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By Charles H. Mercer Jr. and Reed J. Hollander

North Carolina Property Tax Commission Case No. 13 PTC 822 (March 20, 2015) North Carolina Court of Appeals 786 S.E.2d 816 (N.C.App. 2016)

County tax assessors sometimes contend a commercial or industrial property is a “special purpose” property and, on that basis, determine there is no market evidence that bears on the ad valorem value of the property. Such a position often leads the assessor to value the property without use of a comparable sales approach, resulting in values substantially in excess of actual market sales. How can a property owner successfully challenge a county tax office’s classification of commercial or industrial property as a special purpose property and win the resulting valuation challenge? A recent decision from the North Carolina Court of Appeals provides a detailed look at one successful effort.

On June 7, 2016, the North Carolina Court of Appeals unanimously affirmed a North Carolina Property Tax Commission decision in favor of Corning, Inc. in which the Commission concluded the County’s original assessed value of approximately $147 million in 2012 and $152 million in 2013 must be reduced to approximately $26 million for 2012 and $30 million for 2013. The Court of Appeals’ 34-page decision quotes extensively from the trial transcript, providing an illuminating perspective on two critical issues inherent in a property tax valuation case in which special purpose classification is invoked: (a) highest and best use and (b) value-in-exchange vs. value-in-use.

The facility at issue is a fiber optic manufacturing plant near Charlotte. When originally constructed in 1997, then-current technology required certain design features, such as a four-story layout, numerous 70-foot draw towers penetrating multiple floors of the building, and multiple interior partitions. By 2012, however, technological changes had eliminated the need for 70-foot vertical draw towers and multiple-floor designs when making optical fiber. In addition, by 2012 Corning was the only remaining manufacturer for optical fiber in the United States, with all other major fiber manufacturers having moved their facilities overseas. From 2002 to 2010, the Corning facility was shut down due to a drop in market demand for optical fiber, but reopened on a limited basis in mid-2010.

In the trial before the Commission, the County contended that the facility’s design characteristics, current use by Corning, and limited utility to another buyer meant the property was a special-purpose property. In determining the value of the facility, the County assigned no functional or economic obsolescence to the property. When cross-examined at trial on how he could determine what a willing buyer would pay for the property without factoring in obsolescence, the County assessor testified the property was “being used exactly as it was designed to be used, so there was no, in our opinion, no functional obsolescence to the building.”

Two private appraisers hired by the County agreed the property was a special-purpose property, stating in their appraisal report:  “The market for large manufacturing facilities is limited. However, the information provided by Corning with respect to new fiber optic cable manufacturing facilities indicates that the design of the improvements is somewhat outdated. Regardless, the property owner continues to use the manufacturing portion of the property for its intended use. Therefore, the highest and best use of the property as improved is for continued use as a fiber optic manufacturing facility with the possibilities of expansion depending on market conditions.”

In contrast, Corning contended no market existed for the purchase of the property as a fiber optic facility, and the highest and best use of the property was instead alternate industrial use. A private appraisal expert testifying on behalf of Corning explained that the facility was a limited market property, not a special-purpose property, stating that “as improved, … the highest and best use would be continued use as a fiber optic manufacturing plant, but under the market value premise, what we found was there is no demand for either building or buying a fiber optic manufacturing facility … [but] someone would come in and use what we feel is the functional usable area of [the facility].” He went on to explain that he assigned no market value to the third and fourth floors of the facility because “industrial users typically don’t recognize multistory buildings,” and the ancillary buildings are “used specifically for Corning’s process which … would not have any value to any other user.”

In reviewing the matter on appeal, the court explained that Corning’s evidence (1) tended to show the property was not a special-purpose property, but rather a limited-market property with value to an alternative industrial user; (2) properly considered the effect of obsolescence due to the multi-story design, improvements in shell condition, and the ancillary buildings; and (3) most importantly, priced the property based on its value in-exchange, “recognizing that Corning’s use of the facility was not a dispositive factor because there was no market demand for fiber optic manufacturing facilities.”

Summarizing the County’s trial evidence, the appellate court noted the County relied solely on the cost approach and did not properly consider the obsolescence inherent in specialty property. The court also explained that the County’s failure to consider sales comparables was due to the County “insisting that the highest and best use was for manufacturing optical fiber” and, by doing so, “the County pigeon-holed the property into a market with no user-owner demand, and thus, no comparable sales.” Notably, the court found that “[w]hile the County maintains that the highest and best use of the property was for manufacturing optical fiber, each of the County’s experts recognized that there was no market for the same.” Based on this testimony, the appellate court affirmed the Property Tax Commission’s determination that the County’s “highest and best use analysis was based on Corning’s use of the property, rather than its value to a willing buyer” and that the “same subjectivity was evident in the County’s classification of the property as special-purpose property.”

This case demonstrates the importance of establishing that the highest and best use of the property is based on market forces, with specific consideration to how the market would perceive that particular property given its functionality and design compared with market requirements. Further, the case explains the errors inherent in relying on special purpose classification when that classification is used to ignore market evidence of value.

As of the writing of this article, Cabarrus County has a petition pending before the North Carolina Supreme Court requesting that the Court exercise its discretionary authority to review the case.

Charles H. Mercer and Reed J. Hollander are attorneys with Nelson Mullins Riley & Scarborough LLP in Raleigh.