Bankruptcy Sale Found Insufficient to Support Assessment Reduction

By: Ares G. Dalianis and Scott R. Metcalf

Generally the best evidence of a property’s market value is a recent sale price, but that is not always the case. The First District Appellate Court recently ruled in Calumet Transfer LLC v. Property Tax Appeal Board that the PTAB properly rejected a taxpayer’s claim for assessment relief where the taxpayer’s appraisal relied on bankruptcy sales and where the intervening taxing district submitted an appraisal that included evidence of non-bankruptcy sales. Given the turbulence in the U.S. real estate market, this decision offers valuable guidance in property tax appeals premised on the sales of distressed properties.

In assessment-based proceedings, the central question is the market value of the subject property on the assessment lien date – January 1^st of each year in Illinois. The Property Tax Code defines fair cash value as “the amount for which a property can be sold in the due course of business and trade, not under duress, between a willing buyer and a willing seller.” Similarly, the Uniform Standards of Professional Appraisal Practice define market value as, “the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.” In other words, the sale must be an arm’s-length transaction.

Both the United States and the Illinois Supreme Courts have held that in property tax proceedings, assessing officials may not ‘chase’ a sale in setting the assessment. Both Courts have reasoned that such practices may violate constitutional guarantees of uniformity of assessment and that numerous factors may artificially inflate or deflate sales prices. For example, where a property is sold as part of bankruptcy auction or foreclosure proceeding, it is likely that the property was sold under duress, without adequate exposure to the market, and with the seller acting under compulsion.

In Calumet Transfer, the Appellate Court upheld the PTAB’s finding that the evidence submitted by the Intervenor called into question the arm’s-length nature of the taxpayer’s sales. The Intervenor submitted an appraisal that included evidence of sales of comparable properties sold conventionally, and not through bankruptcy or foreclosure. Because the Intervenor’s evidence demonstrated that comparable properties were selling for higher prices when those sales did not occur through the bankruptcy process, the PTAB found the taxpayer’s evidence to be insufficient to support an assessment reduction.

In the next few years, data on foreclosure, bankruptcy and other distressed sales are likely to appear with greater frequency as evidence of value in assessment appeals. The practical lesson from Calumet Transfer is that such sales can be rebutted with arm’s-length transactions of comparable properties sold not under duress but meeting the definition of fair cash value.