. net of taxation valuation
Consider a freehold interest yielding a gross of tax income of $100,000 per annum where comparable evidence indicates a gross of tax yield of 8 percent. The value would be as shown in Table I [Figure omitted. See Article Image.].
Assuming tax at 30 percent, the...