Montana Administrative Register Notice 42-2-959 No. 22   11/25/2016    
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In the matter of the adoption of New Rule I and the amendment of ARM 42.20.106 pertaining to golf course valuation






TO: All Concerned Persons


1. On August 19, 2016, the Department of Revenue published MAR Notice No. 42-2-959 pertaining to the public hearing on the proposed adoption and amendment of the above-stated rules at page 1433 of the 2016 Montana Administrative Register, Issue Number 16.


2. On September 13, 2016, a public hearing was held to consider the proposed adoption and amendment. Robert Story, Montana Taxpayers Association; Terry Nelson, Whitefish Lake Golf Course; Stephen Dunfee, Buffalo Hills Golf Course in Kalispell; Chris Nowlen and Fred Schiwal, Missoula Country Club; and Floyd Hoff and Thomas C. Morrison, Fox Ridge Golf Course in Helena, all appeared and testified at the hearing. Ron Hill, Lake Hills Golf Course in Billings, provided written comments to be read into the record at the hearing and also provided written comments following the hearing. Other members of the public attended the hearing but did not testify.


3. The department is not amending ARM 42.20.106.


4. Based upon the comments received and to correct the authorization and implementing statutes for the new rule, as presented at the hearing, the department adopts New Rule I (42.20.120) as proposed, but with the following changes, new matter underlined, deleted matter interlined:


NEW RULE I (42.20.120) GOLF COURSE VALUATION (1) remains as proposed.

(2) When using the income approach, the department will determine market value using a gross income multiplier (GIM), as defined in ARM 42.20.106For the purposes of this rule, GIM means the ratio between the sales price of similar properties with respect to location, golf course classification, condition, length of time the golf course is open, and the gross income of the subject property. Using

(3) When using a GIM, market value is derived by multiplying the gross income (GI), as defined in ARM 42.20.106, by the GIM. For the purposes of this rule, GI means the anticipated income from all operations of the real property before subtracting vacancy and operating expenses. Golf course gross income is from all sources including, but not limited to, green fees, cart path fees, cart rentals, lease income, pro shop income, and food and beverage income.

(4) Use of a GIM is preferred if:

(a) through (c) remain as proposed.

(3) and (4) remain as proposed, but are renumbered (5) and (6).

(5)(7) The department will not reduce the estimated value of the property if the taxpayer fails to submit the information required by (3)(5).

(6) remains as proposed, but is renumbered (8).

(7)(9) If the department uses the sales comparison approach in (6)(8), the department will look for golf course sales from the subject's market area. If sufficient, relevant information does not exist within the market area the department will seek golf course sales statewide. If sufficient, relevant information does not exist statewide, the department will seek golf course sales in surrounding states and/or regional areas.

(8) and (9) remain as proposed, but are renumbered (10) and (11).


AUTH: 15-1-101 15-1-201, MCA

IMP: 15-8-306 15-6-134, MCA


5. The department has thoroughly considered the comments and testimony received. A summary of the comments received and the department's responses are as follows:


COMMENT 1: Chris Nowlen, representing the Missoula Country Club, asked where the problem is with the current method of golf course valuation. Why is the department proposing to change the way it values golf courses?

Ron Hill, former owner and current mortgage holder on Lake Hills Golf Course in Billings, stated that to the effect the department's proposed rule is a good start in view of the Montana tax appeal board's ruling, the valuation method currently used by the department does not sufficiently capture all forms of depreciation. However, the determination of a gross income multiplier (GIM) needs to be clarified and better defined. He stated that in his opinion, GIM is not currently defined in ARM 42.20.106, as the department suggests it is. The proposed definition is a problem because the key word "similar," in reference to similar properties, needs to be more clearly defined and include seasons, climates, and agricultural considerations.

Mr. Hill further stated that all three valuation methods require similar or comparable properties. The challenge is that very few properties have utility similarities to a golf course, and very few golf courses are exactly alike. Also, the golf industry is in an economic decline and subject to seasonal and climate restraints. These challenges must be addressed in all three methods of value.

Robert Story, Executive Director of the Montana Taxpayers Association, commented that while they understand the department's need to standardize its methodology for valuing golf courses, they are concerned about a couple of the proposals. First, the department's use of a standard GIM has the potential to be problematic due to the unique nature and circumstance of every golf course in Montana. While the use of a GIM is an established approach to golf course valuation, the multiplier used is almost unique to each golf course. Use of a standard GIM will likely create many appeals because the owner is going to question where the department came up with the multiplier numbers. Buyers and sellers have different ideas of what multiplier should be used on a given golf course, and that is a major part of the negotiations in setting the price. The mixture of income a particular golf course has will greatly affect the multiplier used. He commented that the department should have criteria in rule as to how it will determine the multiplier for golf courses depending on the services they provide.

Terry Nelson, representing Whitefish Lake Golf Course, asked how fairness in valuation can be accomplished through the use of a standard GIM, given the extensive diversity of golf course operations across the state. Whitefish, for example, has 36 holes. One golf course is owned by the City of Whitefish and one is locally owned by a golf association. The one owned by the City of Whitefish is not subject to property tax. How would the concessions that operate on the city property be treated tax-wise? The greens fees on each property are also widely divergent. To sort out all of the differences between these two types of properties, in the interest of fairness and equity, is a monumental task.

Mr. Nowlen also asked how the department will distinguish between a thriving golf course and a failing one through the income approach method. He reiterated the concern of others that no two golf courses are the same in terms of operations, deed restrictions, concessionaire income, etc., and asked how the department will treat outside income from concessionaires, tournament fees, and charitable donations in its proposed use of a standard GIM.

Mr. Nowlen also commented that deed restrictions to individual properties need to be carefully examined and taken into consideration when valuing a golf course property. For example, the Missoula Country Club has deed restrictions for all three of its parcels of land, including 11 undeveloped acres that cannot ever be developed according to the terms of the sale from the University of Montana.


RESPONSE 1: The department appreciates the time and comments from all who expressed an interest in this rulemaking action. The department proposed the new rule and definitions because the current methodology does not allow enough depreciation for economic obsolescence in addition to incorporating industry standards and the Uniform Standards of Appraisal Practice, which require all three valuation methods to be considered in determining market value.

The income approach to value is determined by multiplying the golf course's total gross income by a multiplier. The gross income multiplier (GIM) is determined from sales of golf courses with similar characteristics such as location, condition, classification, and length of time open during the year. The department understands that no two golf courses are exactly alike and therefore similarities as opposed to exact characteristics are considered when looking at sales. In mass appraisal, similar properties are grouped together and adjustments are made for specific differences. A golf course's market value considers economic decline and climate restraints, along with the uniqueness of a particular golf course, because these are reflected in the total gross income.

The GIM is multiplied by the golf course's total gross income; thus, the property value is dependent upon the property's gross income. For example, a GIM of 1.5 multiplied by a total gross income of $1,000,000 results in a market value of $1,500,000. A GIM of 1.5 multiplied by a total gross income of $500,000 results in a market value of $750,000.

The department agrees that more clarification is warranted and has determined that defining the term GIM within New Rule I, as it applies specifically to golf course valuation, is more appropriate than adding a general definition of the term in ARM 42.20.106, which contains definitions for all rules in the subchapter. Therefore, the department has amended New Rule I(2) to include a detailed definition of GIM that specifies location, classification, condition, and length of time open. Accordingly, ARM 42.20.106 is not being amended as proposed.


COMMENT 2: Thomas C. Morrison, representing Fox Ridge Country Club in Helena, commented that he supports the use of the income approach to value for commercial properties, as the revenue stream is of the most interest to potential investors. The sales comparison approach is unreliable due to the unique nature of golf course properties.

Mr. Morrison added that he understands why the department is focused upon gross income and multiple net income because those can be distorted by expense items such as salaries. Administrative costs are involved in running a golf course. Any buyer or seller using an income method would have to consider administrative costs. He stated that administrative costs should be subtracted before a determination of gross income. In the real world, if you are using the income method of valuation an investor wants to know, based on a predictable income stream, how long it will take to recover his investment. This concept is captured in the capitalization rate (cap rate). However, he commented that he has not seen cap rate mentioned in the language of the proposed rule. If the department is contemplating an income method of valuing golf courses, a cap rate notion should be built into the formulas.

Mr. Story stated his concern that requiring golf course owners to report their income will become a burden to the process. If a golf course does not comply, the department will develop its own income projections and the owner will not be able to appeal that determination.

Floyd Hoff, representing Fox Ridge Country Club in Helena, stated his concern with the income approach is that the department failed to foresee that the income from the bar and restaurant sales do not flow to the golf course itself. A separate entity provides that service and receives the income from it. That income is not part of the golf course income.

Stephen Dunfee, representing Buffalo Hills Golf Course in Kalispell, stated he has a concern that the presence of concessionaire income, which many golf courses have, makes the determination of actual gross revenue attributable to the golf course very difficult. Many golf courses have concessionaires where the golf course operates and then leases out the concessions, pro shop, bar, restaurant, driving range, etc. In addition, many golf courses experience pass-through or phantom income, such as tournament fees, which cannot be income attributed to the actual gross revenue of the golf course. If gross income and the GIM are used, there are many different income modifiers that will need to be considered.

Mr. Dunfee also commented that the trend lines in golf are very disturbing in the last several years with respect to gross and net income. A reflection of this decline in the golf industry is that the Buffalo Hills Golf Course is currently trying to secure a charitable donation through the Flathead Community Foundation. He asked if charitable donations would be considered gross income. If so, he stated that this would be unfair to both the donor and the property owner.


RESPONSE 2: The department agrees that the income stream is important to investors. Investors look at all forms of income, including contracts and leases. Although only concessionaire or bar and restaurant income that is actually realized by the golf course is included in the gross income, if concessionaire or bar and restaurant income does not flow to the golf course, it is not included in the gross income. When a golf course sells, all attributes of the golf course are considered in the sale price. An investor considers all sources of income and all expenses that are derived by the golf course operations before purchasing or investing in a property. The gross income multiplier (GIM) is based on the investor's purchases, is the preferred method in the industry, and is widely accepted and used by fee appraisers when conducting golf course appraisals for investors and lenders. The GIM allows the department to value the entire property with one multiplier. Because golf courses operate differently, their expenses vary. The GIM normalizes the expenses by removing those expenses that are unique to particular management practices. If the department were to use the direct cap rate method there could be different multipliers for each part of the golf course operation, which would not allow normalization of the expenses.

The use of the GIM requires golf course owners to submit income and expense information. The department currently requests commercial property owners to submit their income and expenses every other year as the department collects data for reappraisal. The data is then aggregated by commercial type. The department will consider an owner's specific property data if the owner provides that information. Charitable donations are considered gifts for income tax purposes and are not taxable. Therefore, charitable donations are not included in gross income.

The number of questions concerning the portion of golf course operations that should or should not be included in gross income (GI) warrants an expansion of the definition of the term. Therefore, the department has added a more detailed definition of GI to New Rule I that is specific to golf courses. The expanded definition makes it clear that vacancy and operating expenses are subtracted, and lists some of the primary sources of income such as green fees, cart rentals, cart path fees, and pro shop and food and beverage income. Accordingly, ARM 42.20.106 is not being amended as proposed.


COMMENT 3: Mr. Story commented that the use of the cost approach, as proposed in New Rule I(9), has been used frequently and successfully by the department in the past and that it is still the best method to value unique properties, such as golf courses, because you can figure out what it cost to put it together and then depreciate it out. He further commented that this would fit in with the set of rules regarding depreciation schedules that the department puts out each year. This would provide people with an idea where the department is going.

Fred Schiwal, representing the Missoula Country Club, commented that golf courses are diverse and questioned whether the gross income method of valuation would result in proper values for these diverse properties. Mr. Schiwal indicated that he believed the cost approach to valuation was a better way to determine the value of golf course properties. Mr. Schiwal stated he believes the cost approach looks at the amount of depreciated investment to determine the net assets of a given property. Mr. Schiwal also stated that the use of a valuation method based on gross income equated to a sales tax, while the cost approach resulted in a true property tax. Under the terms of its inception about 100 years ago, the Missoula Country Club cannot ever sell. It has one use, as a golf course. If the department appraises the Missoula Country Club at $3,500,000, that value might not ever be there. Under the cost approach, at least the capital investments, depreciation, and net assets can be more clearly defined and taken into consideration. The cost approach is a property tax.

Regarding the cost approach proposed in the new rule, Mr. Hill cited the example that a new 18-hole sprinkler system needed by many of the old golf courses costs more than the sale value of the golf course. Circumstances such as these need to be taken into consideration under this approach.

Mr. Morrison commented that the cost reproduction method is usually the least preferred of the three methodologies because it is generally the most speculative.


RESPONSE 3: All three approaches to value must be considered when arriving at market value. The cost, income, and sales comparison to value should reconcile when completing an appraisal. The most defensible values for commercial properties are the income or sales comparison approaches.

The cost approach to value compares the cost to develop a property and the value of an existing property or a similarly developed property; therefore, this approach is typically used when valuing new construction because the improvements represent the highest and best use of the site when no functional or external obsolescence exists. External obsolescence is the difference between the sale price and the cost to build. Therefore, the cost approach to value cannot be the only approach used. The income approach and the sales comparison approach take into account economic obsolescence by virtue of their approaches to value. Economic obsolescence is the concern that the department is addressing, because the current method of valuing golf courses does not allow for enough depreciation.


COMMENT 4: Mr. Story commented that the use of the sales comparison approach to the valuation of golf courses, as proposed, is problematic because the few golf courses that do sell in Montana may be in completely diverse markets and locations than the subject properties used for comparison. By proposing to look out of state for comparable sales, the department is expanding the pool of properties where there may be few similarities.

Regarding the sales comparison approach proposed in the new rule, Mr. Hill stated that the last part of (6) needs to agree with the last part of (7), stating, "If sufficient relevant information does not exist statewide, the department will seek golf course sales in surrounding states and/or regional areas."

Mr. Hill commented that arm's-length sales are by far the most accurate way to find real market value. Reaching out for sales comparisons is necessary.


RESPONSE 4: The department agrees with Mr. Story that golf course sales may be sales from more diverse markets and locations than the subject property, which is why the area to find comparable golf courses may likely be regional, although expanding the sales area to find comparable sales is not uncommon in the industry. The sales comparison approach is based upon the principle of substitution, meaning a property's value tends to be set by the cost of acquiring an equally desirable substitute. For unique properties, investors may look locally and/or nationally for their investment, as needed. When an investor purchases a commercial property, they consider whether the income of that property supports the amount that they are willing to pay.

In response to Mr. Hill's comments, (7) is an extension of (6).  These two paragraphs are not distinct concepts and therefore the language proposed by Mr. Hill does not need to be included in (6). Note, these two paragraphs were renumbered in the final version of the rule as adopted in this notice.


COMMENT 5: Mr. Story further commented that while the department's proposal to value the land according to similar tract land in the area does make sense, his concern is with the methodology that will be used for valuing the land prior to being developed into a golf course. He assumes the department will not get into tract land values to establish the base value because golf courses are hardly ever developed off of tract land, and most golf courses in Montana were agricultural or forest land prior to development.


RESPONSE 5: The department agrees that agricultural land sales are most applicable to valuing golf course land. Most golf courses are zoned as open space and the zoning limits the use of the land. To the extent possible, the department intends to use land of similar sized parcels when appraising golf course land.


COMMENT 6: Mr. Nowlen stated that when you start looking at revenue, a tax becomes a sales tax. The tax under consideration should be a property tax, and whether or not the department has reached a fair valuation.

Mr. Dunfee commented that the taxation of charitable donations, member dues, and capital assessments through consideration as actual gross income starts to seem like a sales tax.

Mr. Schiwal also stated that the income approach is a sales tax.


RESPONSE 6: The income approach to value converts the property's income into the property's value and the result is a tax on the property as opposed to a tax on the income. It is a commonly accepted method for property tax purposes. The new rule is directed at determining an accurate market value for golf courses. Implementing industry standards and changing the method on how the department arrives at market value will not convert the property's value into a sales tax. As with other commercial types, when using the income method to value, the department is only arriving at market value of the real property through the amount of money the property generates.


COMMENT 7: Mr. Dunfee asked for an explanation of how a private versus a municipal golf course, or golf courses with a mixture of both, would be treated under the proposed new rule adoption for valuation purposes.

Mr. Nowlen commented that he is also concerned with the treatment, for valuation purposes, of public versus private golf courses and how membership dues and capital assessments will be considered in the actual gross revenue. For example, the Missoula Country Club assesses its members when they want to do capital projects, which is an investment mechanism for a facility by an income-owning group made up of its members. How will this situation be addressed in the proposed adoption of a standard gross income multiplier?

Mr. Hill also commented that there is also a large dissimilarity with revenue between private and public golf courses leading to inconsistency and inequity. Private golf courses sell golf memberships and a specific social network year round. Public golf courses sell day-to-day golf passes dependent on daily weather and seasonal climate.


RESPONSE 7: The department will consider all three approaches to value regardless of whether it is a private or a public golf course. The amount of data available for each approach is imperative to the accuracy of the value determined by that approach. Sales are imperative to the sales comparison approach; golf course construction costs (less depreciation) are imperative to the cost approach; and total gross income is imperative to the income approach to value. Membership dues and capital assessments are considered in gross income. A standard gross income multiplier is the constant, while the amount of a particular golf course's gross income is the variable that together will result in the property's value. The golf course's gross income considers the differences between courses and, as such, the differences will be reflected in the property's market value.


COMMENT 8: Mr. Morrison expressed a concern that in trying to define fair market value through this new rule adoption, the result might be substitution of administrative rule for what has traditionally been adjudicated through the appeal and court systems, which is fair market value. A lot of those concepts are in this proposed rule, but it is so specific that suddenly you are biasing the determination of fair market value away from other factors that courts have determined were relevant. If the state tax appeal board is adjudicating fair market values, will that board say that this administrative rule trumps what normally is a traditional method of value?

Mr. Morrison further stated he believes that evidence of the listing price of a golf course that has no offers to buy is a relevant piece of information for the department to have when valuing the property. For example, a golf course that is listed for five million dollars with no offers should indicate to the department that the value of that golf course is not five million dollars but something less. In a similar vein, Mr. Morrison proposed that if in the last five years the owner of a golf course received an offer to buy at four million dollars, and turned down the offer, the department should also have the right to access that as relevant information to show that the golf course was worth at least four million dollars or the owner wouldn't have turned down the offer. He explained that these are just samples of information the department could access to come to some sort of notion as to value.


RESPONSE 8: The Montana Tax Appeal Board has ruled that the department is not allowing enough depreciation for golf courses. Therefore, the department is implementing the industry standards in these rules in response to that ruling. The department agrees that more information will help in accurately establishing market value and that the list price of any property should be researched prior to arriving at fair market value. If the property is listed on the open market, the list price generally indicates the top range of market value.


COMMENT 9: Mr. Hill commented that the rules pertaining to the small business impact analysis in 2-4-111, MCA, need further consideration. Property taxes on golf courses are a significant expense unless you are a competing municipal golf course that has no property taxes. As an example, he stated that the Lake Hills Golf Course property taxes were $21,270 for 2014 and $33,904 for 2015. The one-year property tax difference was $12,634. That kind of increase is not sustainable for any thin-margin business. The proposed rules need better clarification and definition with a small business impact analysis reconsidered per statute.


RESPONSE 9: The department's small business impact analysis was not intended to represent that property taxes are insignificant to golf course operations. Rather, the analysis asserted that the result of the rules is anticipated to have a small impact. For instance, the income approach to value requires golf course owners to submit yearly gross income. The department currently requests income and expense information. To continue to do so is not expected to have a significant impact in this instance.


COMMENT 10: Mr. Hill stated that he purchased Lake Hills Golf Course in November 2009, for $1.5 million, invested $1.2 million into the 53-year-old course, and then listed the course for sale two years later for what he had invested in it and received no offers. After two years on the market, he sold the golf course for $1.6 million with similar tangible property value as the previous purchase. He stated his purchase and resale were both done willingly and at arm's-length by both parties on both sides. The department's appraised value of this property, at the time of his purchase, was nearly $4 million.

Mr. Hill explained that he filed a request for review with the department, filed an appeal with the Yellowstone County Tax Appeal Board, and received a reduction by the board to the purchase price. However, four months after he sold the golf course for $1.6 million, the department increased the appeal board's adjusted value of $1.5 million to a new market value of more than $4.1 million. The new appraised value was a $2.6 million increase within four months of a $1.6 million arm's-length sale. Mr. Hill commented that he asked the department how this could happen and the department informed him that the appeal board adjustment was removed with the start of the current reappraisal cycle. Mr. Hill stated that he did not receive a satisfactory explanation for this removal from the department when it referenced 15-7-111, MCA, and ARM 42.18.124(1)(c), because these references do not explain why appeal adjustments disappear with a new appraisal cycle. He commented that he would like specific supporting rationale for the department's statement that "all appeal adjustments are removed at the start of a new reappraisal cycle."

Additionally, Mr. Hill requested that the scope of the current reappraisal cycle be defined and better explained. He stated that he received a communication from the department in August of 2016 that said, "The most recent sale of Lake Hills Golf Course took place on August 29, 2014, which was just outside of the scope of the current reappraisal." Mr. Hill commented that it is unreasonable to have a $1.6 million arm's-length sale and four months later have the department appraise it at just under $4.2 million. It is also unreasonable for the new owner to not find out about the huge increase for another seven months.

Mr. Hill stated that he contends that along with gathering regional and national sales data, due to limited local data, it is important that deadlines for usable data be extended. It is not unreasonable to work on the sale of a golf course for a year or longer before the deal is closed. The closing or settlement date should not have a 90- or 180-day deadline. This stops a valuation that should be considered for years due to the rarity of sales and uniqueness of each golf course. Valuations do not stop and start on artificial deadlines.

Mr. Hill further requests consideration of the abolishment of any rule, retroactive to its inception, that requires any appeal adjustments to be removed at the start of a new reappraisal cycle and further requests a citation to that rule.


RESPONSE 10: The department refers Mr. Hill to 15-1-101(1)(d), MCA. This statute defines commercial property as business property that is used to produce an income. Golf courses fall under the statutory definition of commercial property. The legislature establishes property classifications and determined that golf courses are class four property. Class four property is codified at 15-6-134(1)(d)(ii), MCA. The department is required to reappraise class four property every two years in accordance with 15-7-111(1), MCA. Further, 15-7-111(3), MCA, states that the reappraisal of class four property ". . . is complete on December 31 of every second year of the reappraisal cycle." Appeal adjustments apply to the market value in a given cycle. The law does not provide for adjustments to transfer to subsequent reappraisal cycles. The department reappraised all golf courses as of January 1, 2014, for the 2015-2016 reappraisal cycle. Sales that occurred after the valuation date of January 1, 2014, are considered for the following cycle.

The department has responded to Mr. Hill directly regarding his property specific concerns and will correspond with him again accordingly.




/s/ Laurie Logan                                    /s/ Mike Kadas

Laurie Logan                                         Mike Kadas

Rule Reviewer                                       Director of Revenue



Certified to the Secretary of State November 14, 2016.



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