BEFORE THE DEPARTMENT OF REVENUE
OF THE STATE OF MONTANA
In the matter of the amendment of ARM 42.20.105 and 42.20.107 relating to the valuation of real property
NOTICE OF AMENDMENT
TO: All Concerned Persons
1. On April 12, 2012, the department published MAR Notice Number 42-2-879 regarding the proposed amendment of the above-stated rules at page 730 of the 2012 Montana Administrative Register, Issue Number 7.
2. A public hearing was held on May 14, 2012, to consider the proposed amendments. Nancy Schlepp, President of the Montana Taxpayers Association, appeared and testified at the hearing. Ms. Schlepp also provided written comments subsequent to the hearing. In addition, the department received written comments from Mike Green, an attorney with Crowley Fleck, PLLP, and Todd Llewellyn, a member of the Montana Association of Realtors. The oral and written comments received are summarized as follows, along with the responses of the department.
COMMENT NO. 1: Ms. Schlepp commented, relative to ARM 42.20.105 (2)(a), that the common elements language should not be stricken. She stated that inserting the word "townhomes" after condominiums instead would clarify the language, but leave important guidance to appraisers.
Mr. Green commented that they are concerned about various aspects of the proposed rule amendments, and stated that while much of the proposed amendments are appropriate in carrying out the statutory changes and requirements, some of the department's proposed amendments go far beyond changes necessary to incorporate the statutory changes, and create the possibility for significant appraisal errors as well as taxpayer compliance issues.
He further commented that they oppose eliminating the "common elements" language in ARM 42.20.105(2)(a), because it is an accurate statement of both Montana law and basic appraisal theory, and because it provides guidance for appraisers and taxpayers that was made even more important by the changes enacted through House Bill 132 authorizing unified values of land and improvements. Mr. Green suggested a more appropriate change in this language may be to just simply add the term "and townhomes" after the term "condominiums" to reflect that a townhome owner's undivided interest in common elements, if any, is inherent in the sales comparison approach. Mr. Green's proposed language would retain the proposed stricken language in (2)(a) and it would read as follows: "The common elements of residential condominiums and townhomes are inherent in the individual unit values when the sales comparison approach is employed."
Mr. Green stated that to the extent the language being added in the second to last paragraph in (2)(a) is intended to provide guidance to appraisers, the language should be amended to clarify that in cases of disparate use or values, the department appraiser can use an individual cost approach for a condominium or townhome unit separate from the common elements, and suggested that similar language should be added to (2)(b).
Ms. Schlepp suggested the department change the proposed amendment to the second from the last sentence in (2)(a), to read as follows: "Allocation of value for each condominium unit will be determined by multiplying the percentage, expressed as a decimal, by the appraised value of the entire condominium/townhome project or by adding the individual unit cost to the individual unit's allocation of those elements deemed common." Use of either allocation should ensure that the total of individual condominiums/townhomes not be greater than the whole of the project.
RESPONSE NO. 1: The department agrees with Mr. Green's comments. The stricken language in ARM 42.20.105(2)(a) will be reinserted and "townhomes" added. It will read as follows: "The preferred approach for the appraisal of residential condominium/townhome units is the sales comparison approach, where comparable sales are available. The common elements of residential condominiums/townhomes are inherent in the individual unit values when the sales comparison approach is employed." The department will also add the word "townhome" in the second sentence following this change, which reads: "Allocation of value for each condominium/townhome unit will be determined by multiplying the percentage . . ."
The department further agrees with Mr. Green's comments regarding (2)(b) and will add language to this section, to read as follows: "Allocation of value for each condominium/townhome unit will be determined by multiplying the percentage, expressed as a decimal, by the appraised value of the entire condominium/townhome project or by adding the individual unit cost to the individual unit's allocation of those elements deemed common."
While the department appreciates Ms. Schlepp's comments, unit improvements and ownership changes from a condominium to a townhome may increase the value as a whole, because unlike a condominium owner, a townhome unit owner holds separate title to the land beneath his/her unit. As a result, the land value is added to a townhome unit's value, whereas, in a condominium unit it is not. Therefore, it is quite possible for the whole project's value to change, depending upon the facts related to a particular individual property and the proper application of market appraisal methods to those facts.
COMMENT NO. 2: Ms. Schlepp stated that the Montana Taxpayers Association requests that the word "should" remain in ARM 42.20.105(2)(a) and (b), so that the department has the latitude to fix any outlier issues in percentage valuations. She further commented that by making use of ownership percentages stated in condominiums and townhome declarations mandatory, the department loses its discretion to resolve inappropriate valuations.
Mr. Green provided opposition to the changes to ARM 42.20.105(2)(a) and (b), and commented that the department is making use of ownership percentages stated in condominium and townhome declarations mandatory for allocation of a cost approach by changing the word "should" to "will." He also commented that the current language using the word "should" states a preference for use of the declaration percentage of ownership interests for purposes of allocating a condominium project cost value to individual units, and in situations where this approach led to improper valuations, the department's appraisers and managers maintained the discretion to alter the valuation and allocation methodology. Mr. Green stated that the department should maintain that discretion and eliminate this proposed change to the rules.
Mr. Green further commented, in reference to the current language of ARM 42.20.105(2)(a) and (b), that the language was adopted in 2003 to comply with a legal opinion issued by the department's Office of Legal Affairs, and to address issues that have been raised by appellants in recent tax appeals. Mr. Green stated that the State Tax Appeal Board (STAB) previously declared an earlier version of ARM 42.20.105(1)(b) to be arbitrary and capricious, because it required the department to allocate value based on condominium declaration percentages. He further stated that the department's proposed amendment to substitute "will" for "should" restores the mandatory language declared improper in that case, and that the department should not unravel an important policy correction which was made in 2003, and more importantly should not revert to rule language that STAB has already declared arbitrary and capricious. He suggested that this will only lead to another invalidation of the rule and create uncertainty for the department and taxpayers alike.
Mr. Green stated that the mandatory use of declaration statements to allocate tax appraisal values is an improper extension of the declaration percentages, which only refer as a matter of law, to each unit owner's percentage of ownership of undivided common elements (70-23-043, MCA). These ownership percentages are usually not based on a comparison of fair market values and are not required to be (70-23-403(1), MCA). It is much more common for unit ownership declarations to be tied to some objective measures such as a comparison of square footage. He stated that the declaration percentages are set at a point in time very early in the condominium project's life. The department's mandatory use of the declaration percentages ignores that the percentages are not required to conform to market value differences, and also ignores that even if originally tied to market value comparisons, those values can change over time.
Mr. Green also commented that while the declaration ownership percentages may provide an administratively convenient method for allocating the cost approach, the department must maintain its appraisers' and managers' discretion to use more appropriate allocation methods where the ownership percentages do not conform to actual market values of individual units. He further commented that the department's intent to use ownership percentages in the declarations for townhomes is entirely inappropriate, because the common elements associated with a particular unit will likely be insignificant.
RESPONSE NO. 2: The department agrees with the limitations expressed by both Ms. Schlepp and Mr. Green regarding the replacement of "should" with "will." The word "should" is being reinserted into ARM 42.20.105(2)(b) in place of "will."
COMMENT NO. 3: Mr. Green opposed the new requirements for townhome declarations in the proposed new (3) and (4) in ARM 42.20.105. He commented that the language imposes new nontax related requirements on both new and existing townhome projects and exceeds the department's authority. He further commented that the new provisions add the requirement that townhome declarations identify location and dimensions of each townhome unit's lot and would require amendment of existing townhome declarations, adding that these requirements exceed the department's rulemaking authority and contradict Montana law.
Mr. Green commented that House Bill 460, L. 2011, authorized the department to adopt rules to value townhomes and townhouses, but did not authorize the department to require townhome or townhouse declarations, or to alter the statutory criteria for declarations.
Mr. Green further commented that House Bill 460, L. 2011, allows for a townhome declaration to be filed pursuant to the Unit Ownership Act by townhome developers as an option, but does not require such a filing. He stated that if a townhome developer or group of owners wants to submit a declaration pursuant to the new provisions, they are electing to subject themselves to the Unit Ownership Act, and must comply with the requirements of the Act. Mr. Green further commented that nothing in the bill or the Unit Ownership Act grants the department authority to alter the requirements for declarations that are filed or to require the filing of a declaration.
Mr. Green stated that the department does not have the authority through rule to require developers of new townhome projects to file a declaration, nor to require owners of existing townhome projects to prepare or to consent to amendment of townhome declarations. He further stated that the department's proposal seems to ignore that the declarations of the Unit Ownership Act are not tax documents, that rather they are real property documents which govern and effect interests in property. Mr. Green commented that owners' interests in their townhome properties are prescribed by the documents in existence at the time of their conveyance and that the department cannot require an owner to consent to amendment of their existing interests in property or to accept conversion to a unit governed by the Unit Ownership Act.
Mr. Green further stated that even if the department had the authority to adopt proposed new (3) and (4), the language fails to address the practical problems created by such requirements. For example, in the case of an existing townhome project, there will likely be multiple unit owners who must all consent to either the filing of a declaration or the amendment of the declaration. He commented that the department's new requirement that an amended declaration "must be filed" does not indicate who is obligated to prepare and file such an amended declaration or how the newly required contents of the declaration would be determined by the owners. Mr. Green further commented that this issue illustrates just one of many problems created by adopting real property restrictions in the form of a tax rule.
Ms. Schlepp also commented that the Montana Taxpayers Association opposes the addition of (3) and (4) in ARM 42.20.105, citing the same reasoning provided by Mr. Green.
RESPONSE NO. 3: The department's original intent was not to modify unit ownership, but to receive necessary information from the unit owner for the purpose of properly allocating each unit's value in a way that would be easy for the taxpayer.
As stated in Response No. 1, the ownership change from a condominium to a townhome allows the unit owner to hold separate title to the land beneath the owner's unit. The unit owner must, therefore, inform the department as to the amount of land that the unit owner will acquire after the conversion to a townhome, as well as, the deeds conveying such land. The department can properly allocate the unit value by either the square footage or acreage of land associated with the unit.
The department appreciates and considered the comments from Mr. Green and Ms. Schlepp. An amended declaration is not a proper method for obtaining a unit's square footage or acreage. The department will further amend the rule to delete the proposed language. In lieu of an amended declaration, however, the department will develop a form for the taxpayer to complete with the required information.
COMMENT NO. 4: Mr. Green further commented that proposed new (5) in ARM 42.20.105 imposes improper and arbitrary deadlines on the filing of townhome declarations. He stated that the department's proposed rule ignores its lack of statutory authority for imposing such deadlines and the practical reality that townhome declarations are filed in accordance with development and local planning regulation requirements. Mr. Green stated that the department's January 1 deadline as stated is confusing and improper. He further stated that the department's June 1 deadline for tax year 2012, even if legally permissible, does not provide townhome owners a reasonable opportunity to comply with the department's rules given that the comment period on this proposed rule does not close until May 18, 2012.
Ms. Schlepp also commented that the Montana Taxpayers Association opposes the addition of (5) in ARM 42.20.105, citing the same reasoning provided by Mr. Green.
RESPONSE NO. 4: The department appreciates Mr. Green's and Ms. Schlepp's comments regarding proposed new (5) in ARM 42.20.105. The law requires the department to assess all real property as of January 1 of any given tax year. The department requires specific information from the property owner to accurately assess the owner's property. As stated in Response No. 3, the department will provide a form to the property owner requesting such information. The form and requested documentation must be submitted by January 1 to be considered for that tax year. Forms and requested documentation received after January 1 will be considered for the following tax year.
The rule process takes time, but it serves a valuable purpose by allowing the public to participate and requiring the department to respond. The department takes all comments seriously, and thoroughly researches issues raised in the comments. In this case the rule process took nearly a year, impeding on the time allowed for affected property owners to apply for a townhome ownership in the current tax year. Since the adoption of the proposed rule will occur by August 31, 2012, the department will extend the deadline for tax year 2012 to October 1.
COMMENT NO. 5: Ms. Schlepp further stated the Montana Taxpayer's Association wanted to reiterate its understanding that the proposed rule changes would not result in an increase to condominium and townhome appraisal values and asks that the department make this clear to all department appraisers who will be dealing with this rule. She expressed that this understanding was because the fiscal note for House Bill 132, L. 2011, was zero, and there was no fiscal note for House Bill 460, L. 2011.
RESPONSE NO. 5: The department recognizes the concern that values may increase when a unit's ownership type changes from a condominium to a townhome. As stated in Response No. 1, a townhome unit owner holds separate title to the land beneath the unit as opposed to a condominium unit owner who does not own the land beneath the unit. As such, the land value must be attributed to the townhome unit.
The current reappraisal cycle began January 1, 2009, and will end December 31, 2014. The department values property as of a specific date in time. The 2007 Legislature determined July 1, 2008, to be the valuation date for the current reappraisal cycle. On July 1, 2008, the department valued condominium units without an individual land value because the condominium unit owner did not own the land beneath the unit. To properly allocate the land value to a converted condominium unit or newly designated townhome unit, the department would need a land valuation model to account for nontypical parcel sizes. Given the short time frame between now and the upcoming cycle, the department will not develop a midcycle model to account for the land value. Therefore, the department will not add the land values to the converted condominium units for the remainder of this cycle.
However, in the event that the townhome unit owner makes improvements to the property during the current reappraisal cycle, as with all other properties, the department will reassess the unit value based upon the structural improvements.
The department anticipates developing a land valuation model for the next reappraisal cycle beginning January 1, 2015, at which time the land values for converted condominium units will be added to the property's value.
Ms. Schlepp's comments concerning fiscal notes are appreciated but her concerns are misplaced. The fiscal note for House Bill 132 and the lack of a fiscal note for House Bill 460 are of no significance or relevance to appraising individual townhome properties. The department is required to value properties at 100 percent of market value. Individual property values may change without producing any measurable revenue effect. This is in part because the individual value changes would likely be too small to produce any cumulative changes in statewide mill revenue large enough to actually estimate in a fiscal note.
Further, even if value changes for an individual property were significant at the local level (up or down), there would be no net revenue effect for local governments because of the automatic adjustment of mill levies under 15-10-420, MCA. That is, if a townhome value goes up, the taxes assigned to that townhome might go up (depending upon local budgets), but taxes would go down for other property owners. The net effect on revenues would be zero, even if values for townhomes were changing.
The department concludes that the comments offered with regard to fiscal notes are not relevant to these rules.
COMMENT NO. 6: Mr. Llewellyn stated that the purpose of House Bill 460, L. 2011, was to provide a definition in Montana statute under the Unit Ownership Act for townhomes, because not having a definition for townhomes has caused a hardship on consumers either trying to buy or sell their properties.
Mr. Llewellyn commented that what was to be changed in the Department of Revenue is the classification showing a townhome, and having that classification in the public records. He further commented that the value of the condominiums has been declining due to the lack of financing or the cost of financing, while townhomes are maintaining their values when the change in classification has been completed. Mr. Llewellyn also provided a letter from a licensed appraiser regarding values, and copies of listings for two Billings properties that recently sold for cash at discounted prices because of the classification.
Mr. Llewellyn stated that making the change in the classification will be a big help to the owners and consumers by making the properties financeable at reasonable rates, and explained that townhomes are financed the same as single family homes, while condominiums have increased rates and must be certified by the Housing and Urban Development as a high cost. Mr. Llewellyn requests the department complete the classification rules for these properties.
RESPONSE NO. 6: The department recognizes Mr. Llewellyn's explanation of the purpose of House Bill 460, L. 2011, from a financial perspective. Similar to the financing distinction between a condominium and a townhome, there is a property valuation distinction between the two. The department values property by its physical characteristics and attributes in the market. As stated in Response Nos. 1, 3, and 5, due to the unit owner holding separate title to the land beneath the unit, more than just a "property type" change occurs. The amount of land each unit owner holds separately must be provided to the department so it can be properly identified and assessed, which will change the characteristics for each unit owner and the complex as a whole.
3. As a result of the comments received the department amends ARM 42.20.105 as follows, stricken matter interlined, new matter underlined:
42.20.105 CONDOMINIUMS/TOWNHOMES (1) remains as proposed.
(2) The department will employ the following appraisal and assessment methodology for the appraisal of condominiums/townhomes, except for time-share condominiums.
(a) The preferred approach for the appraisal of residential condominium/townhome units is the sales comparison approach, where comparable sales are available. The common elements of residential condominiums/townhomes are inherent in the individual unit values when the sales comparison approach is employed. When comparable sales are not available, the cost approach must be used. In that instance, the condominium/townhome declaration's percentage of ownership interest required by 15-8-511, 70-23-301, and 70-23-403, MCA,
will should be used to allocate the value. Allocation of value for each condominium/townhome unit will be determined by multiplying the percentage, expressed as a decimal, by the appraised value of the entire condominium/townhome project or by adding the individual unit cost to the individual unit's allocation of those elements deemed common. The common elements are deemed to be inherent in the individual unit's declaration percentage when the cost approach to value is determined and allocated as specified in this subsection.
(b) The preferred approach for the appraisal of commercial condominium units is the income approach where reliable condominium income and expense data are available. The common elements of income-producing condominiums are inherent in the individual unit values when the income approach is employed. When reliable income and expense data are not available, the cost approach must be used. In that instance, the condominium declaration's percentage of ownership interest required by 15-8-511, 70-23-301, and 70-23-403, MCA,
will should be used to allocate the value. Allocation of value for each condominium/townhome unit will be determined by multiplying the percentage, expressed as a decimal, by the appraised value of the entire condominium/townhome project. The common elements are deemed to be inherent in the individual unit's declaration percentage when the cost approach to value is determined and allocated as specified in this subsection.
For new townhome projects, a townhome declaration must identify the location and dimensions of each townhome unit's lot and must have been filed with the County Clerk and Recorder Unit owners seeking conversion from a condominium property type to a townhome property type will require changing the legal ownership of the land for the entire complex, on which the unit is located. Therefore, all unit owners of the complex shall acknowledge, consent, and attest to the validity of the property type change.
For existing townhome projects, an amended townhome declaration must be filed that includes a description of the size in square footage or acreage of land associated with each townhome unit, and identify the remaining square footage or acreage associated with the common land and/or improvement elements.
(5) The deadline for filing new or amended townhome declarations is January 1 The unit owner or unit owner's designated entity must file an application for a property type change on a form available from the local department office before January 1 of the year for which the property change is sought. Applications received after January 1 will be considered for the following tax year. For tax year 2012 only, the deadline for filing new and amended townhome declarations is June 1 is October 1.
(5) The department requires the following information before changing a property type from a condominium to a townhome:
(a) a description of the size in square footage or acreage of land associated with each townhome unit;
(b) the amount of remaining square footage or acreage of land associated with each townhome unit;
(c) if a designated entity, documentation authorizing the designated entity to represent the unit owners; and
(d) signatures of all unit owners of the complex in which the property type change is located.
(6) through (6)(c) remain as proposed.
IMP: 15-7-103, 15-8-511, 70-23-102, 70-23-103, 70-23-301, 70-23-403, MCA
4. The department amends ARM 42.20.107 as proposed.
5. An electronic copy of this notice is available on the department's web site at www.revenue.mt.gov. Select the "Legal Resources" link in the left hand column, and click on the "Rules" link within to view the options under the "Current Rule Actions – Published Notices" heading. The department strives to make the electronic copy of this notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. While the department also strives to keep its web site accessible at all times, in some instances it may be temporarily unavailable due to system maintenance or technical problems.
/s/ Laurie Logan for: /s/ Dan R. Bucks
CLEO ANDERSON DAN R. BUCKS
Rule Reviewer Director of Revenue
Certified to Secretary of State August 13, 2012