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Seem Familiar? Tax Assessment Case From the Last Big Real Estate Recession
By: Andrew McRoberts. This was posted Tuesday, August 25th, 2009
Loading ...Quick question: What year is it?
1. The federal government has intervened in failing financial institutions.
2. Real estate prices which had been sky-high are lower than a year or so before.
3. Wall Street faces a bear market.
4. The incumbent party in the White House has just lost the presidential election.
Answer: 2009? No. Try 1993.
In the early 1990s, many of the issues we are facing now faced us then, including a real estate downturn that slowed development in high growth areas and depressed values for many years. Under those circumstances, landowners filed a flood of challenges to Virginia local government tax assessments. I expect to see the same thing in the coming year or two.
When the challenges come, keep in mind some basic principles of Virginia tax law. Among these are that assessments are presumed correct, a challenger must overcome a stiff burden to prove “manifest error.” See my blog post below, entitled “West Creek Associates v. County of Goochland, Part Three” for the Virginia Supreme Court’s latest statement on the law of tax assessment challenges.
In rural communities, there are special principles to keep in mind in a down economy. One of those principles is that the assessments are set, with few exceptions, only at the beginning of the general reassessment cycle. This cycle can be a two-year biennium, or as much as a six-year cycle, depending upon what the local governing body has elected by ordinance. See Article 5, Chapter 32, Title 58.1 (Sections 58.1-3250 through 58.1-3261) of the Code of Virginia for all the possibilities. Since assessments throughout the County are kept the same for the entire course of years of the reassessment cycle, this can lead to an interesting result favorable to local governments.
A case from the last real estate recession, Elkwood Downs, LTD v. County of Culpeper, 202 B.R. 232 (1996) (district court appellate decision) was decided largely on the ramifications of this cycle and was driven by the down economy. The district court appellate decision relied heavily upon the detailed opinion and order of the bankruptcy court below.
Under the facts of that case, Culpeper County was expanding its airport, and nearby, the building of a Formula 1 Racetrack had been publicly announced. There had been a lot of speculation in the real estate market in the area, and prices had shot up. When the market was its hottest, Elkwood Downs purchased some farmland in the area, and, just after the downturn, rezoned it to Light Industrial use. In part due to the downturn in the economy, the racetrack never materialized and then (as now), property was selling at far less that it had only a year or two before. Elkwood Downs filed for Chapter 11 bankruptcy.
The plaintiff asserted (correctly) that the land values had plummeted by the time the property was rezoned. Va. Code § 58.1-3285 required that a parcel be reassessed the following January 1 after the rezoning. The plaintiff argued that the assessment should be set at fair market value as of January 1 following the rezoning.
However, the rezoning occurred in the middle of a six-year general reassessment cycle. The Culpeper County Commissioner of the Revenue asserted that the Virginia Code required such a mid-cycle reassessment to use the comparable assessments and values determined at the time of the last general reassessment (before the downturn), in order to keep all assessments uniform. This resulted in the higher values from a few years before being used in the reassessment of the now industrially-zoned land, rather than the current lower values.
Elkwood Downs was upset and challenged the reassessment in bankruptcy court as part of its Chapter 11 proceeding. (As an aside, I have never before or since seen a local government assessment suit adjudicated in federal bankruptcy court.) Culpeper County hired my firm, Sands Anderson Marks & Miller (now Sands Anderson PC), to defend the Commissioner of the Revenue’s reassessment.
The case turned on the meaning of Va. Code § 58.1-3285 and what is intended by a reassessment triggered by a rezoning in the middle of a general reassessment cycle. Both the bankruptcy court and the district court on appeal agreed with the Culpeper Commissioner of the Revenue.
Addendum (07/26/2011) Elkwood Downs District Court order
The district court reasoned: “Although the statute does not specify a valuation date upon which an assessment prompted by rezoning should be based, the commissioner is required to consider ‘other assessments of lots, tracts, pieces or parcels of land in the city or county.’ Va. Code § 58.1-3285. This mandate counsels that the valuation date for interim assessments based on rezoning is tied to the date of the last general assessment, at which time the comparison properties were last valued. To hold otherwise would be to require that whenever a property is rezoned, the commissioner of revenue must reassess not only the value of the subject property, but also that of the comparison properties. No tortured construction of § 58.1-3285 permits such an interpretation.”
So, in a downturned economy in a locality with a general assessment cycle, the older, higher values can stay in place for a period of time, despite a downturn in property values. Not fair to taxpayers? Not so fast. Keep in mind two things. First, in a normal economy in which real estate values are steadily increasing during the general reassessment cycle (which is most of the time), assessments in these localities are kept lower than the current sales or other relevant data would suggest. Second, remember that assessments only set the landowner’s share of the tax burden; the amount of the tax bill is dependent upon the tax rate, which is set by the governing body.
Addendum:
Some years later, in 2004, the Virginia Supreme Court decided the City of Martinsville v. Commonwealth Boulevard Associates, 268 Va. 697, 604 S.E.2d 69 (2004), in which the Court held that “[a] taxpayer is entitled to relief under [Virginia] Code § 58.1-3984 if he carries his burden of proving that in either the general reassessment or in the annual levy of taxes ‘the property in question is valued at more than its fair market value or that the assessment is not uniform in its application, or that the assessment is otherwise invalid or illegal.’ [Virginia] Code § 58.1-3984.” The Court disagreed with the City’s argument that a lawsuit to challenge the assessment mid-reassessment cycle could only challenge the valuation decided at the last general reassessment date, and not the assessment of the tax (i.e. the tax bill).
The case does not cite Elkwood Downs, and while casting the case is a different light, does not overturn it. The two cases can be reconciled.
Commonwealth Boulevard’s holding is that a taxpayer may challenge its “assessment” in either of its two meanings — the valuation or the amount of the tax bill — citing the Hoffman v. Augusta County case. But it is also true, as held in Elkwood Downs, that in a locality with a general reassessment cycle, the assessment value from the last reassessment must be used, with only certain permissible statutory adjustments. The Commonwealth Boulevard case cannot be read to change the statutory scheme for general and interim reassessments. It cannot allow the valuation/assessment for the current tax year to be different from the value determined in the past general reassessment (with statutorily-approved changes for zoning, subdivision, local improvements, timbering and the like). Commonwealth Boulevard must be read to allow a challenge to the tax bill in the midst of a reassessment cycle, but cannot alter the statutory assessment framework .
In Commonwealth Boulevard, the trial court had already decided the erroneousness of the assessment and this evidently was not at issue on appeal. That appears to distinguish Commonwealth Boulevard from Elkwood Downs.
Tags: economic slowdown, tax, tax assessment
