In the Winter 2017 issue of Property Tax and Valuation Topics, we projected that the Connecticut Supreme Court’s anticipated ruling in Nutmeg Housing Development Corporation v. Town of Colchester would offer long-sought, definitive guidance about the valuation of low income housing tax credit (LIHTC) properties. Specifically, the ruling was expected to review a New Britain (Tax) Superior Court case that tax credits could be a factor in valuing a LIHTC property and that a statute that appeared to require the use of actual (not market) income and expenses in applying the income approach to valuing LIHTC properties was not applicable.
A detailed review of the trial court decision convinced the Supreme Court that “the trial court did not base its decision on (either of these issues)” and left a ruling on these topics “for another day” which it voiced in a unanimous opinion by soon to retire Associate Justice Peter Zarella.
A number of LIHTC cases must be addressed in the Superior Court without the expected legal input from the Supreme Court.
Nutmeg Housing Development Corporation v. Town of Colchester, 324 Conn. 1 (2016).
A sand and gravel company had operated for about 20 years in the Town of Montville when it stopped crushing operations but continued to store equipment in the town. It claimed that this equipment should be exempt as manufacturing equipment from personal property assessment and taxation when it filed its personal property declaration for the October 1, 2014 Grand List. However, certain information was not furnished, such as descriptions of the equipment, acquisition date(s) and other matters. Because the application was deemed to be incomplete, the assessor rejected it and continued to assess the property at a market value of approximately $1.1 million. An appeal to the town’s Board of Assessment Appeals was futile.
While the equipment owner did not challenge the town’s valuation determination, it pressed its exemption claim in an appeal heard by Judge Robert F. Vacchelli in the New London Superior Court. It asserted that the assessor did have sufficient information to determine whether or not the property was exempt. Reviewing the town’s position, the Court concluded that the assessor could have made the exemption determination and request additional information if it was found necessary; not every box on the application form had to be completed by the owner in order for the assessor to rule on the exemption claim.
While the company won over the court on the technical issue presented by the assessor, it ultimately lost the case because the assessor was found to have been justified in denying the exemption on its merits even though the equipment had not been used for manufacturing for a number of years at that location!
Kobyluck Sand and Gravel, Inc. v. Town of Montville, Docket Number CV-15-6024120, November 15, 2016.
What is a big box store occupied by a retailer such as Walmart worth for ad valorem tax purposes? Should it be based on the cost incurred by the retailer or its landlord in assembling the land and constructing a building which in many cases is something of an iconic structure? Or should the value derive from the selling price of similar properties when the retailer decides to terminate occupancy and the store (now a "dark store") no longer makes sense for big box operations?
Accustomed to resting big box assessments on the cost approach to valuation, communities are grappling, so far largely unsuccessfully, with the argument that a significant part of the cost incurred in creating a big box from scratch no longer adds value to it when the store operation departs. And, if that is the case, is not the incremental cost incurred in creating a distinctive property really a non-assessable intangible linked to that tenant’s way of doing business rather than to the value of the real estate itself? Put another way, do big box retailers spend a lot of money on real estate to advance their retail goals even if from a pure asset management perspective a significant part of that cost makes little sense to anyone else?
The first of these tax appeals, all of which have been focused in Michigan, began in a market where a big box's market value was reduced from its construction cost of about $10 million to $3.5 million.
The larger question, it seems, is not simply whether the judicially-ordered assessment reductions are accurate but whether or not the initial assessments were reasonably calculated. If, indeed, a humongous retail property is only worth approximately what it cost to create it while it is occupied by that retailer, did the municipal assessor capture its real estate value or did she tack on an additional intangible component unique to the retailer to begin with?
Bloomberg Business Week notes: “in most cases the stores have prevailed . . . .” which should lead observers to have doubts about the validity of the cost approach to valuing these properties. After all, given that all appraisal methodologies rest on the principal of substitution, if the closing of a big box is followed by years of vacancy and lack of interest from other tenants, doesn’t its original assessment look suspect?
In 1963, Connecticut adopted progressive legislation designed to reduce pressure from local property taxes on the owners of farms, forest land and open space to develop their properties. Referred to as Public Act 490, the new legal regime permitted owners of these properties to apply for assessment at current use value as opposed to market value, which is typically based on highest and best use.
Assessors rely on the Connecticut Department of Energy and Environmental Protection (DEEP) to promulgate current use values for forest land. These estimates derive from the value of timber that may be harvested as opposed to the property itself. According to an analysis by Eric Bedner in the Journal Inquirer of December 26, 2016, “[w]ith fewer trees being cut, they become larger and therefore more valuable.” Other factors come into play as well, resulting in a recommended increase of forest land value of $130 per acre, last determined in 2010, to $240 per acre at the end of 2015.
DEEP Forestry Director Christopher Martin credits the 490 program with keeping Connecticut development under control. Even with the $110 per acre value increase, Public Act 490 land is “still one heck of bargain,” noted Mr. Martin. The value increase, which will be implemented when a municipality conducts a general revaluation of all real estate in the community, will amount to an estimated $2-$3 per acre tax increase in most communities.
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