The cannabis industry laws are extremely volatile. This is mainly a result of cannabis being a new industry, with a trial and error type of lawmaking process. To date, marijuana is legal in one form or another in 33 states. This new area of law, coupled with county property appraisers’ broad authority, creates an unstable environment for cannabusinesses when it comes to ad valorem tax exposure.
County property appraisers are granted broad authority. As a result, each property appraiser typically marches to the beat of their own drum in determining grey areas of property valuation and taxation. Cannabusinesses should take several factors into consideration to try to minimize property tax exposure and also be aware that they have the ability to appeal unjust property tax valuations and assessments.
As a general proposition, there are several factors that can be considered in arriving at the taxable value of a property. Each state has its own laws laying out what property appraisers can and cannot take into consideration when determining the value of a specific property. Additionally, most property appraisers will use one of three standard approaches to determine the property’s market value: (1) Cost Approach: which considers how much it would cost to replace a structure; (2) Sales Comparison Approach: which considers the sales of similar properties that occurred in the year prior to the assessment; (3) Income Approach: this is the ICV formula generally relied on by buyers and sellers of commercial property. Income approach considers the property’s annual income after expenses and compares that to the cap rate, which is the rates of return for comparable investments. Income x Cap rate = Value. Once the fair market value, or just value, is determined, this is adjusted to account for any applicable exemptions to arrive at assessed value. County taxes are calculated on the assessed value, while school board taxes are calculated using the just value as a basis.
Most states have laws in place that provide for agricultural property exemptions. These laws provide for exemptions from tax for agricultural land. These laws are typically broad and inclusive, and leaves authority to the appraiser to determine whether marijuana cultivation falls within the agricultural exemption. The agricultural exemption already has and will continue to be an issue for both property appraisers and cannabusinesses.
Additionally, many states have laws in place that provide for some type of cap on the increase of assessed value on both residential and commercial property. Similar to California’s Proposition 13, or Florida’s homestead, the cap on commercial property limits increases in taxes, and helps property owners manage expenses. However, also similar to homestead, a change in ownership of a property would trigger a property to be re-assessed, and the benefit of the cap would be lost. This is a consideration for cannabusinesses seeking to purchase property, or transfer ownership of a property. Cannabusinesses who currently own property but want to separate the operating entity and the land-owning entity, while still keeping them under the same umbrella, have options. Specifically, the provisions of the cap allow for lease of the property between entities. This would allow land owning canabusinesses to transfer the beneficial use of the land and reap the benefit of both the capped increase to assessed value, and the agricultural exemption based on the use of the land by the lessor.
Once the land is deemed agricultural, and the exemption is in place, the value of buildings and improvements to the land must be determined. Buildings, such as production facilities for growing and cultivation of plants, are improvements to real property, taxed at just value. Improvements made to existing land can also be assessed at just value, in most states. This is another issue that must be considered by property appraisers as well as cannabusinesses.
As there is only so much landowners can do to plan ahead to reduce property taxes, it is important that landowners also understand that there is an opportunity to challenge appraisers assessments of the land and the applicable taxes. Contact us for a free consultation and a good understanding of your options for planning as well as appeal for property assessment purposes.
About the Authors: Paula Savchenko is an associate attorney at the Law Offices of Moffa, Sutton, & Donnini, P.A, based in Fort Lauderdale, Florida. Ms. Savchenko joined the firm in 2013 and practices primarily in the areas of Taxation and Administrative Law matters, as she counsels and represents businesses and individuals in their dealings with government agencies. More specifically, most of her work involves tax and regulatory matters, with an emphasis on state and local taxation.
About the Author: Amanda Levine is an associate attorney at The Law Offices of Moffa, Sutton, & Donnini, P.A. Ms. Levine joined the firm in 2013, and focuses her practice on state and local taxation issues including property taxation, and criminal proceedings.