Saturday, February 1, 2014

The Trouble with Taxes

Franks v. Town of Essex, 2013 VT 84

This is a property-tax-appeal case.  I’m primarily a litigator.  I don’t do real-estate or tax law.  Save your angry comments for our esteemed Editor at the next VBA event. 

The majority’s introduction to this case is as follows: “These cases raise the question of how non-rental residential properties subject to housing-subsidy covenants should be valued for property-tax purposes.  Let’s try to figure that out together, shall we?        

There are two cases.  In both, the taxpayers argue that under the applicable statute, they’re entitled to an automatic reduction in valuation for tax purposes because the properties are subject to housing-subsidy covenants.  The towns argue that the housing-subsidy factor is, well, just a factor.   

Taxpayer one owns an affordable-housing unit in Essex, subject to a housing-subsidy covenant.  After an assessment came in high, taxpayer one appealed, and the state appraiser concluded that in this case, the housing-subsidy covenant didn’t affect value.  Taxpayer one appealed.   

Taxpayer two’s situation is more complicated, but the quick version is that her house is subject to a housing-subsidy covenant.  She leases the land her house sits on from a land trust and pays the taxes pursuant to a 99-year lease.  The trust appealed an assessment on her behalf, and the state appraiser reduced the assessed value to match the previous year’s assessment but didn’t explain the basis for the calculation.  Town appealed.

The majority holds that there’s no right to an automatic reduction under the applicable statute and that a housing-subsidy covenant’s effect on a property value is a case-specific determination.  Taxpayer one’s case is affirmed; taxpayer two’s case is remanded. 

Let’s explore the reasoning a bit . . . .

The majority first notes that these appeals turn on “the meaning of our property-valuation statute.”  Taxpayers both argue that a housing-subsidy covenant creates a reduction in fair market value.  In Vermont, properties are supposed to be appraised at their fair market—in other words, what a hypothetical buyer would pay for the property on the open market for its highest and best use.

Since 1997, there’s been a statutory requirement that housing-subsidy covenants be considered in the valuation process.  Taxpayers argue “consideration” means reduction, and the majority—as indicated by the way it frames the argument—rejects that premise.  The majority notes that normally it would defer to the state appraisers’ interpretation, but here the appraisers arrived at opposite ends of the spectrum. 

As statutory interpretation fans will know, the majority first looks to a statute’s plain language when interpreting it.  Here, the majority considers “consideration” contemplative.  Because it’s not an ambiguous term, the majority reasons that “consideration” means, more or less, “to take into account” and that’s that.

Interestingly, the majority does not get into what “consideration” means in the contract-law context. 

There’s a robust discussion of the good semantic sense of this interpretation.  The majority also notes that not all housing subsidies are created equal—thus requiring individualized consideration of this aspect.  The majority also notes that most covenants can be terminated by consent. 

Is anybody else thinking that there’s more “speculation” in real-estate-tax assessments than there was in the 19th-Century Gold Rush? 

The bottom line is that consideration is a word that implies discretion.  Accordingly, a housing-subsidy covenant is a factor in making a valuation and that’s that and nothing more. 

That’s really the meat (or tofu for you vegetarians out there) of the opinion. 

The majority does, however, discuss the fact-specific situations of taxpayers one and two.  In this context the majority explores “whether the assessors and listers in these cases properly considered the effect, if any, of these covenants.”

Taxpayer one is first.  Her primary argument is that the state appraiser should’ve deferred to a valuation memo from the Director of the Division of Property Valuation and Review (PVR).  Taxpayer one bought her property with the assistance of some housing-trust grants.  The covenant on her property required that if she were to sell the place, she’d have to get an appraisal, and the grant-providing trust would have the option to find a buyer and purchase the property at an “option price”—there are a lot of terms, but essentially, taxpayer one would have to pay back the grants and share the appreciation in value. 

Taxpayer one’s property was assessed by the town at its full fair market value, and she appealed.  She cited the memo from PVR, which indicated that the putative option buyer’s price should equal the fair market value.  The town’s position was that the assessor found “no market evidence to suggest that the existence of the covenant had any impact on value.”

The state appraiser stepped in and said while some towns reason that such covenants reduce properties’ fair market value, others do not.  Here, the state appraiser found that the covenant didn’t reduce the fair market value, and rejected the PVR memo’s method. 

The majority likewise rejects the PVR memo, noting, “We will not interpret statutory language in a manner at odds with the statute’s language merely because it comes from someone within the agency charged with implementation.”  The majority also notes that the memo just suggests a valuation process and doesn’t mandate one.  The state appraiser therefore committed no error in not deferring to the PVR director’s “suggestion.”

Taxpayer one’s next argument is that the record doesn’t “support the state appraiser’s finding that the town assessor considered the impact of the covenant on the fair market value of the property.”  Taxpayer one takes issue with a list of condos sold—arguing first that the list compares one covenant-restricted sale with nine non-covenant-restricted sales; and arguing second that the prices are inaccurate because they include the grants, which will never become equity. 

The state appraiser likened the grants to a zero-percent second mortgage or owner financing that could be recovered upon sale.  Accordingly, there was no reduction in actual value.  

Before getting into the nitty-gritty, the majority notes that it will defer to the state appraiser in general.  So long as there is some evidentiary basis for the appraiser’s findings, they will generally be upheld. 

People testified for both positions.  One assessor testified that these types of covenants are essentially “back end loaded mortgages” and noted that because traditional assessments aren’t adjusted based on remaining liability, there’s no reason to adjust based on these types of covenants.  Here, the majority reasons that taxpayer one failed to carry her burden showing “that the appraisal did not reflect the fair market value of the property.”  Though there was contradictory evidence presented, the majority defers to the state appraiser’s decision, reasoning that it’s adequately supported by the evidence. 

The final argument for taxpayer one is that the state appraiser misunderstood the issue.  This stems from the appraiser’s statement “that the issue to be determined was the listed value of the property, or the amount on which the owner pays taxes” (noting that listed value is derived from fair market value).  Taxpayer one’s contention is that the issue to be determined was “fair market value.”  Here, the majority simply notes that the parties are “Sayin’ the same danged thing with diff’nt words” as Professor Y. Sam has cogently explained in prior summaries. 

Taxpayer two’s case is similar.  In this case, there is also an option though the mechanics aren’t exactly the same.  Here, however, the listers set a value, property owner appealed to the town Board of Civil Authority, which lowered the assessment slightly.  Taxpayer two appealed further, and though the state appraiser found that “[n]either party offered any market data or sales to support market value showing that any properties were affected” by the housing-subsidy covenants, the appraiser concluded that the statute required an automatic reduction in listed value.

So the town appealed.  And here, the majority notes that despite its usual deference to a state appraiser’s decision, the appraiser here didn’t have any evidence to base the reduction upon.  There’s a bit of juxtaposition here, but we won’t get too deep into that.  Here, the majority reasons “it was an abuse of discretion for the state appraiser to ‘pick a figure out of thin air.’”  Accordingly, the majority sends this one back for further “consideration.”

Justice Robinson dissents.  While the dissent agrees with the majority’s “individualized consideration” reasoning, it disagrees with the majority’s focus on whether there’s a mandatory deduction versus individualized consideration. 

The dissent reasons that the proper focus of inquiry is whether the assessor is supposed to determine a covenant’s impact on appraised unrestricted market value or whether the assessor is s’posed to figure out what a willing buyer would pay a willing seller subject to all the restrictions on the property.  In other words, the primary issue for the dissent is whether one—“one” being an assessor, appraiser, or lister—figures out the no-restrictions value and gives a restriction-based reduction, or whether the “fair market value” is what a willing buyer would pay a willing seller with the knowledge that the buyer will never actually own the “whole shebang.”

Essentially, the dissent’s reasoning is that the owner shouldn’t pay property taxes on the portion “held” by the nonprofit financiers.  Accordingly, the dissent would reverse taxpayer one’s case as inconsistent with that concept and remand taxpayer two’s case for further findings. 
The dissent reasons that “fair market value” as defined in the applicable statute requires consideration of the effect of restrictions on a buyer—in other words, with the applicable restrictions, the buyer is likely going to have to agree to those same restrictions and that is gonna have an effect on value for prospective buyers.  The dissent notes that the majority just glosses over this. 

The dissent also notes that state and local land-use restrictions have an effect on land valuation.  The housing-subsidy covenants don’t exist in a vacuum.  The dissent makes clear that it’s not advocating for an “automatic” reduction.   Rather, the dissent notes the practical effect of housing-subsidy covenants—buyers won’t pay as much for a property that has legal restrictions on it. 

Acknowledgment of this, the dissent reasons, requires the independent approach the dissent advocates and is consistent with the spirit of the statutory scheme as a whole.  The dissent makes the point that housing-subsidy programs are rendered somewhat impotent and self-contradicting when the low-income purchaser who qualifies for the housing subsidies is forced to pay property taxes on the unrestricted value of the property.  As the dissent puts it: “That does not make sense.”

The dissent pooh-poohs the majority’s apparent it-shifts-the-burden-of-taxes reasoning, noting that the legislature makes plenty of policy-based decisions.  “In short, the notion that home-ownership by low-income Vermonters is at least as worthy a public good as college fraternities and county field day celebrations is not jarring.”

While not binding, the PVR’s memo approach has a certain sensibility.  The dissent reasons that the majority’s stubborn non-deference is a little strained.  The dissent notes that the PVR’s approach “is consistent with our application of the statute in other contexts.”

The dissent takes issue with the majority’s unrestricted-market-value-as-guide-star approach.  In taxpayer one’s case, the dissent reasons that the hypothetical “value” of the property without restrictions is a myopic view.  It fails to take into account the reality of the situation—that the potential equity of the housing-subsidy-covenant-restricted homeowner is always limited.  The dissent implies that the majority took a selective view of the evidence without acknowledging the corollaries and counterpoints—for example, the appraiser’s acknowledgement of the “option” price.   

For the dissent, it keeps coming back to what a willing buyer would pay a willing seller, subject to the restrictions.  The dissent doesn’t appreciate the majority’s comparable-sales-prices approach.  There really is no such thing because “the property purchases in these cases are not arms-length, market transactions.”  Everything is somewhat predetermined in this regard.  Put another way, housing-subsidy covenants generally reduce the value of a property to a potential buyer.   

The dissent notes the majority’s pick-and-choose-as-to-deference-to-the-state-appraiser’s approach when it comes to taxpayer two’s case.  The dissent’s characterization stands in contrast to the majority’s: “The state appraiser in the Rockingham case thoroughly reviewed the testimony of the various parties and commonsensically concluded that the housing-subsidy covenant ‘removes one of the bundle[s] of rights an owner has or prospective buyer should consider before purchasing a property.’”  And so, the dissent reasons, here we have a winner.  This is in line with the very idea of “fair market value” that the legislature sought to craft. 

Though the dissent concedes that the reasoning behind the final number in taxpayer two’s case is not entirely clear, this approach is much more in line with the dissent’s understanding of the applicable statute, and the dissent would simply remand for further explanation of the reasoning. 

The dissent notes that the “majority has taken its best shot” at figuring out the statute, but it’s wrong, and calls for the legislature to take a look-see and make any necessary repairs to the scheme. 

This is a relatively lengthy opinion and an interesting read.  If, in muddling through and summarizing it, I’ve made any mistakes, please take it up with the complaint department.

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