Fairfax County has suffered a third defeat in court in its effort to uphold a widely used method of commercial property tax assessment that raises millions in revenues for local governments.
Developers challenging the county's practice of evaluating commercial property based on what building owners could charge for space rather than what owners get from existing leases were the victors when Fairfax Circuit Judge Lewis H. Griffith ruled in the case, involving the assessment of 15 buildings in Reston.
The judge found that the assessment on the property, purchased last year by the development firm of Donatelli and Klein, should have been based on the actual $38 million the developers paid for it rather than on what they could raise through charging tenants the going market rates for rent and office space.
Louis T. Donatelli and his partner, Rodger W. Klein of Bethesda, purchased the 15 buildings in December 1979 from Gulf Oil Land Development Corp. for $38 million. The county contended in court that, based on records of income and expenses of other commercial buildings in the county, the Reston property was worth $50 million and the developers should be charged an additional $200,000 in real estate taxes.
Judge Griffith said the county's "approach to assessment was misplaced." The county, he said, "failed to take into account information readily available to them" about the real value of the property based on existing lease and rental agreements provided by the owners.
"The decision was a correct one," said developer Klein, adding, "If you don't follow some of these established standards of assessment and instead follow a course of hypothetical rents and expenses, then you are going to end up in a never-never land where developers have no real idea of what their real tax assessment should be."
The Donatelli and Klein case is the third commercial property-tax case the county has lost in recent months. The county appealed earlier cases, and one is before the Virginia Supreme Court. At stake in all three cases is about $300,000 in taxes.
The problem of assessments has arisen in recent years as skyrocketing prices for office space and apartments have sharply boosted assessments. The county derives the value of both new and old buildings using estimates of current market rents.
But many firms hold long-term leases that allow only limited rent increases. So, while a building could be leased for an estimated $13 to $14 a square foot today, it may still be subject to a rental agreement reached a decade ago setting the rent at only $5 a square foot.
Klein said the apartment buildings and some of the office buildings in the $38 million purchase in Reston were covered by such long-term fixed rent agreements.
The county maintains that it is required to use its assessment method because under state law property must be assessed at its fair market value -- what it could sell or rent for on the open market.
Robert Cherin, an assistant county attorney who argued the county's position in the case, said he will recommend that the county Board of Supervisors appeal the verdict to the state Supreme Court.