Interim Valuation Adjustments

(from Maine Townsman, February 1989)
by Martha E. Greene, Esq.

A common question confronted by many municipal assessors is whether they should be doing anything to maintain equity of assessment throughout their municipalities between general, town-wide revaluations.

The answer to this question is yes, every assessor should be taking action to make sure that all real estate in their municipality is assessed uniformly between general revaluations.

The Maine Constitution requires assessors to apportion and assess all real estate taxes "equally according to the Just value" of the real estate. This Constitutional requirement sets up a two part test which all assessments must satisfy: (1) each piece of property must be assessed according to its just, or market, value; and (2) each piece of property should bear an equal share of the tax burden.

The Maine Constitution also requires every municipality to perform a general revaluation of all real estate at least once every ten years. This requirement is meant to insure that the assessment of all real estate in a municipality is adjusted for general market conditions according to a common standard at the same time. State law (36 M.R.S.A. § 327) also establishes a minimum assessment ratio of 70% (to fair market
value), and a maximum quality rating of assessment of 20%.

If a general revaluation is done properly, there should be uniformity of assessment when the revaluation is completed. In other words, the assessor will have made sure that all property is assessed at its just value, and the tax burden will have been distributed equally.

However, uniformity of assessment begins to erode as soon as a revaluation is completed. The just value of real estate is constantly changing as building improvements, demolition, and factors affecting specific neighborhoods occur.

As the assessment of property moves away from just value, the share of the tax burden imposed on each piece of property also starts to change. A municipality's assessment ratio then starts to fall, and its rating of assessment quality begins to rise. (The higher the quality rating, the greater the disparity in assessments of similar properties).

The International Association of Assessing Officers (IAAO) recommends, in its manual Property Assessment Valuation, that a municipality undertake a general revaluation every year in order to insure uniformity of assessment. However, due to the expense and time required to undertake a revaluation, the performance of annual revaluations is not practical in most instances. In fact, most municipalities do not
perform general revaluations much more frequently than once every ten years.

The question then becomes what can, and should, be done between revaluations to make sure that the tax burden is uniformly
distributed.

It is acceptable to make interim value adjustments to specific pieces of property, or even all property in a municipality, without
conducting a general revaluation. However, interim value adjustments are tricky business because the assessor must make sure that
the interim adjustments promote equity, and result in the uniformity of assessment which may have been lost since the previous
general revaluation. Interim value adjustments which are not applied uniformly, but instead place a greater tax burden on the
adjusted property than is placed on property which is not adjusted, could be subject to a valid claim for abatement.

In Improving Real Property Assessment, the IAAO explains that interim adjustments should not be made in response to factors
affecting relatively few properties. The IAAO cautions assessors not to revalue property in reaction to crises such as (1) sales of pro-
perty: (2) physical changes in property; (3) an assessment appeal; and (4) the development of a "hot spot" affecting a small number
of properties within a specific location. Interim value adjustments which are based solely on such limited sources of data are
very likely to result in a successful court challenge by the taxpayer.

A recent Rhode Island case, Picerne v. DiPrete. 542 A.2d 1101 (R.I. 1988), provides a good example of an interim value adjustment which was successfully challenged by the taxpayers.

The taxpayers in Picerne owned 16 apartment buildings in Cranston, Rhode Island. The municipal assessor testified that he reassessed their properties because he was aware that the apartment buildings were underassessed. (He had become aware of the low assessments because the taxpayers had appealed their assessment several years earlier.) The major problem with the assessor's decision to reassess the taxpayer's property was that he had made no effort to revalue any of the other residential, industrial and commercial property in the city. In fact, the only other interim adjustments which he had made involved physical changes to property resulting from demolition or improvements.

The taxpayers won their appeal because the assessor had selected a "group amounting to a minuscule percentage (.00055) of
the ratable property in the City of Cranston, i.e., 16 of the approximately 29,000 parcels of the real estate in the city without proper
or lawful motivation."

Another example of a questionable interim value adjustment is found in Allegheny Pittsburgh Coal Company v. County Commis-
sion of Webster County, West Virginia, U.S.
1989 W.L. 1825 (U.S.), a case decided by the United States Supreme Court on January 18, 1989. With the support of the IAAO, the taxpayers in Allegheny Pittsburgh successfully challenged the West Virginia Supreme Court's decision that it is acceptable for an assessor to "chase sales."

The assessor in Allegheny Pittsburgh practiced "welcome stranger assessing." In other words, she assessed recently sold property
on the basis of the reported sales price. Property which had not been recently sold was periodically factored by 10%, but was not
assessed at its current value. The result of this assessing practice was the recently sold property was assessed at roughly 8 to 35
times more than comparable neighboring property which had not sold. The taxpayers argued that "welcome stranger assessing"
was discriminatory, and violated a constitutional provision very similar to Article IX, Section 8 of the Maine Constitution, because
it caused them to bear a greater share of the tax burden than was imposed upon owners of property which had not recently sold.

The taxpayers lost their argument before the West Virginia Supreme Court. The West Virginia Supreme Court decided that sales
price was a correct measure of the true and actual value of the taxpayers' property. The Court also decided that the taxpayers were
not entitled to a reduction of their assessment, for the purpose of equalizing their assessment with that of long time property
owners, because their property was assessed at its correct value. The West Virginia court told the taxpayers that their only
remedy was to proceed to challenge the assessment of any property which they thought was underassessed.

The United States Supreme Court disagreed with the West Virginia court and ruled in favor of the taxpayers. It found that
the assessor's action resulted in intentional systematic undervaluation of comparable property. And, it concluded that "welcome
stranger assessing" violated the Equal Protection Clause of the Fourteenth Amendment of the United States Constitution
because it placed an unequal tax burden on owners of the same class of property. The Court also decided that the taxpayers should
not have to prove that their neighbors were underassessed in order to obtain relief.

The correct procedure for making interim value adjustments requires the assessor to undertake an annual assessing program.
Both the Maine Bureau of Taxation and the IAAO recommend that an assessor continually perform sales ratio studies, develop
and check the effect on value of changing building standards, analyze neighborhood and area trends, and monitor the constant-
ly changing economic situation. While an annual assessing program does not require assessors to change every assessment every
year, it does require assessors to be able to change each assessment each year if a change is warranted, and to have a program
for routinely inspecting properties.

Sales ratio studies are perhaps the assessor's single most important tool for deciding whether to make interim value adjustments. The IAAO likens the sales ratio study to a yardstick, which the assessor should use in evaluating what is being done right, what is being done wrong, and what reappraisal activity is necessary. The IAAO recommends that sales ratio studies be used to investigate: (1) whether lower priced
properties and higher priced properties are treated equally; (2) whether there is an assessment bias against newer homes; (3) whether present assessment discriminates by location: and (4) whether present assessment indicates significant differences in assessment quality in respect to property type.

The information obtained by an assessor who constantly performs sales ratio studies will enable the assessor to determine whether the assessment of a piece of property is similar to the assessment of all other property of the same kind. It will also enable the assessor to determine whether the assessment of different types of property is uniform.

For example, sales ratio studies will help the assessor determine whether the assessment of a new home is similar to the assessments of all other new homes in the municipality. Sales ratio studies will also enable the assessor to determine whether the assessment ratio of new homes is similar to the assessment ratio of older homes in the municipality.

If a large enough sample of sales is available to be used in the sales ratio studies, the statistical data will provide much of the information necessary to determine whether the assessor should make interim market adjustments. The assessor must also physically inspect the property before making a final decision about whether to make an interim value adjustment.

Any adjustments which are made should be: (1) based on the data which the assessor had collected; (2) made to all similarly situated property at the same time; (3) adjusted for the individual characteristics of each piece of property; and (4) result in improved uniformity of taxation throughout the municipality.

There is no doubt that an annual program of making interim adjustments for every piece of property in a municipality is quite an undertaking. In fact, a well run annual assessment program may require more time and expense than many towns are prepared to devote to their assessing department. It is therefore relatively common practice among Maine towns to "factor" assessments on an interim basis between general townwide revaluations.

Factoring is the practice of increasing assessments townwide or by class of property by a specified amount. While this may sound like a simple solution to a decreasing assessment ratio, all assessors must be cautioned that the same procedure used to make property-specific interim adjustments applies to the practice of factoring. The only time-saving feature of factoring is that it allows the assessor to make an initial across the board increase to all similarly situated property, In some cases, the assessor will have to also make adjustments to specific properties in order to ensure that all property is:

(1) assessed at its just value, and (2) assessed uniformly throughout the municipality.

While factoring is sometimes used to make an interim adjustment to the valuation of an entire town or city, it is most appropriate when a particular property group is undervalued in relation to another property group, according to IAAO. For example, factoring could be used if sales ratio studies and market data demonstrated that all coastal property in a town was assessed at 60% of its just value, while all inland property in the town was assessed at 90% of its fair market value. If the assessors were confident that the property within each group was being
assessed uniformly, they would then be justified in "factoring" the coastal property by 50%. The result of the across the board increase would be that all property in the town would be assessed at 90% of its just value.

One problem with factoring is that it should not be used when there is a great disparity in assessments to fair market value within the various classes of property. Going back to the above example, a 50% across the board adjustment would not be fair and equitable if some of the coastal property was assessed at 60% of its just value, while the balance was assessed at 80% of its just value. If the 50% adjustment were
made in such a case, then some of the coastal property would be assessed at 90% of its fair market value, as would be inland property, but the balance of the coastal property would be assessed at 120% of its fair market value. Property owners whose property had been assessed at 80% of its just value would then end up bearing a greater tax burden than would other property owners in the municipality. The assessor's
action would not have resulted in improved uniformity of assessment, and would be subject to a valid claim for an abatement.

Another problem with factoring is that the new, factored assessments may not reflect the just value of the property. In fact, they will only reflect just value if all of the factored property was assessed at the same percentage of just value before the across the board adjustment is made. It is therefore important that assessors check the results of their factoring and make corrections to individual properties, where needed.

Finally, assessors should not limit their factoring to a specific property group unless they are sure that no other property group in the municipality requires adjustment. As the Rhode Island Supreme Court explained in Picerne, it would be improper, and illegal, to only factor property which had been the subject of an abatement (or had just sold, or was located in a "hot spot") without first being sure that all other property in the municipality is assessed uniformly.

The Maine Supreme Court has endorsed a factoring program which included a procedure for making individual adjustments. In
Sears, Roebuck & Company v. Inhabitants of the City of Presque !s!e, 150 Me. 181 (1954), Sears challenged the Presque Isle
Board of Assessor's practice of increasing the assessed value of all property in town by 25%. The Maine Supreme Court denied
Sears request for abatement because the Board of Assessors applied the 25% adjustment to every piece of property in Presque
Isle, after which they adjusted the assessed value of each piece of property to account for its individual characteristics.

In conclusion, the assessor must treat all taxpayers fairly and equitably. While no one wants a tax increase, taxpayers who think
they have been treated unfairly will be most likely to challenge an interim adjustment.

Every assessor should avoid making interim adjustments which affect a small number of property owners, to the exclusion of others whose property is likewise in need of adjustment. The more widespread the adjustment, the more likely will be the taxpayers' acceptance.

 

Martha E. Greene is an attorney with the firm of Brann & Isaccson in Lewiston, Maine.