MPAC values most rented commercial, industrial and multi-residential buildings using the income approach: what the property could earn, not simply what it might sell for. Here is what goes into that calculation, in plain words, with a worked hypothetical example.
The numbers behind an income value
MPAC’s income approach works through the same sequence an appraiser would use.
- Market rent. What the space would rent for today, based on similar buildings, not necessarily what your own lease says.
- Vacancy and collection loss. A deduction for the space that is realistically empty or where rent goes uncollected, based on the market for that property type, not only your own building.
- Operating expenses. The normal costs of running the property, such as realty taxes, insurance, utilities, maintenance and management, normalized against similar buildings.
- Net operating income (NOI). Market rent, less vacancy and collection loss, less operating expenses. This is the income MPAC treats the property as capable of producing.
- Capitalization rate. A rate MPAC derives by studying sales of similar income properties and comparing sale price to income. Dividing NOI by the capitalization rate produces the assessed value.
A hypothetical example
The figures below are a hypothetical, built only to show how the pieces move together. They are not a valuation of any real property.
| Hypothetical 20,000 sq ft building | Amount |
|---|---|
| Market rent, $18.00 per sq ft | $360,000 |
| Vacancy and collection loss, 5% | -$18,000 |
| Effective gross income | $342,000 |
| Operating expenses | -$120,000 |
| Net operating income (NOI) | $222,000 |
| Capitalization rate | 6.0% |
| Value (NOI divided by cap rate) | $3,700,000 |
Two small changes move that value a lot. If market rent were $16.00 instead of $18.00 per square foot, with everything else the same, effective gross income drops to about $304,000, NOI to about $184,000, and the value at the same 6.0% cap rate falls to roughly $3,066,667, a drop of more than $600,000 on a two-dollar rent difference. If rent stays at $18.00 but the cap rate moves from 6.0% to 6.5%, the value on the same $222,000 of NOI falls to about $3,415,000, even though nothing about the property’s income changed. This is still the hypothetical example, but the same kind of movement, in either direction, applies to a real property’s own numbers.
The same math works in reverse. If the evidence shows the market rent MPAC used was too high, the vacancy allowance too low, or the capitalization rate too low, correcting any one of them lowers the value through the identical formula. That is the basis of most income-approach appeals: not a broad argument that the assessment feels high, but a specific, evidenced correction to one or more of the inputs above, supported by comparable leases, vacancy data or sale and income evidence for similar buildings.
Where MPAC’s numbers come from
MPAC does not rely on your lease alone. It collects rent, vacancy and expense data across income-producing properties every year through the Property Income and Expense Return (PIER), a mandatory filing under section 11 of the Assessment Act that goes to roughly 35,000 property owners annually (MPAC, Property Income and Expense Return). It combines that with its own market analysis of sales and financial performance across similar properties to set the market rent, vacancy allowance and capitalization rate it applies to your building. See our PIER service and key dates for when PIER is due each year.
Which property types this applies to
MPAC applies the income approach to properties built to generate rent: shopping centres, office buildings, multi-residential buildings, hospitality properties and industrial malls among them (MPAC, three approaches to value). If you own a shopping plaza, an office building or an apartment building, this is very likely how MPAC arrived at your assessed value, and the inputs above are the ones worth checking first. See retail and plazas, office and multi-residential for what that means by property type.
Why checking MPAC’s inputs is often the strongest case
Because the value comes from a formula, the strongest challenge is usually to the inputs, not the arithmetic. Is the market rent MPAC assumed actually supported by comparable leases for a building like yours? Is the vacancy allowance realistic for your property type and location? Are the operating expenses normalized against the right group of comparables? Is the capitalization rate drawn from sales that are genuinely similar to your property? A dispute over any one of these can move the assessed value substantially, as the hypothetical above shows. This is the work behind our assessment appeals service.
Two other approaches, briefly
MPAC uses two other methods for property types where income is not the best evidence of value. The direct comparison approach values a property against recent sales of comparable properties; MPAC uses it mainly for residential properties, condominiums and vacant land (MPAC, three approaches to value). The cost approach is reserved for properties that rarely sell, working through the cost to replace the building, a deduction for depreciation, and the land value; MPAC applies it to general-purpose industrial buildings, warehousing and other special purpose properties, which is why those property types are argued differently from a rented shopping centre or office building.
If your property is valued using the income approach and something in the numbers looks off, that mismatch, not a general sense that taxes are too high, is what an appeal is built on. See how an assessment appeal works or contact us to have the inputs checked.