In the last 25 years, the U.S. automobile industry has experienced a steady decline. Many automobile assembly plants have been closed and sold for a far different use than vehicle assembly. This phenomenon provides owners of all types of industrial property with lessons on how to protect themselves from unfair property taxation.

As just-in-time logistics began to emerge, a significant need arose to locate assembly plants as close as possible to the manufacturers who produce the automotive parts. This proximity enabled assembly plants to reduce freight and inventory costs and improve product quality.

The fact that parts suppliers are located in the center of the country — far away from the automobile assembly plants on the east and west coasts — presented a major problem. The end result was that many coastal assembly plants closed.

In 1982, 70 assembly plants operated in the U.S. and Canada. Nine of these plants were on the East Coast and four in California. Over the next 20 years, 27 plants closed, including all four plants in California and three of the nine East Coast plants. During this same period, 35 new automotive assembly plants were built, almost all in the central and southern part of the United States.

What history tells us

Since 1984, no auto company has purchased an assembly plant and continued to manufacture cars in it. The underlying reason is clear: New assembly plant construction takes place only on large plots in the center of the country, and in close proximity to suppliers. This means that older plants, located on smaller plots far away from the ideal central U.S. locations, have no chance of being sold for continued use as assembly plants.

Older industrial plants of most any type never sell to owners who retain the assets for the same use. This happens because newer plant designs employ state-of-the-art technology in machinery and equipment and require fewer employees. Therefore, older plants are far less valuable to a manufacturer that makes the same products as the plant formerly produced.

For tax assessment purposes, owners of these older facilities can argue effectively that the market value of these older plants should be based on the value of alternative uses in the marketplace, as distinguished from their current use. Alternative uses, including lighter industrial processes, almost always sell for appreciable market discounts.

The original owners of many types of industrial property continue to occupy these properties, which were built to surround a certain design process for machinery and equipment use. The marketplace, however, finds alternative uses generally less intensive, and at discounted market rates of value.

While it may have been costly to build these plants, no evidence exists that these facilities would ever sell for the same use. For tax assessment purposes, taxing authorities must not look to the current use of the property. Rather, their focus must be on the market value in exchange.

Precedent-setting cases

Perhaps the most insightful comment on the industrial plant property tax assessment issue was made by the appellate division of the State of New Jersey in a 1980 case, Fort Lee v. Hudson Terrace Apartments. The court called attention to the fact that the value for assessment purposes must be on the value of the property in the marketplace, without regard to the particular, or peculiar, circumstances of the owner.

The court stated, “Were this not so, adjacent parcels of land improved with identical structures might be valued differently to the extent that their respective owners' personal situations differed, even though in the open market each parcel would sell for the same price at a fair and bona fide sale by private contract.”

Courts in other U.S. jurisdictions have held similarly. In the case of Kansas City Star Co. v. Wisconsin Dept. of Taxation, the court found that “the test of fair market value is completely objective and has no reference to the peculiar position of the particular seller making the sale.”

And in Columbia Gas of Kentucky Inc. v. Maynard, the court held that “the term ‘market value’ connotes, of course, sale value as distinct from intrinsic value, or value to some particular person.”

The message the courts have sent to industrial plant owners, automotive or otherwise, strongly suggests that taxpayers need to examine their tax assessments. In instances where these assessments rely on the current use as the basis for the property's valuation, without regard to the marketplace, owners have the right to file appeals in order to obtain fair taxation of their industrial properties.

John Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario, based in Montclair, N.J. He is the president of the American Property Tax Counsel, the national affiliation of property tax attorneys.