[This article originally appeared in the New England Real Estate Journal, July 3, 1998.]
A recent New Hampshire Superior Court decision could mean significant tax savings for developers of “current use” land. Under New Hampshire law, certain open space land qualifies for current use tax treatment. While in current use, the landowner gets a substantially reduced property tax assessment. When the property changes from open space use to a nonqualifying use, such as a subdivision or commercial development, the landowner is responsible for a land use change tax (“LUCT”) equal to ten percent of the fair market value of the land which use is changed.
Tyler Road Development v. Londonderry involved the proper method of calculating the LUCT for current use property which receives subdivision approval and is then developed. Prior to 1988, the current use statute (as interpreted by the courts and administrative agencies) provided that when physical changes occurred on the site, the entire property comprising the approved subdivision is removed from current use and the LUCT is assessed on the subdivision as a single parcel, not on the individual, approved lots. Between 1988 and 1991, administrative regulations required the LUCT to be calculated on the value of the land serviced by a single road, not an individual approved lot. In 1991, the statute was amended to generally require the LUCT to be calculated based on the value of each individual lot at the time of the change in use.
The 12-lot subdivision in Tyler Road involved property put into current use prior to the 1991 amendment. The change in use began in 1995. Based on the statute as it existed at the time of the change in use, the Town attempted to assess the LUCT on each lot’s value at the time when a house was constructed on it. This resulted in a substantially greater LUCT than had the LUCT been based on the value of the subdivision as a whole under pre-1991 law.
The Superior Court determined that the Town’s method was unconstitutional because it resulted in a retrospective application of the 1991 amendment. According to the Court, the state constitution requires the LUCT to be determined pursuant to the law in effect at the time the land entered current use, not the law in effect at the time of the change in use.
The Town has appealed this decision to the New Hampshire Supreme Court. Nevertheless, it has important ramifications for developers of current use land. If the Tyler decision is followed, the method for calculating the LUCT will depend on when the land entered current use. Generally, the LUCT will be less for property placed in current use before 1991. Accordingly, it will be important to know the date on which property was classified under current use. Knowing the methodology a Town is employing in calculating the LUCT will also be important. Proper due diligence is critical to minimizing the adverse tax consequences.