Assessed Valuation and Property Taxation of Multifamily Housing: An Empirical Analysis of Vertical and Horizontal Equity and Assessment Methods

Assessment uniformity in ad valorem taxation has been carefully examined for single-family residential properties. The findings of such studies are mixed, but research commonly reports nonuniform outcomes in the appraisal of residential properties. In this paper we analyze the uniformity of the property appraisal outcome for multifamily apartment complexes in Phoenix, Arizona. Specifically we investigate vertical and horizontal equity and equity across assessment methods. Vertical equity results when the assessment ratio-the ratio of assessed value to market value-is uniform across property value ranges. Horizontal equity results when the assessment ratio is uniform across properties with similar market values. We examine apartment transactions and assessed valuations over a five-year period (1998-2002). The Phoenix case is particularly interesting because the appraisal process differs according to the number of units in the complex. A hedonic sales comparison approach is used for smaller properties (fewer than 13 units); while a hedonic income approach is used for larger properties (more than 12 units). Once we account for possible bias in model specification, we find no evidence of vertical inequity in the sample. We do however find modest evidence of horizontal inequity: the results suggest that complex size and geographic location are more difficult for the assessor to value uniformly. We also find inequity between small and large properties, as represented by two different valuation methods, and conclude that the income approach is superior to the sales comparison approach for valuing multifamily properties for tax purposes.