Land Use Change Tax: Where We Are Now and How We Got Here
RSA Chapter 79-A, the current use taxation law, enacted in 1973, recognizes the powerful influence of property taxes on the decisions of landowners to preserve open space land or to develop it. RSA 79-A:1 is a legislative finding of the value of open space and the role high property taxes can play in the loss of open space:
It is hereby declared to be in the public interest to encourage the preservation of open space.… It is further declared to be in the public interest to prevent the loss of open space due to property taxation at values incompatible with open space usage.… The means for encouraging preservation of open space authorized by this chapter is the assessment of land value for property taxation on the basis of current use….
The statute not only holds out the “carrot" of annual ad valorem property taxation at low current use assessed values. It also wields a "stick" as a disincentive to development: the land use change tax (LUCT), which is assessed when land enrolled in current use is disqualified. RSA 79-A:7, V. The LUCT is assessed at the rate of ten percent of "full and true value" (fair market value) of the land that is disqualified by change of use.
Ever since its inception, the LUCT has proven very difficult to administer for tracts of land undergoing development in a subdivision, a process that occurs over a period of several months or years. Does the entire tract change when road construction starts, or does change occur in the subdivision gradually, lot by lot, as actual construction starts? The details of LUCT assessment are crucial because land increases in value substantially during the development process. It starts as a "raw tract"; gains value when approval is voted by the planning board; and leaps in value when the improvements are installed or a bond is posted. At that point the lots acquire individual "retail" value and may be sold or built upon. Lots typically continue to increase in value during the build-out period of a development.
Proponents of open space preservation view the LUCT as an important disincentive to land speculators who use current use to reduce their carrying costs as they plan for future development. Municipal assessing officials view the LUCT as an opportunity to recapture revenue that is lost when current use reduces the tax base. Both are keenly interested in maximizing revenue from the LUCT. Landowners and developers are, of course, motivated to minimize their costs. Very large sums can be at stake. As a result, there have been three decades of litigation; statutory revisions; administrative rule revisions; and more litigation. Conventional subdivisions, cluster development and condominiums all have posed challenges for administration of the LUCT. From the standpoint of open space proponents and municipal assessing officials, progress has been uneven, to say the least, but efforts continue.
This article will review the succession of New Hampshire Supreme Court cases, legislation and administrative rules that have dealt with assessment of the land use change tax on land undergoing development. It will conclude with a discussion of the recent and pending legislation that may finally make it possible to assess the LUCT in all cases with optimal results.
The ‘Bulldozer Rule’
At first, the statute was silent as to what events would constitute a change of use. In Frost v. Candia, 118 N.H. 923 (1978), the New Hampshire Supreme Court held that mere subdivision approval does not trigger the LUCT. In Appeal of Peterborough, 120 N.H. 325 (1980), the developer sent in bulldozers and other equipment to start clearing a 40-acre tract in current use during the summer of 1978, but did not obtain subdivision approval until June 1979. The Town of Peterborough argued that the LUCT should not be assessed until the finished lots were sold. The Court held that the LUCT should have been assessed on the entire 40-acre tract in the summer of 1978 when the bulldozers first entered the site and made actual physical changes for the purpose of residential construction.
In subsequent cases, the bulldozer rule was applied by the Court when the developer started construction of the subdivision road ten days before planning board approval, Appeal of Hollis, 126 N.H. 235 (1985), and where construction started after conditional subdivision approval. Appeal of Sawmill Brook Development Co., 129 N.H. 410 (1987).
The ‘Density Rule’
Dana Patterson, Inc. v. Merrimack, 130 N.H. 353 (1988), was still another case governed by the bulldozer rule, but it introduced a new wrinkle. The subdivision was a 65-acre cluster development comprising three consolidated tracts, one of which was a 25-acre parcel previously enrolled in current use. The current use parcel was not physically disturbed, but was restricted as open space to satisfy the zoning density standard of 40,000 square feet per dwelling unit. The Court held that the undisturbed 25 acres in current use was, nevertheless, changed in use along with the rest of the tract because the acreage was necessary for the intense development of the overall site.
Beyond the Bulldozer Rule: The 1991 Amendments to RSA 79-A:7, V
In 1979 RSA 79-A:7, V was added, authorizing administrative regulations to delineate the amount of land on which the LUCT is assessed. Regulations were promulgated in the late 1980s but were soon superseded when the legislature substantially amended the statute in 1991. As amended in 1991, RSA 79-A:7, V provides in relevant part:
Except in the case of land which has changed to a use which does not qualify for current use assessment due to size, only the number of acres on which an actual physical change has taken place shall become subject to the land use change tax, and land not physically changed shall remain under current use assessment, except as follows:
(a) When a road is constructed or other utilities installed pursuant to a development plan which has received all necessary local, state or federal approvals, all lots or building sites, including roads and utilities, shown on the plan and served by such road or utilities shall be considered changed in use, with the exception of any lot or site, or combination of adjacent lots or sites under the same ownership, large enough to remain qualified for current use assessment under the completed development plan; provided, however, that … assessing officials may delay the assessment of the land use change tax until any and all required permits or approvals have been secured….
(b) When land is required to remain undeveloped to satisfy density, setback, or other local, state, or federal requirements as part of the approval of a plan of a contiguous development area, such land shall be considered changed to a use which does not qualify for current use assessment at the time any portion of such development area is physically changed to a non-qualifying use. However, application of the land use change tax to such development area shall continue to be in accordance with subparagraph (a).
The "exception" in subparagraph (b) was essentially a codification of the density rule of Dana Patterson. But the “exception" in subparagraph (a) was more ambitious: it provided a mechanism to move beyond the bulldozer rule in order to assess the LUCT gradually, lot by lot, when land values typically have been enhanced by road improvements and rising sale prices during the subdivision build-out process. Administrative rules were promulgated to assist in implementing the new system, including:
Cub 308.01 Assessing Full and True Value
(b) In determining the full and true value of the land being disqualified, in accordance with RSA 79-A:7, IV and V, the assessors or selectmen shall not include the value of any betterment to the land, implemented in conjunction with the change in use, including the installation of: (1) Paving; (2) Water lines; (3) Sewage lines; or (4) Other utility lines.
This rule would have unfortunate consequences for municipalities.
Under subparagraph (a) and the administrative rules, municipal assessors began assessing the LUCT in subdivisions according to the following method:
Upon approval of a subdivision (a required approval of a "development plan") and commencement of the subdivision road construction, the right-of-way, itself, would be deemed changed in use, as would be any other land on which subdivision infrastructure was to be installed pursuant to the “completed development plan." The value of the improvements ("betterments") that constituted the physical change would not be included in the value of the right-of-way and other sites of subdivision infrastructure improvements. Such land has little value for the LUCT.
Under the "exception," the approved building lots would not be disqualified at the same time as the road and other infrastructure sites, if the contiguous undeveloped lots totaled at least ten acres. (In smaller subdivisions all the lots would be disqualified at the same time as the road right-of-way.) Each building lot would be disqualified only by reason of size (due to sale) or by physical change of use. Physical change would not be effective until the building permit was issued (a required approval) and construction of lot improvements began. As with the road right-of-way, the value of the "betterments" that trigger the physical change of use to the building lots (septic system, well, foundation, etc.) would not be included in the assessment for the LUCT of the lots.
At the time of sale or construction, the building lot would have a "retail" market value commensurate with being shown on a recorded subdivision plan and served by a road and other infrastructure that was already built or secured by performance bond. The infrastructure “betterments" on adjoining land indirectly enhanced the values of the building lots, and this added value was included in the lots’ value for LUCT.
The Bulldozer Rule by Other Means: Deducting the Value of ‘Betterments’
The new LUCT assessment methodology was immediately challenged at the Board of Tax and Land Appeals, which upheld it in several cases before a case reached the Supreme Court. In Appeal of Van Lunen, 145 N.H. 82 (2000), the Court recognized that the 1991 amendments had superseded Peterborough and Hollis. The Court upheld the Town’s lot-by-lot methodology, with one critical exception—the treatment of "betterments" under Cub 308.01. The problem was the ambiguity of the term "betterment." It can be a synonym for a physical improvement, itself, but it also can mean the enhancement in value to land benefited by public improvements on adjoining land. Black’s Law Dictionary, Eighth Edition, p. 171. The Court held that Cub 308.01 (b) required deduction of the indirect betterments to the house lots—the increase in their value attributable to installation of the road and utilities serving the lots. The net result was a reduction in value nearly to the level of the bulldozer rule as applied to the conditionally approved subdivision in Sawmill Development. The ball was back in the court of the administrative rule-makers.
A Constitutional Challenge
While changes to Cub 308.01 were contemplated, the Court dealt with a constitutional challenge to the 1991 amendments. In Tyler Road Development Corp. v. Londonderry, 145 N.H. 615 (2000), the taxpayer claimed that it would violate the constitutional prohibition against retrospective legislation to assess the LUCT on its property according to the 1991 amendments because its tracts had been enrolled in current use by previous owners before 1991. The Court previously had issued an advisory opinion that it would be unconstitutional to raise the LUCT tax rate above ten percent for property already enrolled in current use. Opinion of the Justices (Current Use Reimbursement Program), 137 N.H. 270 (1993). Relying on that case, the trial court ruled that the taxpayer had a vested right to have the LUCT assessed according to the "LUCT statute and its common law gloss" in effect at the time of enrollment in current use: in other words, the bulldozer rule. The Supreme Court, however, reversed, overruling Opinion of the Justices and holding that the crucial event for vested rights is the date of change of use, not the date of enrollment in current use.
Value of Betterments Included: The 2001 Amendment to Cub 308.01
In response to Van Lunen, the regulations were revised in 2001 so that full and true value for purposes of the LUCT includes the enhanced value of the building lots attributable to the road and utilities:
Cub 308.01 Assessing Full and True Value
(b) The full and true value of the land being disqualified pursuant to RSA 79-A:7 shall be based upon the highest and best use of the land, including the value of all betterments to the land.
Woodview Development Corp. v. Pelham, 152 N.H. 114 (2005), was next. The Court approved the Town’s assessment of the LUCT on subdivision lots at their “retail" value, including the enhanced value attributable to the road and utility improvements. Finally, the statute and regulations provided for the maximum LUCT revenues that open space preservation proponents and municipal assessing officials had been seeking since the 1970s. The bulldozer rule, it seemed, was history at last.
The Problem of Clusters and Condominiums
While the problems with the LUCT in conventional subdivisions under RSA 79-A:7, V(a) were being worked out, problems with subparagraph (b), the Dana Patterson density rule, remained in the background. Condominium developments, as well as cluster subdivisions, rely on restricted open space to satisfy density and other regulatory standards. It is not particularly important when the open space changes in use, because the market value of common areas restricted against development is very low. The value flows to the dwellings that the open space benefits. Locke Lake Colony Ass’n, Inc. v. Barnstead, 126 N.H. 136 (1985). However, for the development sites in cluster and condominium projects, it is important to have a valid method to assess the LUCT gradually, during build-out, in order to maximize revenues. Cub 307.02 addressed cluster projects:
Development Other Than Condominiums. In the case of a development, other than condominiums, which includes land identified in the development plan to satisfy the density requirement of RSA 79-A:7, V(b), that land shall remain in current use until such time as there is no longer 10 qualifying acres of developable land, as shown on the approved development plan.
More daunting was how to administer a "site-by-site" approach to the LUCT in a condominium development. Under RSA 356-B, condominium units sometimes include discrete parcels of land, but, often, their boundaries are defined by the walls, ceilings and floors of buildings. Land not included in condominium units is common area. Discrete portions of the common area may be designated as "limited common area" under the control of one or more unit owners. Condominium projects, therefore, may or may not include boundaries that are useful for administration of a lot-by-lot approach to the LUCT. Cub 307.03 addressed the problem as follows:
(a) In the case of a condominium development, land physically changed to accommodate the construction of a building(s), curtilage and infrastructure shall be removed from current use along with the amount of open space land needed to support that building(s) until such time there are no longer 10 qualifying acres.
(b) The amount of open space land needed to support the building(s) in (a) above, shall be the percentage interest that the building(s) represents in the entire project.
(c) The percentage of ownership interest in the condominium declaration language shall be used to calculate the amount of open space land in (b) above.
"Curtilage" is a flexible concept, suitable for the various ways in which condominium units are developed. It is defined in Cub 301.04:
"Curtilage" for the purposes of this chapter means the land upon which a structure stands and the land immediately surrounding the structure, including the following:
(a) A yard contiguous to the structure;
(b) Land groomed and maintained around the structure; and
(c) Land necessary to the support and service of the structure.
These regulations came under attack in Formula Development Corp. v. Chester, 156 N.H. 177 (2007).
Return of the Bulldozer Rule?
In Formula Development the developer’s project was a clustered 20-unit condominium on 30 acres. The regulations required 1.5 acres per unit and a minimum of 40 percent restricted open space. The individual condominium units consisted of discrete parcels and undivided interests in the common area. Construction of the road and other infrastructure began in early 2001. Relying on Van Lunen and the administrative rules, the Town assessed the LUCT on a site-by-site basis as each condominium unit was sold or developed until the total remaining acreage fell below the minimum required for current use assessment. At that point, the remainder of the land was assessed for the LUCT. The Court, however, held that Van Lunen and RSA 79-A:7, V(a) were inapplicable to the case. Instead, the Court ruled that administration of the LUCT in a cluster subdivision is controlled entirely by subparagraph (b). As a result, the Court concluded, the entire development—building sites as well as open space—was changed in use all at once, when construction commenced. Cub 307.02 and 307.03 were held to be invalid. "Administrative officials do not possess the power to contravene a statute [and] … administrative rules may not add to, detract from, or modify the statute which they are intended to implement." 156 N.H. at 182. The bulldozer rule was back, at least in the case of cluster development.
Two of the justices in Formula Development filed a separate, concurring opinion expressing their view that Van Lunen (and thus Woodview) had been incorrectly decided. They interpreted RSA 79-A:7, V(a) to mean that the entire subdivision is changed in use when construction of the road commences, excepting only contiguous lots totaling ten acres that are both (1) intended to remain in open space "under the completed development plan," and (2) not subject to the LUCT under the density rule of subparagraph (b). Few projects, of course, permanently set aside ten acres unless required for density. In short, two of the justices would return to the bulldozer rule in almost all cases.
Cluster Developments: The 2009 Amendments to RSA 79-A:7, V
In response to Formula Development, the Legislature went back to work on the LUCT during the 2009 session. House Bill 424, enacted as Chapter 84, addressed both problems identified in Formula Development.
First, in response to the concurring opinion, the phrase "under the completed development plan" is deleted from RSA 79-A:7, V(a), and rephrased language is designed to make clear that the lot-by-lot method of Van Lunen and Woodview is what the statute intends.
Second, to take cluster projects out of the bulldozer rule under RSA 79-A:7, V(b), that subparagraph is substantially revised and now reads as follows:
When land is required to remain undeveloped to satisfy density, setback, or other local, state, or federal requirements as part of the approval of a plan of a contiguous development area, such land shall be considered changed to a use which does not qualify for current use assessment at the time any portion of such development area is physically changed to a non-qualifying use. However, application of the land use change tax to such development area shall continue to be in accordance with subparagraph (a).
The new language introduces the term "development area" to distinguish the land that will be developed from the land that will remain in open space. The intent is to make clear that the LUCT in the area of development is assessed building site by building site. The open space is all changed when the first development area is disturbed, but, as previously noted, restricted land has little value of its own.
The Current Use Board has proposed the following amendment to Cub 307.02:
Development Other Than Condominiums
. (a) In the case of a development, other than condominiums, which includes land identified in the development plan to satisfy the density requirement of RSA 79-A:7, V(b), that land and any land in the development area shall
remain inbe removed from current use.
(b) Any lot or site, or combination of adjacent lots or sites shown thereon, which are under identical ownership shall remain in current use until such time as there is no longer 10 qualifying acres of developable land, as shown on the approved development plan.
Condominium Developments: 2010 Session House Bill 1609
Effective April 1, 2009, Cub 307.03 was amended to comply with Formula Development:
Cub 307.03 Condominium Developments.
(a) In the case of a condominium development, the entire development parcel shall be considered changed at the time any construction of the road or development begins.
(b) When individual land use change tax bills are issued, they shall be assessed at the time any construction of the road or development begins.
(c) The percentage of ownership interest in the condominium declaration language shall be used to calculate the amount of land value attributed to each unit when individual land use change tax bills are issued.
This regulation essentially confirms the bulldozer rule for condominium developments. However, House Bill 1609, introduced in the 2010 session of the Legislature, is intended to rectify this problem. Section 4 of the bill provides:
4 New Subparagraph; Land Use Change Tax; Condominium Development Areas. Amend RSA 79-A:7, V by inserting after subparagraph (b) the following new subparagraph:
(c) When a road is constructed or utilities installed pursuant to a condominium development plan, only the development area shall be removed from current use along with the percentage interest in the open space land assigned to the unit or units within that development area.
Presumably the bill, if passed, will enable the gradual disqualification of development sites in condominium projects using the “curtilage" concept of former Cub 302.03. The Current Use Board may find it useful to adopt a similar regulation.
History suggests caution, but it appears that if House Bill 1609 passes, the LUCT will finally have moved beyond the bulldozer rule.
David Connell is legal services counsel with the New Hampshire Local Government Center’s Legal Services and Government Affairs Department. For more information on this and other topics of interest to local officials, LGC’s legal services attorneys can be reached Monday through Friday from 8:30 a.m. to 4:30 p.m. by calling 800.852.3358, ext. 384.