Colchester property tax dispute resonates beyond lakefront cottages

Lake Champlain

Lake Champlain

If location is a premium that boosts a building’s sales price, it’s also a perk that increases a building owner’s tax bill — even if that building is on leased land.

So ruled the Vermont Supreme Court last week in the cases of seasonal camp owners who sued to have their Colchester taxes reduced. The taxpayers had argued that landowners, not building owners, should be taxed on the value of the camps’ location.

Taxpayers won the first round — one case in Chittenden County Superior Court and a separate case heard by Vermont’s Property Valuation and Review Division. The Town of Colchester, however, ultimately won its appeal to the Vermont Supreme Court.

As of Friday, the higher tax bills stand, building owners are liable for taxes on the full market value of their buildings — including location. The decision could affect the owners of other structures on leased land.

Why the fuss?

In 2011, when Colchester reappraised real estate in the town, the tax bills sure looked different for camp owners whose buildings were on leased land. Where once only the appraised value of the buildings had appeared, now a line for “land/amenity” value showed an appraisal, too.

At first, it appeared to camp owners that they were being assessed for land they did not own, Town Clerk and Treasurer Karen Richard said.

Richard explained that the camps’ amenity value had always been appraised and taxed. Real estate amenities include infrastructure, such as a paved driveway or septic system, as well as location and factors such as scenic views.

But the town’s previous tax software had calculated the camps’ amenity value — including the value of its location — and rolled it into the building value. The combined appraisal was reflected as one figure on the “building” line.

Colchester’s new assessor wanted the calculations to be more transparent. With new software, Robert Vickery separated the calculations. The building value was reported in the “building” line and the amenity value was reported in the “land/amenity” line of the property record card.

But the newly unveiled equation on the tax bill was not all that had changed. What brought about the reappraisal to begin with was notice from the state that Colchester’s appraised values and fair market values had grown seriously out of sync. The town was required to conduct a reappraisal.

In keeping with past protocols, Vickery’s office compared the sale prices of camps and similar properties to the estimated cost of simply replacing the camp buildings (a figure reduced through appraisal when the building’s value is depreciated for age).

They determined that, on average, owners were selling their camps for about $100,000 more than the value at which the buildings were appraised. “Back in 2003, it was about $40,000 difference,” Vickery said.

The realization that the buildings were being taxed for their location, therefore, was accompanied by sticker shock when the buildings were reappraised. Many values had increased twofold or more since 2003.

“They understandably got upset,” Richard said.

Some camp owners, realizing for the first time that they were being taxed on the value of their buildings’ location, protested that landowners — not leaseholders — should be charged for that portion of the tax bill. The town disagreed.

Two cases ensued: Lesage, McNeil and Mostrom v. Colchester, in which the state’s Property Valuation and Review Division sided with the camp owners; and Marchelewicz v. Colchester, in which the Chittenden County Superior Court also ruled against the town.

On July 5, the Supreme Court overturned both decisions, concluding that the taxpayers, state appraiser and superior court all “read too much into” state law governing property valuation.

Brian Monaghan, the town’s lawyer in the cases, argued that because the location’s value is reflected in the sales prices of the camps, it should be reflected in the assessed fair market value.

“Indeed, it is hard to imagine any factor more closely tied to the value of a building than its location,” the court wrote in its opinion.

The camp owners who were party to the suits could not be reached for comment.

What it means

The Colchester case appears to be more of a clarifier than a game changer in property tax law.

Steven Jeffrey, executive director of the Vermont League of Cities and Towns, said he’s not aware of any municipalities that assess their taxes any differently.

But it’s more than seasonal camps that often are built on leased land. Grocery stores, fast food franchises, airport hangars and a host of other entities routinely set up shop on land they don’t own.

Monaghan said that, while the Colchester case focused on the camp owners’ taxes, the implications reach beyond vacation homes.

No matter the nature of the building, he said, “the building owner will be liable for taxation on the full fair market value of the building. … It’s all the elements that combine to give a property value,” he said.

And herein lies a paradox of owning a building on leased land — especially in a short-term lease (such as three to 20 years) as most of the camps in the Colchester case are.

The downside is the uncertainty of whether or not that lease will be renewed. This could change a building owner’s calculus in determining whether to make capital improvements.

The upside is that the building owner has use of that land as long as the lease lasts.

Likewise, a paradox exists for the landowners, whose parcels are “encumbered” by any leases in effect. The owner may claim the land, but not necessarily be able to use it.

Assessing all real estate according to its full fair market value as reflected in sale prices, the high court decided, is the only fair way to balance these competing interests.

Follow Hilary on Twitter @nilesmedia

Comments

  1. David Usher :

    The Supreme Court made the proper decision.

  2. Good to know that taxpayer won the first round in the cases of seasonal camp .nice post about property tax.

  3. There are really some good plan for real estate property and that services. thanks to share it.

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