With all the recent publicity surrounding proposed legislation in New York allowing towns in New York the option of assessing golf and club properties based on their highest and best use, I thought I’d share some observations to alleviate some of the confusion in other states.
There are some who view golf properties in general, and private clubs in particular as properties of such special use that they perceive that they rarely sell and never make money. Neither statement is true. However, those who believe this theory (including some tax court judges) advocate the use of the cost approach in these valuations which could not be more flawed. Golf properties do sell and many are profitable. Using proper appraisal techniques that are reflective of the market can solve most of these issues.
Unlike New York, most (if not all) other states currently assess all real estate based on highest and best use. Highest and best use is defined as: The most probable use of a property which is physically possible, appropriately justified, legally permissible, financially feasible, and which results in the highest value of the property being valued. In some cases, the golf property may represent highest and best use, in others it may be an alternative use. Thus, what may happen in New York is unlikely to happen in other states. In many other states, there are programs that enable golf properties to enjoy preferential assessments, but they’re all different. In order to clear up the confusion and highlight some options, the following list might help for those courses not otherwise restricted but seeking property tax relief:
- Conservation Easements – This option is typically used only by for-profit clubs that can take advantage of the tax benefit. Once an open space conservation can be donated to a qualifying trust and the property owner conveys an easement that precludes development in perpetuity. The property owner is then entitled to an income tax deduction in the amount of the difference in value but can’t ever develop the property. The Internal Revenue Service scrutinizes these transactions very closely. A residual benefit of a conservation easement is that the property would then be assessed at the value after the easement is placed.
- Down-Zoning – In some cases, a property can be “down-zoned”. This means that the owner could apply to have his zoning changed to a classification with fewer development rights and uses. If approved, the market value (and thus the assessment) would decline and there are instances where if the local government seeks to preserve open space, they might pay the property owner.
- Agricultural/Open Space Designations (Temporary) – In some jurisdictions there are programs to preserve agricultural lands by providing real estate tax relief incentives. An example might be a program where as long as the property is preserved as open space taxes are applied at a reduced rate. If, and when the property is developed, there may be penalties in the form of payment of back taxes at the higher rate for a period of years.
- Transferable Development Rights (TDR) – In some areas, there are something called “transferable development rights” (TDR’s), which can be sold. In such cases once a property sells its TDR’s, its value has likely been diminished and the property should be assessed accordingly. These can be temporary or permanent and in some cases municipalities will purchase the development rights, and if the municipality later decides to do so can re-sell those rights to develop the property.
- Legislative Relief – In one instance I know of, in Virginia the state legislature actually passed a bill ordering the county (only one county) to tax clubs at an open space rate. While this is unusual, it can happen.
- Specific Rules – In Maryland, private golf courses of at least 50 acres with more than 100 paying members are assessed at the rate of $1,000 an acre, instead of the value of the property as assessed by the state. There are other states with similar rules specific to golf courses or clubs. In Maryland, there was a move to rescind the rule, which was defeated in the state assembly.
- Allocation – Since golf and club properties are going concern businesses which simply utilize a significant amount of real estate, it is important to understand that what they sell for and often what they’re valued at is for more than real estate, which is what is assessed. Accordingly, it’s always necessary to allocate between real and personal property to arrive at a fair tax assessment for real estate. In New York, they avoid this allocation by use of a method called the market rent approach to isolate real property value. I believe this method is flawed for several reasons that can be addressed in a different space. There are allocation methods, which frankly, also have flaws but addressing the issue of allocation can often mean the difference between an assessment that is fair or not. Other than in New York, allocation (in many forms) is widely used and acknowledged in the valuation of golf properties for tax assessment purposes.
While I’m confident there may be other remedies as well, tax relief for golf courses and clubs can be found in several forms. However, unlike in New York (for now) the golf course or club will have to give something up for that relief. Highest and Best Use is a foundation of real estate valuation, and thus tax assessment and is unlikely to change anytime soon. Therefore, it’s imperative for clubs to know and understand their options if they are not using the property at its highest and best use and not otherwise restricted.