Few issues have attracted more attention in property tax appeal cases than those related to the appropriate methodology for valuing the fee simple estate.
In part due to the relative complexity of this issue and perhaps more particularly the volume of related litigation this issue has even attracted the attention of legislators seeking clarity by dictating the methodology for valuing property for assessment purposes. As recently framed by the Appraisal Institute the central issue in the context of property taxation was whether when valuing “the fee simple estate in property that is typically leased and sold as a lease…should it be valued as though occupied or as though vacant”. In part in response to this question the Appraisal Institute hosted a Property Rights Symposium in September 2017 “to consider differences of opinion relating to the valuation of fees simple estates.”
The product of this Symposium was the Appraisal Institute’s Property Rights Symposium Discussion paper dated December 21, 2017. This discussion paper included a proposed new definition of a fee simple estate as “The highest estate allowed by law. An inheritable ownership interest of indefinite duration.”, the discontinuance of use of the terms leased fee and leased fee estate and an invitation for public comment on its proposal. David Lennhoff responded on January 5, 2018 with an emphatic rejection of the proposed new definition. Noting the extensive jurisprudence defining these terms he emphasized that “…it is not the Appraisal Institute’s role to define terms that are more legal than terms of the profession.” opining that “The courts are unlikely to follow any such definitions, rather relying on their own interpretations and existing case law.”
He stressed that by using the fee simple in the property tax context it was understood that “the valuation is to disregard leases, or other interests into which the whole may have been divided.” Referring to long established judicial precedent he noted that “The reason for establishing the assessed value in terms of the fee simple interest is the requirement that taxes be equitable among properties. Assessing property based on occupancy would introduce the likelihood of inequitable treatments as a result of specific leases, or any leases for that matter.” This is the crux of the issue. The fairness and correctness of the property tax assessment model relies on a long-established definition of fee simple and while we can quibble about its application in any given appeal the current definition provides critical safeguards to taxpayers.