Developers get farmland tax break as bulldozers approach

To protect farms from the bulldozer, Kentuckians long ago agreed to keep property taxes low on land that produces crops and livestock. But the bulldozer often comes anyway.

Take the 77-acre grassy lot at Polo Club and Man o’ War boulevards. It’s the last open space on a busy suburban crossroads with a Costco Wholesale, a Rite Aid and dense rows of homes. Work is underway to turn it into an apartment complex called WaterStone at Hamburg. It’s no longer farmed. However, the lot’s tax was slashed in 2015 to $644 under the state’s farmland-preservation tax break.

Using public records, the Herald-Leader found at least 43 large vacant properties around Lexington that have been rezoned for commercial or residential use and are owned by developers who expect to build shopping centers, homes or apartments on them. Most have a planning map on file with the city to show where buildings and streets will go.

All of these properties were classified on the tax roll as agricultural, so their assessments — and their taxes — were reduced by the farmland preservation tax break. Fayette County officials did not require any of them to be actively farmed or to be saved as green space for the future. It was enough that in the previous year, they contained at least 10 contiguous acres that once were used for agriculture.

Collectively, these 1,997 acres were assessed at a total agricultural value of $1.7 million. That was just 2 percent of their fair cash value of $96.2 million, which is the usual basis for taxation. Their average tax bill was $410, substantially lowering overhead for the developers who own them.

In effect, a tax break originally meant to prevent the destruction of farms has come to subsidize it.

“It makes a massive difference,” said Lexington developer Patrick Madden, whose family helped build the sprawling Hamburg Place retail, dining and residential community out of its Winchester Road horse farm of the same name. “This real-estate development game is tough, I’m telling you. You couldn’t afford to pay those kinds of taxes and hold onto a property for very long.”

Madden owns the 77 acres on Polo Club Boulevard where WaterStone at Hamburg soon will stand. The lot used to be farmed, but not anymore, he said.

“We’ve had cows on it at different times,” Madden said. “I couldn’t swear as to when. Maybe two years ago, around then.”

Patrick Madden

The lot’s fair cash value is $1.57 million, according to Fayette County Property Valuation Administrator David O’Neill. But O’Neill put its agricultural value at just $63,600. That’s what matters under the farmland preservation tax break. So the 2015 tax bill was just $644.

By comparison, a two-bedroom rental house across the street, assessed at $145,000, had a $1,715 tax bill.

Some neighbors say they don’t understand why a farmland preservation tax break is given to land that is neither farmed nor being preserved.

“I am surprised at how low the taxes really are on it,” said Steve Ricker, a member of the nearby Greenbrier Residents Association. “I knew that farms pay at a lower tax rate, but I had no idea it was that low. (And) I do feel there should be farming, there should be actual agriculture going on if you’re going to get this tax break.”

Part I: Tax relief intended to save Kentucky farms helps pave them instead

Part II: 10-acre lawns get benefit meant for working Fayette County farms

Part III: How other states guard against 'fake farmers' | Developers get tax break as bulldozers approach

‘Let’s not pretend’

Giving a farmland preservation tax break to a property planned for development “makes no sense,” said Richard England, professor of economics and natural resources at the University of New Hampshire.

England has studied the tax breaks for many years. Every state has its own version, to shield farmers from the rising land values of urban sprawl. But some states end the break and levy financial penalties once landowners move to develop their land, he said. Nebraska won’t allow properties inside a city limits or sanitary sewer district to even get the tax break unless owners accept permanent conservation restrictions on the land.

Richard England

“If you’re talking about 40 acres of barren land rezoned for commercial use next to a new interstate off-ramp, then let’s face it, that’s going to be developed,” England said. “So go ahead and develop it as the best use of the land. But don’t give it an agricultural tax exemption. Let’s not pretend this is going to be a farm in 10 years.”

However, a property can be farmed while it awaits construction, said Lexington developer Tim Haymaker. When circumstances permit, Haymaker said, he leases his development land to a local farmer on a year-to-year basis. Having someone grow corn and tobacco on the land keeps it cleared for when he’s ready to build on it, he said.

“Otherwise, you finally get out there and it’s a forest. It basically costs us nothing this way to keep the land cleared,” Haymaker said.

The Kentucky Department of Revenue does not provide uniform guidance to county PVAs on when they should disqualify land from the farmland preservation tax break. In Fayette County, O’Neill said he doesn’t strip a land of the tax break until the year after the lots are platted by a developer — that is, divided into smaller parcels — and work crews break ground at the site.

It isn’t fair to tax a developer’s property at fair cash value until after construction starts, O’Neill said. Even partway into development planning, unexpected delays can keep the land vacant for another year or more. Until something is built on it, it’s still capable of being used for farming, which is all the law requires, he said.

David O’Neill

“In 2008, when every developer in town was sitting on large tracts of land and the economy tanked and nobody was buying a house, nobody was building a house, nobody knew if anyone would build a house again, the idea that someday this land might have to be converted back to another use was a real possibility,” O’Neill said.

Keeping overhead low

Lexington developers say it’s common for them to hang onto empty land until the economy is strong enough to support a project and they can complete the cumbersome process — permits, hearings, plan reviews, bonds — necessary to build inside the city. The farmland preservation tax break keeps their costs down during these long periods.

“If I had to pay full taxes on all of this land, I wouldn’t buy any of it in the first place. I couldn’t afford to sit on it,” said C.M. “Bill” Gatton, a development landowner and past chairman of the University of Kentucky Board of Trustees. “You would just kill any development on land around Lexington. You wouldn’t have but about two percent of it.”

Developer James D. Baker of Baker-Haydon Properties made a different prediction.

“If they pass some sort of ruling saying ‘You’ve got to pay higher taxes,’ we’ll just pass it on to the consumer,” Baker said. “So instead of paying $40,000 for a lot, you’ll pay $45,000. Instead of paying $120,000 for a house, you’ll pay $130,000. So the question becomes, who really winds up paying this?”

Baker-Haydon Properties owns 72 acres on Spurr Road just south of Interstate 64 that it plans to turn into Unit 1 of the Masterson Hills subdivision. The fair cash value is $3.51 million. But with the farmland preservation tax break, the agricultural value is $27,600, so last year’s tax bill was $279.

Baker acknowledges that’s cheap. A relatively small house neighboring his land is taxed more than seven times as much. But unlike that house, he said, his vacant land doesn’t require any public services.

“We get nothing for our taxes there,” Baker said. “Nothing. We’ve owned that land for 15 years, 20 years, and I can’t think of any government services we’ve gotten for that land. No garbage collection, no street lamps, no real need for police or fire protection. My argument would be, I shouldn’t be paying anything!”

Emma Tibbs, an activist with the Fayette County Neighborhood Council, said that argument misses the point. Taxes on a property’s real value are part of how a community equitably collects money to support schools and local and state governments, Tibbs said. People who can afford to spend more on property are supposed to contribute more in taxes, she said.

“If you want to talk about fairness, when your typical homeowner is paying more taxes on their property than someone with this huge acreage worth millions that he’s working to develop, then that’s not fair,” Tibbs said. “It’s not fair that they get to pay the lesser ag(riculture) value, as if it were a farm, right up until they’ve actually built this massive development.”

Explore a map of Lexington properties getting farmland tax breaks

A tree farmer appeals

State officials at the Revenue Department, who provide guidance to county PVAs, say the law behind Kentucky’s farmland preservation tax break is so loosely written that property owners prevail on appeal if their tax breaks are challenged.

The officials cite an Anderson Circuit Court decision in 2009. In that case, Anderson County’s PVA stripped 87 acres of its agricultural assessment because the owner was developing his land into a housing subdivision. A plat map had been approved, there were paved roads with street signs, and two lots had been sold, with a real estate agent soliciting offers for others.

Clearly, this land was not a preserved farm anymore, the PVA said. So the taxable value of the property jumped from $225,000 to $885,000.

The landowner, in his appeal, said he was “currently growing timber” on the property and therefore was entitled to the farmland preservation tax break. The Kentucky Board of Tax Appeals sided with him. Those trees qualified as “the minimum requirements for agricultural property” because they could be cut and sold as an “agricultural product,” the board said. The tax break could stay while he developed the rest of the property.

Upholding the Kentucky Board of Tax Appeals’ ruling, Anderson Circuit Judge Charles Hickman wrote: “While the court believes that the evidence could have equally supported a decision in favor of the PVA ... it is not the role of this reviewing court to supplant the findings and determinations of the KTBA.”

Most PVAs have concluded that any parcel of 10 acres or more that is capable of agricultural production should be assumed to qualify for the tax break, said David Gordon, executive director of the Office of Property Valuation at the Revenue Department.

“You say they (the landowners) are obviously cheating. Well, in this case, we thought this gentleman was obviously — well, it was even platted. And the courts ruled against us,” Gordon said.

O’Neill, the Fayette County PVA, said that even if his office required active farming for property to qualify for the tax break, developers could just periodically bale the grass as hay. That wouldn’t really create more farming, he said.

“They are extremely competent business people, and if the requirement changed that there has to be something growing on that land, I assure you the developers will plant something on that land,” O’Neill said.

This story was originally published February 22, 2016 at 1:08 PM.