Judge calls DCF for energy plant a ‘financial haruspication’

BVWireIssue #162-3
March 16, 2016

The valuation of a waste-to-energy plant in Bridgeport, Conn., is the subject of an ongoing property tax dispute between the plant’s owner and the city. The company accuses the city of inflating the property’s valuation in order to fill gaps in the city's budget, according to a report in the ConnecticutLawTribune. The company, Wheelabrator, values the plant at $200 million while the city says the value is $400 million.

Say what? In state superior court, the judge reduced the amount to $314 million and rejected the DFC approach the company used, calling it "financial haruspication,” or akin to the archaic technique of using the entrails of sacrificed animals to predict the future. The judge said the proper valuation method is the reproduction cost approach. On appeal, the state’s Supreme Court said that the trial judge erred by dismissing the DCF approach without offering a legal rationale for doing so, even though some experts said it was the appropriate way to evaluate this type of facility. A new trial was ordered on the valuation issue.

Cash-starved municipalities sometimes veer away from traditional real estate valuation methods in favor of business valuation methods that can produce a value that encompasses intangible assets—which are not subject to property taxes in some jurisdictions. Of course, the practice of inflating valuations may be inadvertent. Regardless, it presents an emerging valuation practice opportunity, as many commercial property owners may be paying too much tax.

What to do: First, examine the local areas to see whether the laws exempt certain intangible assets from commercial property taxes. Then, determine whether the assessment for the client’s property includes the value of exempt intangible assets. If it does, these exempt assets must be identified and valued in order to subtract them from the assessment.

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