North Carolina county improperly revalued properties in nonrevaluation year

North Carolina county improperly revalued properties in nonrevaluation year

The North Carolina Supreme Court recently held that a county’s reappraisal of undeveloped parcels constituted an improper revaluation because it occurred in a nonrevaluation year.  In In re Ocean Isle Palms LLC, the Court overturned an earlier ruling by the Court of Appeals and rejected claims by the county that the reappraisal was the mere correction of assessment errors.

North Carolina’s octennial cycle

In order to provide accurate and uniform taxation of real property in the state, the North Carolina General Assembly established statutory “Standards for Appraisal and Assessment” and a framework of the “Time for Listing and Appraising Property for Taxation.”  The state required each county to conduct an initial valuation of all real property (which occurred in 1972-1979), followed by subsequent revaluations every eight years.  A county may schedule more regular revaluations, but such revaluations must be declared in advance.

During a revaluation year – and only during a revaluation year – every property is reappraised and its taxable value is established.  These newly set values are carried forward until the next revaluation year unless specific circumstances arise, such as the need to correct errors.

Condition factors, generally and specifically

The sales comparison method of calculating the value of property uses recent sales price data for similarly situated parcels.  However, because sales data captures predominantly developed parcels, the method leads to inaccurate values for undeveloped parcels.

To account for this difference, Brunswick County applied a “condition factor” to the sales comparison method.  The factor reflected the property’s degree of development, so a parcel without water, sewers, or paved roads could receive a factor of .20.  As infrastructure was added, the condition factor would increase, reflecting the rising value of the property. The County used the method consistently for over thirty years.

Ocean Isle Palms was a master-planned seaside community in Brunswick County.  For the 2007 revaluation, the County appraised each of Ocean Isle’s one hundred nine undeveloped parcels, and assigned each a condition factor of .20, causing the true value of those properties to be set at 20% of the base values of comparable developed parcels.  This resulted in the assignment of values ranging from $45,000 to 60,000.

The next year, a newly-appointed County tax assessor ordered that the County appraisers stop applying condition factors and that the condition factor be removed from all existing tax cards.  As a result, in 2008 (a nonrevaluation year) Ocean Isle’s parcels were given taxable values ranging from $191,250 to $718,630.  Ocean Isle challenged its new assessments as being based on an invalid reassessment, one occurring in a year that was not an authorized general reappraisal year.

The County’s “error correction” was itself an error to be corrected

In defense of the assessments, the County argued that it was merely correcting a “misapplication of the schedule of values.”  North Carolina law allows reappraisals in off years to correct appraisal errors “resulting from a misapplication of the schedules, standards, and rules used in the county’s most recent general appraisal.” The County reasoned that because Ocean Isles has sold a number of its undeveloped lots by 2008, and because those sales showed an average price significantly higher than the 2007 tax values, the condition factor was not uniformly applied and, when applied, did not yield an accurate value.  The elimination of the condition factor corrected this “error.”

The Court noted that, while the County attempted to frame its actions in 2008 as the correction of an error, the County’s actions were actually the institution of a new revaluation system.  The County had used its condition factor methodology for decades, and it gave appraisers the ability to use their discretion whether to apply a factor to accurately capture the value of the parcel.  However, a county in North Carolina “may not retroactively label as error an historically approved methodology endorsed by the schedule.”  Thus, if a county seeks to limit appraisers’ use of their discretion whether to apply a condition factor in future revaluations, the county may only do so prospectively.

The County’s response to the alleged shortcomings of the 2007 appraisals was not to correct the application of the condition factor to reflect new information, as it argued, but was instead to throw out condition factors altogether.  This went beyond the mere correction of an error and was instead a new appraisal.  Because the 2008 reassessment was conducted in a nonrevaluation year, the alteration of the taxable value of Ocean Isle’s property was unlawful.

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