One of the more difficult problems property tax practitioners – and trial courts – face is to determine the fair market value of large industrial plants that are due to close and be torn down. Such properties rarely have much value to either their current owner(s) or for continued use by other industrial users. Often, the land beneath the improvements outstrips the value of the improvements themselves. Yet assessors still are required to value such teardowns according to their current highest and best use as of the Jan. 2 snapshot date, particularly when the time horizon involved in closing such plants often takes years to achieve.
Such was the problematic situation confronting the Minnesota Tax Court recently in Ford Motor Co. v. County of Ramsey. In an exhaustive opinion written by Chief Judge Delapena, the tax court ordered the value of the main Ford Motor Plant parcel located in St. Paul, Minnesota to be decreased by a total of $132.8 million and the real estate taxes adjusted accordingly. In its opinion, the tax court said it was tasked with determining the market value of Ford’s property on each of the valuation dates. The court noted that “Ford and the county have both concluded — and we agree — that [the] traditional valuation methods cannot be used to value the [property]. Briefly, there are no sufficiently comparable sales to examine; no one today would construct comparable improvements on the site; and the obsolete existing improvements would be of no interest to an investor.”
The court also said that it agreed with Ford and the county that the property today would have been purchased by a developer intending to raze the existing improvements, and that it needed to examine what price a developer would have been justified in paying for the property, given the cost of clearing and developing the lots. As viewed by the trial court, “An essential step in the development cost approach is the adoption of a reasonable development plan. Solely to value Ford’s property for tax purposes on the five valuation dates, we have adopted the county’s proposed development plan, which subdivides Ford’s property into 23 saleable lots, and which the county commissioned solely for this property tax litigation.”
The court found that Ford presented substantial evidence that the assessor’s estimated market value for the primary parcel of land was excessive for the five valuation dates in question, but that the tax assessor accurately estimated the market value of a different parcel on the property.
The court ordered the 2006 value on the primary parcel be decreased from $62.6 million to $33.9 million, the 2007 estimation be decreased from $74.5 million to $34.6 million, the 2008 value be altered from $60.5 million to $34.8 million, the 2009 value lowered from $43.5 million to $26.8 million and the 2010 estimation be decreased from $43.5 million to $21.7 million. The court affirmed the substantially lower estimated values for the parcel located in the River Corridor Overlay District: $2.4 million in 2006, 3.1 million in 2007 and 2.8 million in 2008-10.
Given the eventual outcome of this seminal case, the question becomes whether it is better to counsel clients owning obsolete industrial plants to consider the actual price they may achieve by selling their land for re-development versus continuing to treat their property tax assessments as the full value of the existing use? While the outcome in the Ford Motor case suggests the redevelopment alternative may be the preferred option, this outcome was mitigated somewhat by the fact that the plant was located on land in a desirable section of a major city.
Had the functionally obsolete plant been located in a small town, or on the outer edge of a suburb – places where land values are either stagnant or still in decline relative to the market for land in built-up urban core areas like St. Paul – the situation may have been drastically different for all concerned. Nonetheless, after the tax court’s decision in Ford Motor, taxpayers seeking to challenge the assessments of their rust bucket large industrial properties have an interesting alternative to consider, one that should be carefully examined by property tax practitioners and assessors alike. As the old adage says, “Be careful what you ask for; you just might get it.” In the case of Ford Motor Co. v. Ramsey County, truer words were never spoken.