The Riverside Owner L.L.C. v. City of Richmond case involved the appropriate amount for a tax exemption earned by a developer under Virginia Code § 58.1-3221 and Richmond City Code § 27-83.  These laws provided for a partial exemption of the real estate taxes under the City’s tax Abatement Program for Rehabilitated Real Estate.  Qualifying properties earned an exemption if the “assessment” of the rehabilitated property increases by 40% after rehabilitation. 

Under the facts of the case, Richmond Power Plant, LLC developed a site located on Brown’s Island, which was originally valued at $500 dollars. After significant rehabilitation and development, the mixed-use property was subsequently sold to Riverside Owner, L.L.C. Rather than use the property’s actual assessment after rehabilitation, the staff had applied its long-standing ”Chandler policy” to calculate the exemption, using only the part of the assessment due to the rehabilitation.  The purpose and effect of the “Chandler policy” was to “eliminate from the final estimate of value any enhancement created by something other than rehabilitation or physical improvement.”   Using this policy, the City staff assessed the rehabilitated offices after rehabilitation at $63.8 million.  However, applying the ”Chandler policy,” the City staff only awarded an exemption to Riverside in the amount of $45.2 million, rather than the actual assessment of the offices.

The Supreme Court determined the language of the statute required that a partial exemption be based on the “first assessed value of the rehabilitation.” This assessed value is the first fair market value “assessment” after the rehabilitation (in this case $63.8 million), which had a statutory and well-settled meaning.  The Supreme Court held, therefore, that the amount calculated under the “Chandler policy,” $45.2 million, was far less than the City’s “assessment” of $63.8 million, which must be used under Virginia Code § 58.1-3221 and Richmond City Code § 27-83.

Riverside won its additional tax exemption.  The plain meaning controlled.  The “assessment” is the assessment, not some other amount.

During the session, the state legislature adopted some important changes in the law affecting local governments.  Over the coming weeks, I will be touching on some of the most significant bills.  In this post, I’ll discuss HB 1588 (and its companion, SB 1350), which will change the manner in which tax appeals are handled effective for tax year 2012.

Tax assessment cases have always been difficult for taxpayers to win. Some form of manifest error must be shown, the taxpayer bears the burden of proof, and a mere difference of opinion is insufficient to prevail.  The law in this regard has mostly been well-settled.  For a discussion of much of the law in this area, see the previous blog post on TB Venture LLC v. Arlington County and the three-part series of posts on West Creek Associates v. Goochland County: Part 1, Part 2 and Part 3.

In the 2011 General Assembly session, an attempt was made to change the tax appeal procedure and burdens on taxpayers.  Early versions of HB 1588 and SB1350 would have even completely shifted the burden of proof from the taxpayer to the locality.  (If successful, these early versions would have resulted in the only lawsuits in America in which the plaintiff would have had absolutely no burden!)

After a compromise and several amendments, the final versions of the bills will result in some significant changes to tax appeal procedures, effective for the 2012 tax year. 

In brief:

– Written notice will be required of certain of taxpayer’s rights in the event of an owner appeal to a board of equalization or circuit court involving residential property containing less than four units.  Virginia Code section 58.1-3331.E, as amended.

– For board of equalization appeals, if provision of assessment records is not given to an owner of residential property containing less than four units as required by law, the assessor is required to present certain types of evidence first in the BOE hearing.  There is a change in the evidentiary standard. Virginia Code section 58.1-3379, as amended.

– For circuit court appeals, the law is unchanged for most tax assessment appeals, but for appeals seeking “relief from real property taxes” there are change in the procedure.  There is a difference in evidentiary standard.  In addition, if the assessor’s records are not produced as required by law in an owner’s appeal involving residential property containing less than four units, the assessor must produce certain types of evidence first at trial. Virginia Code section 58.1-3984.B, as amended.

The wording of some of these amendments is complex, and is still being interpreted by attorneys who practice in this area.  Litigation is likely for many years before the meaning of these amendments are truly decided.

A Sands Anderson Webinar will be held in the Spring to assist local government attorneys and assessors in interpreting these new amendments.  Check back to this site and the Sands Anderson PC website, www.SandsAnderson.com, for further details.

The statutes involved are Virginia Code section 15.2-2400, et seq., dealing with creation of service districts.

Background

Stafford County had adopted two service district ordinances to provide “road improvements” which “are expected to generally improve vehicular traffic flow and transportation safety” and “enhance business opportunities … [and] improve access to businesses” in the service districts.  Funding for the imrpovements was to come from a special tax assessment within the districts, as well as other state, county and private sources.  Significantly, the Board of Supervisors excluded residential but not industrial and commercial properties from the special tax.

The Challenge

The plaintiff challenged the ordinances on several grounds.  The Supreme Court disagreed with the plaintiff on all of them. 

First, the plaintiff argued that the Stafford County Board of Supervisors lacked the authority to adopt the ordinances.  If the Board of Supervisors had authority, the plaintiff argued that the Board’s exemption of residential properties constituted unconstitutional special legislation.  Lastly, the plaintiff argued that the ordinances failed to state their purpose, plan for improvements and benefits as required by Virginia Code section 15.2-2402(2), (3) and (4).

The Holding

The Supreme Court easily held that localities have express authority to adopt ordinances creating service districts, citing Virginia Code section 15.2-2400. 

The Court went on to uphold the tax classification scheme to exempt residential properties as expressly authorized under Virginia Code section 15.2-2403(6) (“Such tax may be levied on taxable real estate zoned for residential, commercial, industrial or other uses, or any combination of such use classification….”).  And, citing FFW Enterprises v. Fairfax County, the Court held that such a classification was not unconstitutional, as the Virginia Constitution expressly empowers the General Assembly to define and classify taxable objects. 

The Court then held that the relatively simple statements of purpose, proposed plan and benefits of the service districts expressed in the ordinances (see quotes above) satisfied the requirements of Virginia Code section 15.2-2402(2), (3) and (4).

Significance

This order is significant for many reasons, beyond the obvious importance to Stafford County.  All Virginia localities are facing a growing lack of state funding for infrastructure such as roads.  As a result, funding for transportation and other important infrastructure are increasingly being funded through special taxes imposed within service districts, Community Development Authorities, and other authorities and means. 

There are many excellent reasons why exempting or excluding residential properties from a special or additional tax is reasonable as well as legal.  Some are discussed in the FFW Enterprises opinion.  But as a practical matter, governing bodies can more easily tax businesses that have the ability to grow and create revenue, which can be enhanced by the improvement being financed by the special tax.  This goes beyond convenience and is an economic and political reality.  The inability of a governing body to exclude residential property from a special tax could have severely limited the utility of these taxes to local governments.

Also importantly, the Supreme Court’s upholding the relatively simple descriptions of purpose, plan and benefits adopted by Stafford County as sufficient assists local governments by requiring a fairly low threshold of detail, and therefore allows some necessary flexibility as a major project unfolds.

Lastly, there is little authority in Virginia regarding how to adopt service district ordinances.  A series of Attorney General’s Opinions from about 1981 onward is the best we have.  This decision from the Virginia Supreme Court, although not in a published opinion, is a big help to local governments understanding the rules of (financing) the road.  

Note:  Citing unpublished judicial dispositions like this one “is permitted as informative, but shall not be received as binding authority.”  Rule 5.1(f) of the Rules of the Supreme Court of Virginia.  Citation to this unpublished order is controlled by Rule 5.1, which allows citation to a ”publicly accessible electronic database,” and, failing that, requires ”a copy of that disposition must be filed with the brief or other paper in which it is cited.”

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.