Document Number
14-61
Tax Type
Land Preservation Tax Credit
Description
Land Preservation Tax Credit/Credit was revalued/Appraisals
Topic
Assessment
Land Preservation Tax Credit
Reports
Date Issued
04-30-2014

April 30, 2014




Re: § 581-1821 Application: Land Preservation Tax Credit

Dear *****:

This will reply to your letter in which you contest the Department's adjustments to the Land Preservation Tax Credit (the "Credit") application submitted by the ***** (the "Taxpayer"). I apologize for the delay in responding to your appeal.

FACTS



In November 2008, the Taxpayer conveyed a conservation easement on a tract of land located in the ***** (County A). Pursuant to the conveyance of the easement, the Taxpayer registered the donation with the Department for purposes of the Credit. The Taxpayer requested and was awarded Credit based on an appraisal by an unrelated third party appraiser contracted by the Taxpayer. Subsequently, the Taxpayer transferred the Credit to unrelated individuals.

A subsequent review of the Taxpayer's application raised questions about the value of the easement for which the Credit was granted. As a result, the Department commissioned an appraisal from an independent third party appraiser. Based on this appraisal, the Credit was revalued and assessments were issued against the individuals that received the transferred Credit. The Taxpayer appeals the revaluation of the Credit, contending its appraiser followed accepted professional standards and the easement was properly valued in its appraisal. The Taxpayer has provided two additional appraisals to support its position.

DETERMINATION



Virginia Code § 58.1-512 provides a Credit for 40% of the fair market value of real property or an interest in real property donated to an eligible charitable organization or instrumentality of the Commonwealth for qualifying land conservation purposes. In order to qualify for the Credit, a donation of an interest in real property must qualify as a charitable deduction under Internal Revenue Code (IRC) § 170(h).

Treasury Regulation § 1.170 et seq. governs charitable contributions. Under Treas. Reg. § 1.170A-13(c)(3)(ii), a qualified appraisal must include the appraised fair market value of the property on the date of the contribution. Treas. Reg. § 1.170A-1(c)(2) further states the fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the facts. In the Taxpayer's case, the issue is the correct valuation of the easement.

Virginia Code § 58.1-512.1 C provides in pertinent part:

    • The fair market value of any property with respect to a qualified donation shall not exceed the value for the highest and best use (i) that is consistent with existing zoning requirements; (ii) for which the property was adaptable and needed or likely to be needed in the reasonably near future in the immediate area in which the property is located; (iii) that considers factors such as, by way of illustration and not limitation, slopes, flood plains, and soil conditions of the property; and (iv) for which existing roads serving the property are sufficient to support commercial or residential development in the event that is the highest and best use proposed for the property.


Easement Description

The easement was placed on two adjacent tracts of property. One tract (Tract A) included approximately 79 acres comprised of two different tax parcels. Tract A had extensive footage along a major arterial highway, two smaller roads, as well as the ***** (the "River"). A railroad line also ran along one property line. Tract A included no improvements.

The second tract (Tract B) included approximately 109 acres comprised of four tax parcels. Tract B has substantial frontage on the two smaller roads and on the River. ***** (the "Town") is directly across the River in the ***** (County B). A residence and several smaller buildings are located on Tract B. A portion of Tract B lies within the River's flood plain.

Both Tract A and Tract B were zoned agricultural, but were within commuting distance of a major metropolitan area. The permitted uses under the County's agricultural ordinance include agricultural and single-family detached dwellings. In addition, a special use permit allowed certain other uses including certain community and commercial/industrial use. The County's comprehensive plan called for Tract B to be rezoned for commercial use.

Two civil war battles occurred on the subject property, with battle remnants such as trenches and bridge footing still visible. The easement recognized the historical significance of the site, and as such, put substantial restrictions on the subject property including the disallowance of any additional improvements and the destruction of historic buildings or topography.

Appraisals

In the valuation process, the appraisers develop a supportable estimate of market value of the property appraised. This process involves collecting market evidence to support an analysis of value trends, the reactions of buyers and sellers in the marketplace, and a proper interpretation of these facts. Virginia Code § 58.1-512 requires an appraisal to meet USPAP standards in order to be considered valid. See the Guidelines for Qualified Appraisals, issued as Public Document (P.D.) 07-9 (3/12/2007).

The appraisal process typically involves three approaches in determining value: the Cost Approach, Sales Comparison Approach, and Income Capitalization Approach. A brief description of each technique follows:

    • The COST APPROACH: An appraisal procedure using depreciated replacement or reproduction costs of improvements, plus land value, as a basis for estimating market value. The underlying assumption is most reliable when the improvements are relatively new and are the highest and best use of the land.
    • The SALES COMPARISON APPROACH: An appraisal procedure using sales prices of whole properties similar to the subject property as a basis for estimating market value. The nature and condition of each sale are analyzed, making adjustments for dissimilar characteristics. The Sales Comparison Approach offers a good indication of value when reliable data exists for a sufficient quantity and quality of sales in the marketplace.
    • The INCOME CAPITALIZATION APPROACH: An appraisal procedure using capitalization of expected future income as a basis for estimating market value. In this approach, there is a direct relationship between the amount of income a property earns and its value. An appropriate capitalization rate is used to estimate value based on the anticipated net operating income of the property. Factors such as risk, time, interest on the capital investment, and recapture of the depreciating asset are considered in deriving an overall rate. The underlying assumption in this approach is that an informed purchaser will pay no more for the subject property than would have to be paid for another property with an income stream of comparable amount, duration, and quality. When analyzing land, the Income Capitalization approach may be presented as a discounted cash flow and is known as the Subdivision Development Approach.


The final step in the appraisal process is the reconciliation of value indications and the final estimate of value. The appraiser considers each approach according to the quantity and quality of information available, as well as the peculiarities of the subject property, and weighs each value estimate. The result is a final conclusion of market value for the subject.

An appraiser's opinion of value is based on the property's "highest and best use." According to the Appraisal Institute's Dictionary of Real Estate Appraisal (Third Edition, 1993, p. 171), highest and best use is defined as:

    • The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity.


Taxpayer's Appraisals

The Taxpayer submitted three appraisals. It submitted an appraisal with its conservation easement application, a revised appraisal by the same appraiser as the one submitted with the application, and an appraisal by a different appraiser of the fee simple interest in Tract A. The sales comparison approach was used with each submitted appraisal.

Appraisal submitted with the Application

The appraisal submitted with the conservation easement application appraised Tract A prior to the easement at approximately $8.4 million and Tract B for $2.7 million for a total before value of $11.1 million. The appraiser valued the subject property after the easement at approximately $1.5 million. As such, the total value of the easement was appraised at approximately $9.6 million.

Revised Appraisal

The revised appraisal that was submitted with the conservation easement application appraised Tract A at approximately $9.5 million and Tract B for $4.2 million along with an additional small parcel at approximately $0.9 million for a total value of $14.5 million prior to the easement. The appraiser valued the subject property after the easement at approximately $1.7 million. As such, the total value of the easement was appraised at approximately $12.8 million.

The Taxpayer's appraiser issued a revised appraisal after the distribution of the credits. This appraisal included three contiguous parcels of property owned by the donor, but not part of the easement. These three parcels were included with Tract B. Under Treas. Reg. § 1.170A-14(h)(3), a conservation easement includes the portion of the contiguous property owned by the donor and donor's family when determining the before and after value of the property when the property is encumbered by a conservation easement.

Fee Simple Appraisal

The Taxpayer also provided an appraisal for the fee simple interest in Tract A. This appraisal valued Tract A at approximately $7 million prior to the execution of the easement. However, no estimate was made as to the value of the easement in order to establish the proper amount of Credit issued. Accordingly, the appraisal determining the fee simple value of Tract A will not be addressed.

Appraisal Commissioned by Department

As mentioned above, the Department commissioned an independent third party appraisal subsequent to the Taxpayer's appeal. The appraiser appraised Tract A prior to the easement at approximately $1.6 million and Tract B for approximately $0.9 million, for a total before value of approximately $2.5 million. The appraiser valued the subject property after the easement at approximately $0.9 million. As such, the total value of the easement was appraised at approximately $1.6 million. The Department's appraisal addressed the three contiguous parcels owned by the donor which were not part of easement as required by Treas. Reg. § 1.170A-14(h)(3). The appraisal concluded that these three parcels did not enhance the value of the easement.

Analysis of the Appraisals

The Taxpayer's appraisals value the easement significantly higher than the Department's appraisal. The difference in value primarily results from judgments made concerning the highest and best use of the subject property. The property is currently zoned agricultural, but the County has a portion of it designated to be rezoned commercial at some point in the future.

The Taxpayer's appraisals determined that the highest and best use of Tract A and Tract B before being encumbered by the easement is for commercial development and residential development, respectively. The Department's appraiser concluded Tract A's highest and best use prior to the easement was to hold the property until demand justifies future rezoning to a low intensity commercial, or light industrial use. The Department's appraiser ascertained Tract B's highest and best use prior to the easement as rural residential and agricultural use.

The Taxpayer's appraisals determined that the highest and best use of the subject property after the easement was for historical preservation. The Department's appraisals determined that the highest and best use of the subject property after being encumbered by the easement was as one larger residential and agricultural property.

An important factor in determining the highest and best use of both Tracts A and B prior to the easement is the availability of water and sewer and soil quality. The subject property had no public sewer and water. The improvements currently located on the property relied on a well and septic system. The Taxpayer asserts that water and sewer would be available from the Town. The Taxpayer's appraisals admit a lack of public water or sewer, but included a study allowing for the construction of an on-site treatment system that could support a small inn and restaurant. The Department's appraisal determined that sewer and water would not be provided by the Town, although it may be provided by County A at some undetermined future time.

Because of the unique nature of the parcels at issue, and the relative absence of sales of large parcels around the time of the donations, identifying comparables was a challenge for both appraisers. As such, each appraiser used different comparables when determining the value of the subject property both before and after being encumbered by the easement. The Taxpayer's appraiser tended to use smaller parcels that were more heavily developed. The Department's appraisal tended to use large parcels that were more rural in character. However, both appraisers adjusted their comparables to account for size, location zoning and other factors.

The Taxpayer's appraisals state that the soil is marginal, but that the Taxpayer secured approval through a soil scientist and the County planning office for eleven residential sites. The Department's appraisal found that the soil had shrink-swell qualities, poor drainage capabilities and would require additional drainage improvements to support buildings, roads, and other facilities. Although not stated in the appraisal, the Taxpayer asserts that the soil has no drainage problems and that two large drain fields have been approved for the subject property. The Taxpayer's appraisal indicated there was County A approval for eleven buildable lots on Tract B. However, no evidence of this approval was submitted to the Department with the appraisals.

The subject property is located in a rural area. Tract A does front a busy highway and is planned to be rezoned commercial. Both tracts border the River and have river views. However, the subject property has no public sewer and water. The Taxpayer indicates that the Town will provide the subject property with water and sewer. There is no substantive evidence that the Town would provide these services, and the Department believes that it is highly unlikely that a locality would provide utility services to privately held land located in a different locality. There is no evidence that County A will extend water and sewer to the subject property in the foreseeable future. The Taxpayer has provided a study that provides for the construction of an on-site treatment system that could support a small bed and breakfast and a 100 seat restaurant. The bed and breakfast and restaurant constitute limited commercial development that does not validate the values of Tract A established by the Taxpayer's appraisals.

The Taxpayer asserts that the metropolitan area is considerably closer to the subject property than what was stated in the Department's appraisal. As such, the Taxpayer contends that the Department's appraisal underestimates the number of commuters that will pass by the subject property. Regardless of the actual distance, the Department's appraisal acknowledged that the subject property was within commuting distance of the metropolitan area. As such, the dispute in distance is accorded little weight.

The Taxpayer also contends that the Department's appraiser was not competent as required by USPAP because he did not have experience performing appraisals in the County and lacked knowledge of the market and geographic area. USPAP requires that when an appraiser conducts an appraisal in an unfamiliar locality, the appraiser must spend sufficient time to understand the market and locations involved. In this case, the Department's appraiser has performed appraisals of conservation easements throughout the Commonwealth of Virginia. He made several trips to the County and the subject property to familiarize himself with the area and contacted local officials and realtors. Thus, the Department's appraiser fulfilled his obligation to understand the market and location of the subject property under USPAP.

CONCLUSION



After reviewing all of the information provided, the development potential of Tract A and Tract B were more limited prior to the easement than proposed by the Taxpayer's appraisers because of its lack of public water and sewage. As such, it is my determination that the valuations of both Tract A and Tract B before being encumbered by the easement as stated in the Taxpayer's appraisals are excessive. Further, the comparables used by the Department's appraiser more accurately reflect the subject property in their size and rural character. Based on this analysis, I find the value of the subject property before the easement as stated in the appraisal commissioned by the Department appears reasonable and had the better analysis.

Based on this determination, the assessments issued against the individuals claiming the Credit passed through from the Taxpayer are upheld. The Department will issue updated bills with accrued interest. The individuals must pay the outstanding balance within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rulings and Decisions section of the Department's website. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M. Burns
Tax Commissioner




AR/1-5127846669.B

Rulings of the Tax Commissioner

Last Updated 06/03/2015 07:55