blog
By: Kim Hoffman
Recent legislation in Dover could give Delaware counties subpoena power to obtain information relating to any property’s fair market value. Property owners should consider steps to avoid disclosing sensitive business information when responding to an assessment–related subpoena.
Senate Bill 230 (SB 230) recently passed the Delaware House of Representatives and now heads to the Senate. If enacted in its current form, the bill would grant Delaware’s three counties authority to issue subpoenas and compel testimony from property owners, even when there is no pending tax assessment challenge.
While the measure is intended to strengthen counties’ ability to fully evaluate whether the present assessment reflects fair market, and adjust assessments accordingly, property owners may have to provide a wider range of information than an applicant might normally present to a county, even in an assessment appeal.
SB 230 signals a willingness to use subpoenas to proactively pursue assessment increases outside the normal reassessment cycle. In contrast, when a property owner files an assessment appeal, normally the board is limited to an appraisal and the assessor’s testimony, unless the county brings in its own expert. An appraisal will discuss a wide range of information, from the physical condition of the property to how it generates income. However, subpoenas will give the county the ability to “go around” the appraisal to information it is based on, and to assemble its own evidence of value outside the reassessment and tax appeal process. To prepare for this possibility, property owners should understand the types of evidence relevant to determining fair market value (FMV) and thereby driving assessed value, to understand what may have to be produced.
Property values are determined by applying the Uniform Standards of Professional Appraisal Practice (USPAP) by law. One possible valuation method under USPAP is the “income” approach, which considers the revenue a property generates. Because of this accepted methodology, a subpoena issued under SB 230 could potentially require property owners to produce materials such as:
USPAP also allows the comparable sales approach. Since the best “comp” is the past sale of the subject property, SB 230 could potentially require production of:
Excepting recorded conveyance documents such as deeds, a buyer and seller normally expect these materials to remain confidential. In other words, the County could obtain documents that go far beyond basic property information, and which may contain proprietary or commercially sensitive business data.
While protecting sensitive business information has always been important in litigation or administrative proceedings, SB 230 could make proactive planning even more critical for Delaware property owners. Based on years of experience handling property tax appeals, here are several practical strategies property owners should consider.
Property owners should consider retaining legal counsel to hire and oversee appraisal preparation. When attorneys retain the appraiser and direct the work, communications and draft materials may qualify as attorney work-product, which can help shield them from disclosure in response to subpoenas.
Leases often contain business information that goes beyond rent terms or valuation factors. Property owners may want to review standard lease forms to determine whether sensitive representations, such as tenant financial viability, could be handled in separate agreements or documents rather than embedded in the lease itself. This approach may reduce the amount of sensitive information disclosed if leases are subpoenaed.
Lease agreements should clearly address subpoena and disclosure obligations. Well-drafted confidentiality provisions can require landlords and tenants to promptly notify each other if a subpoena is received, allowing all parties to:
No strategy completely eliminates the risk of unwanted disclosure in a response to a subpoena, in and out of adversarial proceedings. However, thoughtful document management and legal planning can:
In most cases, commercial leases reflect market rates, and documentation produced during valuation disputes will simply confirm that fact. However, property owners should evaluate their lease structures and related agreements in light of potential reassessments and heightened scrutiny. For example:
Some policymakers have raised questions about valuation methodologies used in reassessments. However, abandoning the income approach or broader USPAP standards as some have discussed could create serious disruption across the real estate, lending, and appraisal industries. The word “uniform” in USPAP is first for a reason: without consistent valuation methods across the lending, assessment, leasing, and sales landscape, anomalies arise, such as a bank appraisal and assessment determination using markedly different criteria, reaching grossly disparate results. Such confusion abounded before recent changes because appraisers had to try to determine what a property’s value was in say, the 1980’s.
The USPAP valuation framework is deeply embedded in financing, underwriting, and real estate transactions nationwide. Any changes where Delaware departs from those standards should involve careful consultation with appraisers, lenders, and real estate practitioners.
Finally, counties eager to boost revenue could inadvertently find themselves stuck with USPAP’s comparable sales approach. Sometimes, no good comparable sale presents itself. (Like when assessing say the only large-scale data center in the state.) Furthermore, comps could mask an unusually high rent situation, which the income approach might reveal. If the present downward trending office lease market wags the dog and provokes counties to abandon valuation based on the income approach, then the income approach will not be available to support future revenue increases.
SB 230 now awaits action in the Delaware Senate. As the state continues to navigate the aftermath of the recent statewide property reassessment, stakeholders across Delaware’s real estate community will be closely watching how this legislation evolves. Property owners concerned about assessment issues, responding to government inquiries or about protecting sensitive business information if served with a subpoena, should consider seeking legal guidance early.
Our team can help. Schedule a consultation with Kimberly Hoffman to discuss or call 302.888.5209.
Some policymakers have raised questions about valuation methodologies used in reassessments. However, abandoning the income approach or broader USPAP standards could create serious disruption across the real estate, lending, and appraisal industries.
