Economic obsolescence

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Additional information on economic obsolescence requests:

ORPTS has experienced a steady increase in the number of requests for obsolescence over the last several years. Many of these requests had little or no documentation to support their conclusions and were denied. In order to eliminate confusion, and save time and resources for all concerned, we have elaborated on our position on economic obsolescence. The Rules for Real Property Tax Administration 20 NYCRR  8197- 2.8 define economic obsolescence as the loss in value of property caused by an impairment in desirability or useful life resulting from factors external to the property. Remember it's important to first identify the impairment to value and then measure the impairment's loss of value to the property.

The loss in value can be measured several ways, but adequate documentation must be provided. Companies that file an Annual Report to the Public Service Commission, generally have an acceptable source of financial data in that report. ORPTS has devised a model for determining economic obsolescence based on the Annual Report to the Public Service Commission. The components of this method are defined in the Procedures of ORPTS. This method requires determining a five-year average achieved rate of return on rate base and comparing that to a modified five-year average required rate of return based on the capital structure. Be advised that any allowances for functional obsolescence and other valuation reductions will need to be reflected in the rate base. If the modified required rate of return exceeds the achieved rate of return, the difference is divided by the modified required rate of return to determine an economic obsolescence factor. An explanation why the modified required rate of return is not being met is necessary. If the economic obsolescence factor is approved by ORPTS, it will be applied to the special franchise assessments and/or full values and to any advisory appraisals. ORPTS has provided templates that indicate the items used in the determination of economic obsolescence. There may be circumstances when it's misleading to use the amounts in the Annual Report to the Public Service Commission. In these circumstances, additional data may be necessary. There are templates for electric & gas, water and local distance telephone companies. These templates have red field tabs that indicate the page numbers of the required information in the Annual Report to the Public Service Commission. Each template is posted on the internet.

If your company is not required to file an annual report with the Public Service Commission, it may be possible to examine other filings, such as, annual financial reports to the Federal Energy Commission (FERC) or audited financial statements. ORPTS has provided a template for natural gas pipeline companies. This template indicates the data needed in the FERC Form No. 2, Annual Report of Major Natural Gas Companies. There may be circumstances when it's misleading to use the amounts in the Annual Report to the FERC. In these circumstances, additional data may be necessary.

These templates are not the only acceptable methods to measure obsolescence. However, ORPTS will not accept the following as proof of obsolescence:

• Any request not supported with documentation
• Newspaper and /or magazine articles, which broadly define market trends
• Requests based on a business valuation
• Requests not specific to New York State

If you have any additional questions on obsolescence, please contact valuation services at (518) 474-5711.