Winter 2017

In this Winter 2017 Issue:

Important Supreme Court Decision Awaited

On September 30, 2016, the Connecticut Supreme Court heard oral argument in Nutmeg Housing Development Corp. v. Colchester.  On the face of it, the ad valorem valuation of a garden variety property in the suburbanizing  Town of Colchester with 32 rather small apartment units would not seem to be a major event in property valuation litigation annals.

However, on further examination, how the courts deal with the valuation of this low income housing tax credit (LIHTC) asset will have a major impact on the hundreds of low and moderate income properties in Connecticut. 

The Colchester assessor’s valuation of slightly less than $2.3 million was supported by the Town’s expert appraiser, who concluded at a market value of $2.5 million.  However, the Town appraiser’s valuation depended in substantial part on the inclusion of the low income housing income tax credits generated by the project within his overall valuation.  Not surprisingly, the property owner challenged the use of LIHTC credits and contended for a value, on the basis of its appraiser’s work, of slightly more than $500,000.

Are LIHTC tax credits part of the bundle of rights which the assessor is entitled to value?  Or - are they intangibles which must be viewed separately from the real estate?

Another issue in the case was a Connecticut statute that requires assessors to value low and moderate income housing properties based upon “the capitalized value of the net rental income of the housing project” meaning “the gross income of the project as limited by the schedule of rents or carrying charges, less reasonable operating expenses and property taxes.”  In other words, regulatory rents, not market rents, govern.

At first glance, the statute would appear to be spot on and to control the assessor’s judgment.  However, the Superior Court concluded that unless Colchester had adopted an ordinance permitting the abatement of property taxes for these properties, the statutory valuation formula would not control.  The court’s reasoning was that the passage of the ordinance would permit the Town to apply for reimbursement of “lost taxes” from the state.  Of concern here is the linkage of the valuation formula with the Town’s decision to seek tax reimbursement.  While the two might seem to be inextricably linked, adoption of an ordinance is elective while the valuation formula referred to above appears to be mandatory.

The Supreme Court's ruling was released as PTVT went to press.  It will be analyzed in our Spring issue.

Nutmeg Housing Development Corp. v. Colchester, Superior Court Docket No. CV-12-6016973

Elliott B. Pollack or Laura B. Cardillo can be contacted at or 860-424-4340 or or 860-424-4309 for more information about this topic.

Automobile Dealership Real Estate Valuation Discussed

Given the high level of car sales over the last number of years and the growth and expansion of the size of automobile dealerships, Bradley Carter’s article “An Introduction to Automobile Dealerships” in the summer 2015 issue of The Appraisal Journal bears mention.

Mr. Carter’s highest and best use (HBU) discussion was most provocative.  “[W]hen someone buys real estate for use as a dealership,” he notes, “they aren’t thinking about buildings or land; what they are really seeking is an entry point . . . into a market from which they can operate and generate revenue and profits.”  The real estate, he points out, enables the occupant to sell new and used vehicles, conduct repairs (including potentially a collision shop) and to stock parts both for in-house repairs and limited retail sales.

The real estate is not a freely tradable asset.  However, since the dealership property typically trades with the sale of the dealership itself, the transfer requires the manufacturer’s approval if the automotive use is to be continued.

How should these realities impact the appraiser’s HBU conclusion?  The author notes that “[s]ites are typically large relative to the improvements they support, since space is needed for vehicle display and storage of automobiles and inventory.”  This leads to the conclusion that in many cases the highest and best use of automobile dealership real estate is not necessarily the continuation of that operation since the improvements tend to be large boxy structures with small amounts of office and high finish space.  It is doubtful that a dealership is a special use property requiring valuation via the cost approach. 

Thus, the editors of  PTVT suggest that a detailed land use analysis be conducted by appraisers to determine whether repurposing of the real estate might result in a “higher and better” HBU than continuation of automobile operations. 

Gregory F. Servodidio at or 860-424-4332 can answer questions about valuing auto dealerships.  

Major New Jersey Hospital Exemption Case Decided

On June 25, 2015, the New Jersey Tax Court issued what may prove to be a very influential ruling.  The Court completely rejected the property tax exemption application of Morristown Memorial Hospital.  Noting that this is the first time “a non-profit hospital’s entire property tax exemption has been called into question,” the decision appears to erode 164 years of New Jersey exemption law. 

Without going into every detail of this 90 page opinion, the key takeaways are that over the years, New Jersey courts have grafted a test called “conducted for profit” over the statutory exemption available to hospitals. In the Morristown case, this turned out to be the deciding factor. 

The crucial elements cited in the Court’s decision were:

  • The relationship between the hospital’s activities and “for-profit activities carried out by private physicians” on the hospital campus who were not employed by the hospital.  Basically, the ability of non-employed physicians to operate as proprietary entities on the campus infected the hospital’s otherwise non-profit status.  While the payment of reasonable compensation by an exempt hospital will not jeopardize its federal exempt status, at least in New Jersey, it has become problematic when determining entitlement to an ad valorem tax exemption;
  • The affiliation of the hospital with for-profit entities such as captive physician professional corporations, proprietary members of its health care system such as a captive insurance company and real estate operations;
  • The salaries paid to executives which the hospital could not establish as reasonable.  The Court refused to apply reasonability standards adopted by the Internal Revenue Service in its exempt organizations analyses and dismissed the lack of a challenge by the IRS to Morristown’s salaries as having no significant bearing on its property tax exemption. 

Needless to say, if extended to other states, the New Jersey court’s ruling will find similar financial and contractual relationships among hospitals, physicians and other for-profit entities.  Whether New Jersey’s judicial attitude will find additional traction remains to be seen.  Needless to say, its potential for great mischief is obvious. 

The New Jersey Tax Court never doubted the competence of Morristown Memorial Hospital or questioned its “well deserved reputation for excellence in medical care and education.”  It simply said that these concerns were not terribly relevant when analyzing its entitlement to the property tax exemption.

New winds are blowing in the exemption world – stay tuned!

For further information about this issue, please contact Elliott B. Pollack at 860-424-4340 or

Winter Note

We regret to announce that Tiffany K. Spinella has decided to take a sabbatical from the practice of law to dedicate more time to her young family.  Everyone in the Property Tax and Valuation Department wishes her much happiness.  Michael J. Marafito joins the department as her successor.  Michael is a graduate of Quinnipiac Law School and looks forward to working with the Department’s clients and friends. 

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