Saturday, October 12, 2013

A New Lease on Depreciated Life


In re Colchester Leased Lands, 2013 VT 48

Sit up and take notice! 

Today’s case is about property tax, the grand list, and the limits, if any, that a town is bound by in appraising property. 

While the immediate question is a fairly narrow one—whether a town can consider location and other factors when appraising a house located on leased land (that is a situation where the owner of the house does not own the land underneath)—the larger implications should be considered by every property owner in Vermont.

Let’s start at the top.  The homeowners in today’s case own camp buildings in Colchester on or near Lake Champlain.  The land underneath is owned separately and rented to owners on a long-term basis.  The situation is known as leased lands.  For years, the owners of these buildings have been taxed by the Town because a statute denominates these leased land buildings as real property (as opposed to personal property).  During this time, the Town looked only at the value of the building in terms of replacement value, which depreciated over time.


The result is that when the Town went through a re-appraisal in 2011, it found that these buildings were selling for twice what they were appraised to be worth.  In response, the Town decided to add a land/amenity category to the property appraisal for these buildings to capture this lost value.  This new category did not tax for the value of the land but rather for the location of the building.  If your camp has a spectacular view of Lake Champlain, then this would be factored into the value of the property on the Grand List. 

The owners, faced with a doubling of their property taxes, responded with what we in the legal community call “freaking-out.”  Owners grieved this new listing.  Their two primary arguments were that this new category was by default a tax on land that they did not own and that the statute only permitted the Town to tax the building and not its locational amenities. 

Owners, whose ranks included several prominent attorneys, cleverly divided their appeals.  Some went to Superior Court and others went to the hearing officer from the State’s Property Valuation Review.  By statute, owners can choose either course.   Appeals from both go directly to the SCOV.

At both the State and trial court level, owners prevailed.  Both forums agreed that the Town had improperly included land-based factors to determine the value of a building and rejected the Town’s new land/amenity category. 

All of the cases were appealed to the SCOV, which consolidated the dockets into a single decision. 

Before we get into the details, it is important to set the table.  In Vermont, we raise municipal funds primarily by one method: taxation of real property.  The single most important guideline is that the Town is obligated to tax property at its fair market value to ensure that each landowner pays his or her fair share based on the value of the land that they own.  The theory (and this is an old and creaky one) is that private property is the most direct beneficiary of municipal spending.  Therefore, the more valuable the property is the larger the benefit will be for its owner from the various municipal services. 

Based on this position, the SCOV begins its analysis of the present dispute with the first principal that the goal of any assessment process is to determine the actual fair market value.  In Vermont, the one true test of fair market value is the price a property will bring when sold to a third party on the open market.  This is always hard to break to a homeowner set to grieve her property taxes.  The conversation usually goes something like this:

(Int.  Office.  Day.  A client sits in a client chair across from an attorney who is writing notes on a legal pad)

CLIENT:         They messed up my appraisal.  It’s too high.

ATTORNEY: How much is it appraised for?

CLIENT:         $200,000.

ATTORNEY: How much did you pay for it?

CLIENT:         $360,000.  We bought it last year.  Why?

(Attorney, without a further word, pushes retainer check back toward client and weeps silently for his lost billable hour.)

This person is going to lose, or worse she will suffer the fate of any number of grieving homeowners who come out of the process with a higher grand list value than they had going into it. 

They don’t call it grieving for nothing.

The point here, and one that the SCOV makes in today’s case, as well as a number of recent decisions, is that any methodology adopted by a town to determine fair market value is just that—a method, a means to an end.  And the SCOV will uphold nearly any means so long as the ends are justified in terms of rendering accurate fair market value appraisals. 

So despite the clever arguments put forth, owners were really behind the eight-ball in today’s appeal.  They had to show that the Town’s methodology was so improper that it trumped the result, which was to bring the grand list value into alignment with the fair market value for which the owners had been buying and selling their buildings.

It is a burden that the owners cannot meet no matter how much wind they had at their backs coming into the appeal.  The SCOV rejects the argument that the Town’s valuation somehow taxed the building owners for the land that they did not own.  The SCOV also rejects the argument that the statute only allows the Town to tax the building without reference to its location. 

In essence, owners had argued that the statute only allowed the Town to tax the building itself.  Nonsense, says the SCOV.  Feeding into the larger purpose of assessing fair market value, the Town is free to look at what is essentially context.  The buildings at issue here do not exist in a vacuum.  They don’t even exist in a generic or low-value space.  They are situated on prime real estate, facing, and, in some cases, accessing Lake Champlain.  Certainly, these locations factor into how these buildings are marketed and sold, and so they are relevant to the municipal assessors in the search for fair market value. 

The importance of this decision for property owners, apart from Colchester camp owners, is that the SCOV’s reasoning explicitly embraces the use of intangible qualities in determining the value of real property.  In this case, the owners are being assessed for what are great views.  What is the price of a sunset?  We all may soon know.

Certainly, the owners would portray this decision as a Pandora’s Box of unanticipated consequences.  It arguably opens the door to towns adding more esoteric categories to their appraisal systems, but such predictions of doom and listers-run-amuck are unlikely to be borne out.  The limitation here is on fair market value.  If the methodology does not tend to yield fair market value, it will not be sustained. 


This is little comfort for the Owners who tax bills are likely to double, but on the bright-side, they now have a method to quantify all those intangibles that make the camps worth having.

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