On March 27, 2015, the Georgia Supreme Court rejected a challenge to the legal validity of property tax incentives in Georgia, largely on procedural grounds. SJN Properties, LLC v. Fulton County Bd. of Tax Assessors, No. S14A1493, 2015 WL 1393398 (Ga. Mar. 27, 2015).

The case began in 2009 when a citizen, John Sherman (later substituted with SNJ Properties, LLC), filed a class action suit against the Fulton County Board of Tax Assessors seeking to invalidate property tax incentives provided to companies investing and creating jobs in the area. The Georgia Constitution’s uniformity provision generally prohibits county tax assessors from directly abating a company’s property taxes. Property taxes can potentially be reduced, however, through bond transactions involving local development authorities.

The transactions at issue were structured such that title to private property is transferred to a local development authority in connection with the issuance of revenue bonds. The authority leases the property back to the private party and uses the lease stream to pay down the bonds. The fee estate held by the tax-exempt authority is generally exempt from property tax, while the private party pays property tax on its leasehold interest. For purposes of determining the amount of property tax due on the leasehold interest, the parties agreed to use a “50% ramp-up method,” under which the property is valued at 50% of the fair market value of the fee estate in the first year, ramping up by 5% each year over 10 years until the property is valued at 100%. Sherman sought a determination that the 50% ramp-up method was unlawful on the basis that it did not reflect the property’s fair market value. Op. at 2-3.

The trial court initially dismissed Sherman’s claims, but in 2010, the Georgia Supreme Court reversed, holding that dismissal at that stage was improper because Sherman should have had an opportunity to present evidence regarding whether the valuation method was valid. 701 S.E. 2d 472 (Ga. 2010). On remand, the parties filed cross motions for summary judgment supported by expert affidavits of real estate appraisers. The trial court granted summary judgment on the merits to the Fulton County Board of Tax Assessors, and Sherman appealed.

The Georgia Supreme Court’s Opinion

On Friday, the Georgia Supreme Court upheld the trial court’s judgment on the merits in favor of the county. The Court held that:

  1. Sherman (and his substitute, SJN Properties) had standing as citizens and taxpayers of Fulton County to seek mandamus relief, which would allow the claimant to seek to force a public official to perform an official duty (here, valuing property), Op. at 12;
  2. Sherman’s claims for injunctive relief were barred by sovereign immunity, Op. at 10-11;
  3. Sherman’s claims for forward-looking declaratory relief were barred because he “faces no uncertainty or insecurity as to any of [his] own future conduct, but rather seeks an adjudication only of issues that will impact the future conduct of the FCBOA,” Op. at 17-19; and
  4. On the merits, Sherman’s claims for mandamus relief failed, due in large part to a lack of proof. The Court reasoned that county tax assessors have broad discretion in valuing property, and the county’s two expert appraisers testified that the 50% ramp-up formula was analytically sound and reasonable. The Court also noted that Georgia courts had “previously endorsed” similar methods for valuing bond leasehold estates, citingDeKalb County Bd. of Tax Assessors v. W.C. Harris & Co., 282 S.E. 2d 880 (Ga. 1981). Sherman’s expert appraiser opined on the 50% ramp-up formula only in the abstract and did not actually appraise any particular property. Thus, the claims failed “for the simple reason that [Sherman] has adduced no evidence that any actual assessment of any particular property has been or is other than at fair market value.” Op. at 13-17.

Sutherland Observations: Citizen taxpayers often lack standing to challenge economic development incentives. See, e.g., DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006). Georgia, however, like some other states, grants citizen taxpayers standing to pursue mandamus relief, see O.C.G.A. § 9-6-24, and it was through the mandamus vehicle that Sherman was able to bring his challenge.

As this case and others like it illustrate, taxpayers negotiating credits and incentives must be mindful of the possibility that, at some future time, the legality of the incentives may be challenged. Care should be taken when negotiating and drafting the relevant agreements to anticipate and plan for these challenges and other potential risks (e.g., clawbacks, burdensome reporting obligations, etc.).