In this case, a real estate developer appeals a trial court’s decision to value certain lots at fair market value and not use an “absorption discount.” The developer argued that the court should have accounted for expert testimony supporting a discount of 20-33% from market value due to the time it would take to sell the lots. But, the Iowa Court of Appeals upheld the trial court’s determination that a discount of this kind is not an “economically sound concept.”
This case involved lots surrounding a golf course. The development company appealed the valuation to the county board of review. The board of review sided with the market value method and failed to discount the property value. On appeal, the trial court listened to the expert testimony from three appraisers. Unsurprisingly, the two appraisers hired as experts for the developer testified that there was a significant change downward in value since the last assessment “based on the rather extensive absorption timeframes associated with the subdivision.”
The trial court did agree. Though the developer’s experts testified that there were not sufficient buyers and sellers within the market to absorb the lots, the appellate court affirmed. The court found that the county assessor had used a uniform and recognized appraisal method, and that the evidence presented supported the trial court’s valuation of the property. The court noted that several other courts around the country have expressed skepticism about absorption discounts and that the application of this theory would be an “administrative nightmare,” violating state constitutional provisions requiring uniformity in taxation.
The court’s opinion seems incorrect insomuch as a discount for “absorption” has been routinely recognized by the U.S. Tax Court as a valid concept given the right factual setting. JCO Properties, Inc. v. Board of Review for Scott County, No. 0-429/09-1453 (Iowa Ct. App. Oct. 6, 2010).