In their quest for more revenue, taxing authorities are attempting to use theories of property valuation that unfairly raise owners' property taxes.

For example, the first step in valuing a property is to determine its highest and best use. The assessor will designate the current use of a property as its highest and best use, making it akin to a “special purpose” property, which is defined as a property built with unique characteristics useful only for a specific purpose. If the property is an automobile assembly plant, a bakery, a bottling plant, etc., it can be very difficult to find comparable property in the marketplace that has sold recently enough to act as a comparable for assessing purposes.

By classifying property to eliminate the use of market data as a valuation method, the assessor forces the use of the cost approach, which yields a higher valuation than would a market transaction.

Under the cost approach, the assessor reviews the actual cost to build the facility and what those costs would be in today's dollars. From this analysis, the assessor derives the highest possible value for the property because the calculations do not take into account what a willing buyer and seller could agree upon today as an appropriate price for the property.

What Are ‘Special Purpose’ Properties?

A perfect example is the assessment of the Ford Motor Co.'s assembly plant in Mahwah, N.J. Under the cost approach, the assessor valued the plant at $80 million. A short time later, Ford closed the plant and turned to the market to find a buyer. The price Ford obtained was only $20 million, one-fourth of the assessed value.

Increasingly, the courts have limited labeling properties “special purpose,” thereby deterring the assessment community from forcing owners to use the cost approach to value.

For instance, in a trial before the New Jersey Tax Court regarding the assessment of the Ford assembly plant in Edison, N.J., the court rejected the use of the market comparables presented by Ford, which had used industrial plant comparables. The court held that the assembly plant was a special purpose property and could only use other auto assembly plants as comparables and dismissed the case. On appeal to the New Jersey Supreme Court, the focus was determining whether the property was special purpose or general purpose. If the property was designated as general purpose, the next decision was to determine whether its highest and best use was as an automobile assembly plant.

The Supreme Court determined that “a property does not qualify as special purpose when it possesses certain features, which, while rendering the property suitable to the owner's use, are not truly unique.”

According to the Supreme Court, if one narrows the prospective demand for a property solely to its present occupancy then one has eliminated the use of any market data from the process. Moreover, by limiting the demand in any market solely to the user/occupant, one implicitly categorizes the property as special purpose, even though the category “special purpose” may not be applicable.

In a General Motors case, the New Jersey appellate court analyzed the Supreme Court's language in Ford's Edison case in this way: “The Supreme Court held that the Ford plant is not subject to classification as a ‘special purpose’ property. We are, therefore, persuaded that it was an error to have so classified the General Motors plant.”

Moreover, the Court in Ford Motor v Edison made clear that it would have been an error for the Tax Court to have “limited its consideration of value to the current use of the property as an auto-assembly plant.” By so doing, “it would have reached by the back door much the same result as would have been reached by classifying the property as ‘special purpose’ property.”

The Costs of Improper Classification

It is critical for taxpayers to challenge the tax authorities when they try to bar the use of market data by designating the current use of a property as its highest and best use.

It is especially helpful in these challenges to bring in experts to testify, such as site location experts, zoning law experts and industrial brokers. This point cannot be stressed enough since the failure to properly classify a property will expose you to valuation methods that increase your property taxes. The mistake of failing to properly develop your case could be extremely costly.

Phil Giannuario is a partner in the law firm of Garippa, Lotz & Giannuario. The firm is a member of American Property Tax Counsel, the national affiliation of property tax attorneys. Phil can be reached at phil@taxappeal.com