April 7, 2009
VALUING PROPERTY FOR ASSESSMENT PURPOSES
By: Kevin E. McCarthy, Principal Analyst
You asked the following questions regarding the valuation of real property for assessment purposes:
1. what is the statutory framework for valuing property for tax purposes,
2. what is the meaning of “fair market value” and “highest and best use” in this context,
3. would single family developments be considered the “highest and best use” in areas zoned for such housing, and
4. what is the impact of permanent conservation easement on such valuation.
The Office of Legislative Research is not authorized to issue legal opinions and this memo should not be seen as such.
Except for farmland, open space, forest, and maritime heritage property in the “490” program, most property must be assessed based on its fair market value. This is the value that would probably result from fair negotiations between a willing seller and a willing buyer based on the “highest and best use” of the property. The “highest and best use” is the one that will most likely produce the highest market value, greatest financial return, or the most profit from the use of a particular piece of real estate. A single family development may or may not be the “highest and best use” of a parcel that is so zoned, depending on the interplay of market forces. The statues do not specifically address how conservation easements should be reflected in valuations, although the Supreme Court ruled that everything that might legitimately affect a property's value must be considered in assessing it for tax purposes.
In contrast, property in the “490” program must be assessed based on its current use, which may result in an assessment that is below fair market value. Since the property must be assessed based on its current use, its “highest and best use” is not relevant to the valuation process. We have found one Supreme Court case in which the Court overruled a board of assessment appeals that had refused to reduce the valuation of farmland in the “490” program to reflect a permanent conservation easement held by the state.
VALUING PROPERTY FOR ASSESSMENT PURPOSES
Property Not In the 490 Program
Real property is subject to CGS Sec. 12-64, which requires that property be assessed based on it “present true and actual valuation.” With the exception of property in the “490” program (discussed below) this is the same as the property's fair market value, as distinct from the value resulting from a forced or auction sale (CGS Sec. 12-63). For tax assessment purposes, “fair market value” is the price that would probably result from fair negotiations between a willing seller and a willing buyer. Xerox Corp. v. Board of Tax Review of City of Hartford, 175 Conn. 301 (1978).
There are three methods for determining a property's fair market value for tax purposes: the comparable sales, income or capitalization, and cost approaches. Sun Valley Camping Co-op. Inc. v. Town of Stafford, 94 Conn. 696 (2006). Residential property is most commonly valued using the comparable sales approach, particularly when valuing homes in subdivisions or condominiums. The income or capitalization approach is most commonly used for commercial properties, including apartment buildings. In this approach, the income that a building or development
In Metropolitan Dist. v. Town of Burlington, 241 Conn. 383 (1997), the Appellate Court noted that the fair market value of property for tax purposes, regardless of valuation method, takes into account the property's highest and best value. The Supreme Court has stated that
a property's highest and best use is commonly defined as the use that will most likely produce the highest market value, greatest financial return, or the most profit from the use of a particular piece of real estate….The highest and best use determination is inextricably intertwined with the marketplace because fair market value is defined as the price that a willing buyer would pay a willing seller based on the highest and best possible use the land assuming, of course, that a market exists for such optimum use….the highest and best use conclusion necessarily affects the rest of the valuation process because, as the major factor in determining the scope of the market for the property, it determines which methods of valuation are applicable.
United Technologies v. East Windsor, 262 Conn. 11 at 25-26 (2002).
We have found no cases that discuss whether the “highest and best use” of a vacant lot that is zoned for single family housing would be this use. As the Supreme Court held in United Technologies, the highest and best use determination is intertwined with the marketplace, where many different variables can affect a property fair market value. For example, there may be areas that are zoned for single family housing where the marketplace will not support this level of development or where the lot does not meet minimum zoning requirements for such development, e.g., if the lot is 1.5 acres in a zone that requires two-acre lots for single family homes. Conversely, there may be circumstances where the market could support more intensive development, for example if the lot is larger than comparable lots in the area and could be resubdivided into multiple
lots. Similarly, if the lot abuts a larger lot that is owned by the same person and that is zoned for commercial development, the assessor might determine that the highest and best use of the property, taken together, is commercial development. Other factors that could affect the highest and best use determination are the availability of sewers and other infrastructure serving the lot and the types of development that have occurred nearby.
The statutes do not directly address the impact of conservation easements on the valuation of property for property tax purposes, but the Supreme Court has held that everything that might legitimately affect a property's value must be considered in assessing it for tax purposes. Chamber of Commerce of Greater Waterbury, Inc. v. City of Waterbury, 184 Conn. 333 (1981). The existence of a conservation easement (particularly a permanent easement) might well affect a property's market value. For example, if the owner of a residentially zoned property has entered onto a easement with an environmental organization that requires that the bulk of the property be kept in its natural state, this could reduce the number of units that could be built on the property and thus its market value. However, the impact of such easements on values may vary significantly. For example, if a property is not subject to substantial development pressure, the existence of a conservation easement may have little impact on its market value and thus its valuation.
Property in the 490 Program
Under CGS Sec. 12-63, property in the 490 program must be valued based on its current use without regard to more intensive use of nearby land. By extension, the valuation of such property does not depend on the highest and best use. Again, no one method of valuing the property is controlling and the valuation can reflect a mix of approaches. In Rustici v. Town of Stonington, 174 Conn. 10 (1977) the Supreme Court held that the current use value of property in the program could be less than its fair market value.
We have found one Supreme Court case in which the Court overruled a board of assessment appeals in part because it refused to reduce the valuation of farmland in the “490” program to reflect a permanent conservation easement held by the state. In Cecarelli v. Board of Assessment Appeals, 275 Conn. 485 (2005), the development rights to the property in question were permanently conveyed to the state under the Department of Agriculture's farmland preservation program. The
plaintiffs appealed the property's assessment, arguing that the assessor had improperly disregarded the restrictions on the farmland's development rights. The board rejected this argument and the plaintiffs then appealed to the superior court, which found for the plaintiffs (Cecarelli v. Board of Assessment Appeals, 49 Conn. Supp. 125, 131 (2003). The board appealed this decision, but the Supreme Court affirmed the trial court's decision.