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 decision) was decided largely on the ramifications of this cycle and was driven by the down economy.

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, 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.

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.

The stakes had never been higher.

On appeal to the Virginia Supreme Court for a second time, the West Creek LLCs were asking for complete reversal of Circuit Court Judge Sanner’s comprehensive ruling in favor of the County, and also for final judgment setting the assessments (collectively) at $34.1 million. This could have cost the County millions of dollars in tax refunds and interest.  The County defended, insisting that Judge Sanner had gotten it right, and the County’s $105.1 million collective assessment of the 144 parcels must be affirmed.

The Oral Argument

The main issue on oral argument appeared to revolve around whether a plaintiff in a tax appeal under Virginia Code § 58.1-3984 could bear their burden of proof by proving the assessments differed substantially from the proven evidence of fair market value. The trial court’s grant of the motion to strike regarding the northern one-third of the West Creek Business Park, based solely on lack of any evidence of how the assessment was determined, came under fire.

Based upon the questions asked, the Supreme Court seemed interested in settling the question of whether evidence of methodology is required to prove a “manifest error.” The West Creek LLCs argued no, pointing primarily at Board of Supervisors v. Telecommunications Industries, Inc., 246 Va. 472, 436 S.E.2d 442 (1993) and the statutory language from Virginia Code § 58.1-3984 which seemed to support its argument. The County argued yes, distinguishing the Telecommunications case as involving fungible items of personal property (personal computers) rather than unique real estate, and pointing in support to the many Virginia Supreme Court opinions describing the standard as “manifest error in the making of the assessment.”

After oral argument, both sides awaited the results, which came in a detailed opinion issued in September of 2008. In the opinion, the Virginia Supreme Court relied on its precedent, re-affirmed many well-settled points of tax law, and settled the question raised at oral argument.

The Opinion

The Court largely upheld the Circuit Court on the law, with one exception, and upheld the assessments, but remanded the forty cases decided on the motion to strike. Here are some legal highlights of the opinion.

Claims for Erroneous Assessment, Generally

The Court started by reciting very familiar principles of Virginia local government tax assessment law.

Courts are generally deferential to the judgment of the taxing authority. See West Creek Associates, LLC v. County of Goochland, 276 Va. 393, 410, 665 S.E.2d 834, 843 (2008) (“The value of property is a matter of opinion and there must necessarily be left a wide room for the exercise of opinion, otherwise courts will be converted into assessing boards and in assuming to act as such, would assume powers lodged elsewhere by the law-making branch of government.”).

As such, a taxing authority’s assessment is presumed to be correct. 276 Va. at 409, 665 S.E.2d at 842 (“A taxing authority’s assessment is presumed to be correct . . . .”); 276 Va. at 414, 665 S.E.2d at 845 (“In all cases . . . a taxing authority’s assessment is presumed to be correct . . . .”).

The taxpayer carries the burden of proof when claiming erroneous assessment. 276 Va. at 409, 665 S.E.2d at 842 (“[A] taxpayer has the burden to rebut that presumption by establishing that the real property in question is assessed at more than fair market value or that the assessment is not uniform in its application.”); Va. Code § 58.1-3984(A); 276 Va. at 409, 665 S.E.2d at 845 (“[T]he taxpayer has the burden of proof ‘to show that 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.” (citing Va. Code § 58.1-3984(A))).

The taxpayer must prove its case by a clear preponderance of the evidence to meet its burden of proof. 276 Va. at 409, 655 S.E.2d at 843 (“We have held that a taxpayer must show by a clear preponderance of the evidence that the taxing authority committed manifest error or totally disregarded controlling evidence in making the assessment.”).

Use of FMV to Establish Erroneous Assessment

This is the most signicant point of law addressed in the West Creek case, and settled the question raised at oral argument regarding whether proof of “manifest error in the manner of making the assessment” was mandatory.
Reconciling conflicting caselaw, the Court concluded that a taxpayer need not “prove what information the taxing authority considered and how it arrived at the assessment in question, i.e., its methodology,” to establish the erroneous assessment. 276 Va. at 413, 665 S.E.2d at 845.

Instead, the property’s fair market value may be used to establish the erroneous assessment. 276 Va. at 414, 665 S.E.2d at 845 (“[W]e have never explicitly held that manifest error cannot be established simply by evidence showing that the real property is assessed at more than its fair market value.”).

As a result, the Supreme Court of Virginia reversed and remanded the circuit court’s decision to strike forty claims at the conclusion of the plaintiffs’ case, since the decision was based solely on the grounds that West Creek had presented no evidence establishing Goochland’s methodology (i.e., “the manner of making the assessment”).

Since proof of an error in methodology was not the sole way the plaintiffs could have prevailed, the Court held that the circuit court erroneously granted the motion to strike based on lack of proof of methodology alone without considering (at that stage) whether the plaintiffs’ had proven a substantial difference between the assessment and the fair market value.

The Supreme Court stated that in accordance with the deference shown to the taxing authority, this difference between assessed value and fair market value must be substantial. 276 Va. at 414, 665 S.E.2d at 845 (“When a taxpayer attempts to prove manifest error solely by showing a significant disparity between fair market value and assessed value without showing that the taxing authority employed an improper methodology . . . the taxpayer cannot prevail ‘so long as the assessment comes within the range of reasonable difference of opinion . . .’.”).

An area to watch for in future litigation may be the issue of what constitutes a “significant disparity.” 

Use of “Bulk Sale” Pricing as Evidence of FMV

The Code of Virginia requires that the property of different owners be assessed individually. 276 Va. at 414, 665 S.E.2d at 846 (“[P]ursuant to Code § 58.1-3290, the County was required to assess the 144 parcels individually.”). Specifically, Va. Code § 58.1-3290 provides that “[w]hen a tract or lot becomes the property of different owners in two or more parcels, subsequent to any general reassessment of real estate in the city or county in which such tract or lot is situated each of the two or more parcels shall be assessed and shown separately upon the land books, as required by law.” Besides this Code section, there were other statutes the Court agreed mandated an individual assessment for each parcel.

A property’s recent sale price is not controlling evidence of the property’s fair market value. 276 Va. at 415, 665 S.E.2d at 846 (“As we have previously stated, the recent sale price of real property is ‘merely one of the factors to be taken into consideration’ when determining whether such property has been assessed at more than fair market value.” (citing American Viscose Corp. v. City of Roanoke, 205 Va. 192, 196, 133 S.E.2d 795, 798 (1964)).

Because the purchase price of 34.1 million dollars reflected a “bulk sale” discount, it could not be used to establish the fair market value of the real property and carry the taxpayer’s burden of proof. See 276 Va. at 417, 665 S.E.2d at 847 (“[T]here is an inverse relationship between the size of a parcel and the purchase price, i.e., the larger the parcel, the cheaper the price.”); 276 Va. at 415, 665 S.E.2d at 846 (“Since the 34.1 million dollar figure represented the ‘bulk sale’ of the 2,500 acres, the County is correct in its assertion that the mere difference between the purchase price and the assessed value was not sufficient to show manifest error or disregard the controlling evidence.”).

In so ruling, the Supreme Court distinguished the case of Board of Supervisors v. Donatelli & Klein, Inc., 228 Va. 620, 325 S.E.2d 342 (1985), in which the sale of the subject property “was not a sale in bulk, because the sale of each individual property was negotiated separately to its ultimate purchase price.” 228 Va. at 625, 325 S.E.2d at 343. In contrast, the $34.1 million sales price for the West Creek Business Park was negotiated for the entire acreage of the park, and the parcels created later at closing for tax planning purposes.

In part because West Creek’s experts simply divided the $34.1 million purchase price among the individual parcels, the Supreme Court of Virginia affirmed the circuit court’s ruling regarding the remaining ninety parcels that West Creek failed to show that the property in question is assessed at more than its fair market value. The plaintiffs’ appraiser adopted not only the owners’ theory of valuation (“one business park, one property”), but also their opinion of value ($34.1 million total, then broken down by parcel), to the penny. The Court upheld Judge Sanner’s finding that such an expert opinion was simply not credible.

The plaintiffs failed to develop a credible opinion of value that could be compared to the assessed value. Therefore, the Court ruled that the plaintiffs failed to carry their burden of proof to show “substantial disparity” between the fair market value and the assessments.

After remand of the forty cases reversed by the Supreme Court, the plaintiffs ultimately agreed to dismiss them all. The final order was entered in Spring of 2009.

After almost eight years of litigation, the County of Goochland had prevailed.

(The author gratefully acknowledges the assistance of Eric Howlett and Kitty Bice in the preparation of this post.)

After having walked away from $34 million in assessment relief on appeal, the 144 West Creek plaintiff LLCs re-filed 159 lawsuits in December 2004. Some were later dismissed for various reasons. One hundred thirty (130) of these cases were later consolidated for trial, this time before resident Circuit Court Judge Timothy Sanner.

Against our vigorous defense, the plaintiffs steadfastly pursued their “one business park, one property” theory. At one point, after this theory had been attacked again and again by the County on demurrer, motions and in discovery disputes, Judge Sanner (somewhat wearily) remarked before ruling on a discovery motion that he wished he could just rule on the 144 parcels versus one business park issue and move on. However, the issue was not squarely presented for ruling until trial of the consolidated cases, which was held in November of 2006.

At trial, the plaintiffs presented valuation evidence from an appraiser as well as from representatives of the owners. All consistently told the same tale – that the parcels should be valued collectively as a portion of the business park – and all agreed on the proper value, to the penny, of each parcel’s value. These values, not surprisingly, added up to the $34.1 million purchase price for the business park in June of 2000. All faced vigorous cross-examination on the “one business park, one property” theory, the curious similarity of the appraiser’s and the owner’s opinions of value, and many other grounds. The plaintiffs also presented evidence from the Commissioner of the Revenue, who on cross-examination explained clearly how she was required to list each parcel separately on the land book, which then meant that the County had to assess each parcel separately.

There were bumps in the road for the County. The County’s contract appraiser, who was not used as an expert by either side, had developed one value ($75,000 per acre) based upon comparable sales, then applied that value to each of the 144 parcels. The Court was convinced this was an erroneous methodology.

However, the contract appraiser was not the assessor, and there was no evidence presented of how the County’s board of assessors or the court-appointed board of equalization had assessed the property. Many of the citizens who had served on these boards were elderly, most had no specific memory of what they did, many were unavailable, and one had died. Fortunately, during the 2000-2001 general reassessment process, some proposed assessments had been set at values inconsistent with the contract appraiser’s recommendation at each stage. This was most apparent in the northern one-third of the business park, which had been set at $35,000 per acre by the board of assessors. The contract appraiser had testified that he did not know what information the boards considered in making their assessments, and that he knew the boards had information he did not.

Therefore, the Court could find no “linkage” between the erroneous contract appraisal and the assessment by the board of assessors or the board of equalization, other than a frequent $75,000 per acre value in the southern two-thirds of the business park. Finding no “linkage” between the erroneous contract appraisal and the assessment in the northern one-third of the business park, the Court dismissed those 40 northern parcels on the County’s motion to strike because there was absolutely no proof of “manifest error in the manner of making the assessment.” Examining the evidence in the light most favorable to the plaintiffs, the Court overruled the remainder of the motion to strike.

In the County’s case-in-chief, only two witnesses were presented. One was an appraiser, William C. Harvey, II, MAI, who thoroughly criticized the plaintiffs’ appraisal. The other, Jay B. Call, III, MAI, presented his own opinion of value for the 144 parcels, which was consistent with the assessments.

Given this evidence, and the requirement that the Court give the County assessment a presumption of correctness and that manifest error be proven by a clear preponderance of the evidence, the Court ruled fully for the County. The Court ruled again that there was no evidence of the manner of the making of the assessment, but additionally, that the evidence presented of value presented by the plaintiffs was simply not credible, for many reasons. In his ruling, the Court rejected the “one business park, one property” theory. The Court relied in part on its common sense, by reasoning that if a hypothetical 100-acre parcel were purchased and split into 100 parcels, each parcel would be worth more than one percent of the purchase price, even with problems with access and a lack of infrastructure as argued by the plaintiffs.

Given this serious setback, the plaintiff LLCs appealed to the Virginia Supreme Court for the second time.

Next Time –
Round Four: The Second Appeal and the Supreme Court’s Opinion (2006-2008)

As County Attorney in Goochland County from 2001 to 2009, I was counsel in 248 erroneous assessment cases, resulting in two multi-day trials and two appeals to the Virginia Supreme Court, resulting in one incredible opinion issued by the Court in September of 2008, West Creek Associates, LLC v. County of Goochland, 276 Va. 393, 665 S.E.2d 834 (2008) (opinion here). 

The tale has some twists and turns, so hang on for the ride.

Background (in brief)

In 2000, businessmen Bill Goodwin and Booty Armstrong (through 144 individual limited liability companies, including West Creek Associates) contracted to purchase 2,500 acres of real estate in Goochland County, consisting of 20 individual parcels at the time, for a purchase price of approximately $34.1 million from Bank of America, Trustee. All the West Creek Business Park was zoned industrial/business; some was improved, but most was unimproved.  It was and inarguably is a first class, master-planned business park.

At settlement in June of 2000, the real estate was subdivided, not by subdivision plat, but by 144 separate deeds, each conveying a single parcel to a different limited liability company. As required by law, each of those parcels was shown separately on the land book. In 2000-2001, the County’s citizen board of assessors assessed each of the parcels during its general reassessment of the County.  The collective taxable value of those parcels was assessed at $105.4 million.

The First Trial

The first 89 lawsuits were filed in August of 2001, and were consolidated for trial, which was held in April 2003, presided over by Circuit Court Judge-designate Charles Russell (former Justice of the Virginia Supreme Court). Just before trial, the various plaintiffs attempted to non-suit the 89 cases in order to re-file with all 144 parcels and pursue a previously-unexpressed theory, namely, that all 144 parcels should be valued collectively as a whole, and valued at the “price paid,” $34.1 million. Because the County had a pending counterclaim for increased assessments, Judge Russell denied the motion and presided over a four-day trial. At the conclusion, neither side was happy with the result. The West Creek plaintiffs appealed the non-suit ruling. The County of Goochland appealed the assessment reduction of approximately $34 million ordered by the court, only about half to one-third what the plaintiffs hoped to receive under their new theory.

The First Appeal

On appeal in 2004, the Virginia Supreme Court reversed the non-suit ruling, essentially giving the plaintiffs a “do-over” to present their “one business park” theory. The Court seemed very interested in reversing on the non-suit issue in oral argument, which would also reverse the $34 million assessment reduction ordered below. Understandably, near the end of argument, Chief Justice Hassell asked counsel for the West Creek LLCs, “Are you sure your client wants this?” The client did. The Court ordered the plaintiffs’ non-suit motion granted, and therefore did not reach any of the multiple (and I believe well-founded) assignments of error cited by the County.

In some ways, it was like both parties had entered a time warp and lost the previous three years of litigation.

Next time –
Part Two: Round Three, The Second Trial (2004-2006)