International Property Tax Institute recommendations for an audit

International Property Tax Institute recommendations for an audit

For its 2022 General Valuation (GV2022), the City of Cape Town (City) invited bids from suitably qualified organizations to undertake a review of the GV2022 process adopted by the Valuations Department. After the Bid Adjudication Committee completed its review of tenders submitted, the International Property Tax Institute (IPTI) was informed that its bid was successful. IPTI was also successfully appointed in the past to do a review of GV2000, GV2006, GV2009, GV2015 and GV2018.

IPTI is widely recognised as the world’s leading organization on property tax policy and practice. IPTI’s mission is to provide impartial, objective expert advice in the area of property tax systems and promote the concept that these systems should be fair and equitable and meet the needs of all stakeholders, i.e., governments, taxpayers, practitioners and academics.

The scope of work, as set out in the contract between the City and IPTI, was stated as follows.

• Evaluate the City’s conformance to best international practice in the context of computer-assisted mass appraisal.
• Identify and benchmark progress in terms of current industry trends.
• Confirm the extent to which the valuation roll represents a fair and equitable base for the levying of property rates.
• Comment on any observed inadequacies and recommend future improvements in work processes, valuation methodologies, quality control procedures and technologies.
• Comment on observed improvements and trends based on previous audit reports.
• Provide an audit opinion showing the high-level compliance issues and any matters arising that need addressing.
• Submit a management letter showing all the issues raised that need specific attention.

The original documentation referred to an “audit” of GV2022; however, at an early stage in the process, the City requested IPTI to refer to their work as a “review” of GV2022. This was in response to the City’s Internal Audit Department which advised that the work to be done by IPTI could not be regarded as an audit in the conventional sense.

IPTI’s purpose was essentially to review the accuracy and uniformity of property values produced for the GV2022 Valuation Roll. IPTI advised that their review would employ recognized mass appraisal testing procedures and techniques to verify assessed property values against the accepted professional standards of accuracy expressed in the International Association of Assessing Officers (IAAO) Standard on Ratio Studies (2013). The focus would be on operational outcomes of assessments with much less emphasis on procedural processes. IPTI further advised that the final product deliverables would not consider property types that did not have a valid sample size or specialised property values not based on market value.

IPTI informed the City that their final report would contain graphical and tabular presentations of the statistical results in addition to a narrative component that included full descriptions of:

• Factors considered in the design of the study.
• The methodology used to perform the study.
• The methodology used to time adjust sale prices to valuation date.
• The handling of extreme ratios or values.
• Potential areas of improvement and areas of strength.
• Use of Computer Assisted Mass Appraisal (CAMA) technology and how new industry trends may impact the City’s results.
• Commentary regarding best practices from which the City may benefit in adopting.

For the GV2022 review, IPTI considered and identified strengths and weaknesses and made recommendations in the following important areas:

1. Overall Outcome of IPTI’s Review. This refers to the approach and manner in which the GV Roll was prepared and the overall extent to which the GV Roll represents a fair and equitable base for the levying of property rates in Cape Town.

2. Legislative and Administrative Framework. As part of its review, IPTI interviewed officials from the Valuations Department to set out any suggestions for changes in the legislative framework that might improve the operation of the property rates system in Cape Town. IPTI also carried out a brief review of the legislation, primarily to ensure it had a good understanding of the statutory requirements for the purposes of its consideration of the Valuations Department’s work on GV2022.

3. Data Collection and Analysis. IPTI reviewed the various data collection processes employed and the extent of integration with technology, taking into account the constraints on physical property inspections imposed by Covid-19. Their work included a review of the extent to which data collection was integrated with the Valuations Department’s GRM CAMA system (i.e. the valuation database and modelling software used by the Valuations Department), as well as the effectiveness of this system’s workflow component, used to track and monitor the progress of work to improve cycle times.

Further, IPTI reviewed the organisation and discerned how technology was used and compared this to new industry trends that could provide impactful results for the City. This included a review of the CAMA technology, the City’s data-management strategy and integration points and the provision of feedback on areas where IPTI was of the view that the City could gain positive results. IPTI also highlighted areas where the City excelled within the Valuations Department compared to international best practices.

4. Valuation. IPTI reviewed the suitability of the different types of CAMA candidate values produced for the different property typologies i.e. candidate values determined in terms of the sales, income and cost approaches to valuation for the different property use types. This included a review of the data sources on which non-residential CAMA modelling depended.

5. Internal Review of Valuations by the Valuations Department. IPTI reviewed the procedures that are required to direct the valuers to use one of the modelled values as the preferred valuation during a general valuation and to limit the use of override values. IPTI stressed the importance of a written set of standard operating procedures that should clearly identify the reasons why an override value is acceptable in specified circumstances. It was also emphasised that all override value reasons should be made available to the CAMA modelling team so that they can take this feedback into consideration during the next general valuation cycle.

6. External Review of Valuations by IPTI. IPTI carried out a detailed sales ratio analysis for each of the 16 residential modelling regions, income-producing properties, sectional title properties, non-residential vacant land properties, residential vacant land properties, and agricultural vacant land properties.

Evaluating appraisal performance involved the application of the IAAO’s Standard on Ratio Studies in the design of IPTI’s independent ratio study analysis (i.e. the appraised value of a property divided by its sale price). Ratio studies examine appraisal uniformity and are usually concerned with a general measure of overall variability, like the Coefficient of Dispersion (COD), as well as a measure of variability that specifically measures vertical inequity, like the Coefficient of Price-Related Bias (PRB) or the Price-Related Differential (PRD).

The COD provides a general measure of how tightly the sales ratios are distributed around the median sales ratio. The lower the COD, the more tightly the sales ratios are distributed around the median sales ratio. Conversely, the higher the COD, the more spread out the sales ratios are around the median sales ratio. The IAAO standard range used for the COD varies by type of property and factors such as the size of assessing jurisdiction. With the City’s review, a standard of 5% to 15% was used for residential properties and sectional-title properties, 5% to 20% for income-producing properties and residential vacant land properties, and 5% to 25% for non-residential land properties and agricultural vacant land properties.

The PRB and PRD are measures of market value vertical inequity and therefore give an indication of whether the vertical inequity, if any, is regressive (favouring higher-valued properties) or progressive (favouring lower-valued properties). The IAAO Standard on Ratio Studies states that the PRB standard range is -0.10 to 0.10 and that values outside of this range constitute unacceptable vertical inequities, while the PRD acceptable standard range is 0.98 to 1.03.

7. Communications. IPTI considered the communications strategy of the Valuations Department, required to inform all stakeholders about GV2022 and its impact on them and compared this to international best practise.

8. Review of IPTI’s Previous Recommendations. IPTI reviewed the extent to which previous GV recommendations were implemented for GV2022, taking the obstacles of time, resources and desire into account.

9. IPTI’s Quality Assurance Framework. IPTI has a very strong focus on quality and therefore shared their Quality Assurance Framework (QAF) with the Valuations Department, with the recommendation that the Valuations Department carry out a self-assessment of its quality standards, quality assurance and quality control processes and procedures using the QAF to identify where further improvements may be made.

10. Recommendations for the particular GV.

As with previous IPTI reviews, the GV2022 IPTI Report provided detailed findings and recommendations for further improvement.

The overall outcome expressed was as follows:

“IPTI found that the Valuations Department of the City of Cape Town approached the work involved in preparing valuations for GV2022 in a professional and enthusiastic manner and considers that the valuation roll overall represents a fair and equitable base for the levying of property rates in Cape Town.”