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Kentucky: KBTA Rejects Appraisal Using Residual Method in Property Tax Appeal


The trend of Property Valuation Administrators trying to include intangibles as part of real estate values for property tax purposes continues. The Kentucky Board of Tax Appeals (“KBTA”) recently entered a “directed verdict”, finding that the recent sales price of a shopping mall was the best evidence of fair cash value in a real property tax appeal and rejecting an appraisal using the residual method. CPT Louisville I LLC v. Jefferson County PVA, Order No. K-24995, File No. K14-S-85, K15-S-278 (Ky. Bd. Tax App. January 8, 2016).

The Jefferson County Property Valuation Administrator (“PVA”) valued the property at $111,485,968.58 for the 2014 and 2015 tax years based on the sales price contained in the deed for the sale of the property in 2013. The taxpayer contended that the property should be valued at $92,000,000 and entered into evidence an appraisal of the property supporting that value.

At the KBTA hearing, the taxpayer’s appraiser testified that the sales price was inflated due to certain tangible and intangible factors such as a trained work force, aesthetics, going-concern value, business value, and buyer appeal. He testified that none of these factors should be included in an assessment. However, the appraiser was unable to point to any specific instances of these factors affecting the sales price when questioned by the board. He also testified that nothing had occurred between the date of the sale and the date of the assessment that would have caused a reduction in price, and that the sale price had been a voluntary one that was not overstated. The appraiser also admitted that he had not reviewed the sales documents and therefore did not specifically analyze the factors that may have explained the discrepancy between the sales price and his appraisal. The appraiser had instead applied a “residual method” which involved appraising the property and then assuming that any discrepancy in value is attributable to factors that would not be evaluated in an appraisal. Under this method, which is commonly used in appraising shopping malls, the appraisal value includes the value of the land and buildings only.

The KBTA found that because Kentucky values property based on its fair cash value, the value of a property must be based on what it is worth in money, or, the price of the property in a voluntary cash sale. The KBTA found that the taxpayer did not overcome its burden to show that the recent sale did not represent the property’s fair cash value, given that the appraiser could point to no specific evidence of the tangible and intangible factors he claimed had affected the sales price. The KBTA noted that when a retail property such as the one at issue here is in a desirable location and has desirable tenants, those factors would necessarily be encompassed in a fair cash value determination and could not be separated from the value of the buildings and land alone. Therefore, the KBTA upheld the PVA’s assessment in a directed verdict.

Taxpayers should take note of this decision, especially if the taxpayer is contesting the property tax value of property that has recently been acquired by purchase. Should such an owner wish to challenge a PVA’s assessment value, the owner may wish to obtain a detailed appraisal of the property that explains the difference between the appraisal value of the land and buildings as well as the separate value of tangible personal property and intangible personal property. The taxpayer should also be prepared to present evidence that such personal property should not be included in the value of the real property. Each taxpayer must overcome its burden of proof. The more specific evidence a taxpayer has that tangible and intangible factors were at play in the sales price, the more persuaded the KBTA may be that such values should not be included in the real property value for tax purposes.

Taking this back a step further, when a taxpayer purchases a significant property, the taxpayer may consider the potential resulting real property tax consequence for the structure of the deal. Planning ahead of the assessments could produce a different result.

To view a complete PDF of the February 15, 2016 SALT Insights, please click here.

To learn more about Mark A. Loyd and his practice, please visit his profile.

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