Savvy property owners across Tennessee reaping dramatic tax savings because of loopholes in, and timid enforcement of, a 1976 law intended to prevent farmers being taxed off their land

Audrey Dixon

KNOXVILLE, Tennessee , October 14, 2012 (News Sentinel ) – Real estate investor Michael Lightman hopes to cash in on a lush woods located in the midst of top-dollar real estate development in east Shelby County, and taxpayers are subsidizing his gambit.Lightman bought the 27-acre stand of long-needle pine, oak and maple in 1998 as FedEx opened its colossal technology campus, the FedEx World Tech Center, just across Bailey Station Road in Collierville, Tenn. He's attempting to sell the property for $7 million and more than double his investment.

Yet Lightman paid just $347 in county property taxes on the land last year -- less than the bill on a $35,000 home -- after Shelby County Assessor of Property Cheynne Johnson enrolled it in a widely exploited, poorly regulated state farmland protection program.

According to county records, Lightman receives a $53,000-a-year property tax discount on the tract, though it's advertised for sale as a prime development site for a hotel or office building.

"Taxes will eat you alive on a property like that," he said. "You've got to try to find some help."

A joint investigation by the News Sentinel and its sister E.W. Scripps newspaper in Memphis, The Commercial Appeal, found that Lightman and many other savvy property owners across Tennessee are reaping dramatic tax savings -- often paying pennies on the dollar - - because a 1976 law to prevent farmers from being taxed off their land is full of loopholes and timidly enforced by many of the state's 95 assessors.

MANSIONS GET BREAKS

The newspapers found that more than half of the land in Tennessee -- nearly 15 million acres -- is enrolled in the program, the vast majority in rural counties where agriculture is the dominant industry. Yet in urban areas the tax rolls show evidence of significant abuse -- from wealthy estate owners living in mansions on huge tracts of land to real estate developers escaping much of their annual tax bills by declaring a woods a timber preserve, a manicured lawn a pasture, a future subdivision a farm.

The 1976 Agricultural, Forest and Open Space Land Act, or "Greenbelt Law," is subsidizing estates and hobby farms of business icons such as AutoZone founder J.R. "Pitt" Hyde, a Memphis multimillionaire, and some of the biggest names in country music, Wynonna Judd among them. Former University of Tennessee football coach Phillip Fulmer qualifies by baling hay on his $2.8 million, 47- acre Maryville estate.

Generous farm and forest tax breaks are in force for estate after estate along Nashville's tony Chickering Road, though official paperwork at the Davidson County Assessor's Office at times provides little evidence of how the properties qualify. Among the recipients: former Tennessee Gov. Phil Bredesen, a wealthy health care entrepreneur; and billionaire Thomas Frist Jr., co-founder of Hospital Corp. of America.

Even Knoxville's private Cherokee and Holston Hills country clubs have been sheltered under the "open space" provision of the law.

In some instances, the law is actually subsidizing the land speculation it was created to combat.

In 2009, for example, Shelby County's Johnson cut 97 percent from the value of an East Memphis field for sale for commercial development and surrounded by a 127-room Hyatt Place Hotel, ServiceMaster offices and a strip shopping center. Annual taxes on the $2.99 million, 65-acre site owned by Forest Hill Associates loomed at more than $48,000 if taxed at fair market value, yet fell to less than $1,000. Now, an apartment complex is under construction there.

"We've done what's right within the law," said co-owner Charles Wurtzburger.

Maybe so, with many saving big on this huge break many others are carrying the tax load.

KNOX DEVELOPER BENEFITS

In Knox County, a development called Beacon Park off Northshore Drive is classified as agricultural land and receives a $78,000 annual greenbelt subsidy, the largest in the county.

Farming isn't the long-term plan, though, for the 495-acre peninsula along Fort Loudoun Lake, a prime location for some of Knox County's million-dollar lakefront homes.

In July 2011, Schaad Companies resubmitted a 385-lot subdivision plan for the site to the Metropolitan Planning Commission. A month later, the developer applied for greenbelt status on the land, and got it. The $3.5 million market assessment for the waterfront property dropped to $207,125.

For now, the prime development land is just a hay field and timber resource, as far as the Knox County assessor is concerned.

"We would have to decide that the time is right for it not to be a farm," said Jenny Banner, CEO of Schaad Companies, developer of Beacon Park.

Asked what agricultural activity was taking place, she said, "There is hay that is taken off, and beyond that, I need to know whether there are still cattle out there or not." She would not say who farms the land, however, and when asked for details on the activity there, she said, "I'm finished talking."

From the air, Beacon Park property appears to be open fields. Tree-lined Chandler Road bisects the land. One field does have rolls of hay dotting the terrain. Whether its true use is development or agriculture is an issue that lies with the property owner and the property assessor.

"If they're filing an application for greenbelt properties, it appears to me that it's used for agriculture," said Dean Lewis, director of assessments in the Knox County property assessor's office. "I see it's prime land."

In all, there are more than 214,000 properties enrolled in the program throughout the state, shielding nearly $191 million in annual property taxes from collection, according to the newspapers' compilation of county-by-county figures. Unlike some states, like California and Vermont, which track every greenbelt dollar and even attempt to reimburse local governments for the lost tax revenue, Tennessee officials said they didn't know the cost of the program.

Statewide, an average of 5.8 percent of county tax bases are shielded under the program. The number is as high as 20 percent in some rural counties.

"You'll find out there's a lot there (on greenbelt) that shouldn't be," said Bill Boner, former property assessor in Middle Tennessee's Rutherford County, who blames his recent defeat for re- election on his aggressive attack on greenbelt abuses. Boner stripped hundreds of property owners of their tax breaks, even his brother, and created a backlash of appeals. He said political favors are at the heart of the law and many subsequent decisions by assessors to grant the tax breaks.

"This is one of the best ways to get the money to people who are going to back you," he said. "Every rock quarry we had in town, every junk yard we had in town was on greenbelt," said Boner.

FAMILY FARMS WERE TARGET

The law was crafted to protect farms, forests and open space from encroaching development that pushes up land values and causes a corresponding spike in property taxes. Under the law, farmland is taxed at its lower, agricultural "use value" rather than its market value as a development site.

Without the legislation, lawmakers determined, farmers would be taxed off their land as property values soared.

There is a penalty when greenbelt-protected land is developed. Authorities can recoup up to three years in back taxes -- some states, like Pennsylvania and Washington, recoup seven years -- and any unpaid taxes beyond that are lost. No interest is charged on Tennessee's rollback.

William Tipton, who owns land along Northshore at Choto Road, had to pay a rollback tax when he sold a part of his family farm to a developer.

A Weigel's sits on property he used to own that now belongs to a developer who promises a shopping center nearby. Across the street is the rest of Tipton's family farm, which he leases for horse pasture.

"Back when I had both sides, I had a barn and a farmhouse there," Tipton, 75, of Kingsport, said. "I had a bunch of cattle and stuff on it. I had a barn on that property where the Weigel's is."

The remainder of the family farm, 29 acres, receives a $3,043 greenbelt benefit.

When he sold his old greenbelt property across the street to a developer, the rollback that he paid came out of the sale price.

Tipton's land is the sort of family farm the law was intended to protect. "It had been in the family for about three generations," he said.

County assessors find it difficult, though, to challenge speculators and developers who also claim exemptions for prime land.

A 2008 decision on a Williamson County case appealed to the state Board of Equalization -- generally the first stop in appealing an assessor's decision -- reasoned that a developer wasn't entitled to a discount because farming on the property was "incidental" and not representative of the property's "primary purpose" -- development.

However, the Assessment Appeals Commission, the next rung on the appellate ladder, emphasized last year on a Rutherford County case that assessors should consider a property's "predominant character," and that a taxpayer "does not necessarily lose the right to preferential assessment" because of any intent "to develop the property in the future."

"We try to make sure we don't approve (greenbelt for) properties that are development properties," said George Rooker, assessor in Nashville-Davidson County. He quickly adds a caveat: Developers are as entitled as anyone else to the discount as long as they're farming, even if it's as minimal as occasionally cutting hay. "Sometimes it can be a challenge to administer," he said.

RULES CONFUSING

Johnny King, Sevier County property assessor, knows that well. Along four-lane Winfield Dunn Parkway, retail development pushes out from Sevierville to Interstate 40. Among the resorts, outlet stores and attractions from there to Pigeon Forge, at least a dozen tracts are being held under greenbelt for forest or agricultural uses.

"How do you determine if it's for a developer or if it's for an LLC and if they're cutting hay for it?" King said.

Whether a developer or a farmer is baling hay on a field, or some other agricultural purpose, King assesses based on the greenbelt application and the current use of the land."You don't want to get caught in a situation where you're accused of discriminating," he said. "It's just loaded every which way you look."

Years ago, greenbelt recipients didn't have to farm at all -- they could simply hold land for agricultural use. A 1992 amendment changed that. Now, the land must be "engaged" in agricultural production. State-approved application forms indicate a greenbelt property "must be actually used as agricultural land."

However, assessors say the law's permissiveness -- participants must average just $1,500 a year in gross agricultural income over a three-year period, an amount unchanged in 20 years -- makes it difficult to know what actual farm use even is.

"Cattle sales may be down. Hay sales may be down," said Melanie Edwards, greenbelt appraiser for Williamson County Assessor Brad Coleman. "Greenbelt is highly controversial ... but as long as they're following the law, who are we to say you can't do this?"

It's difficult to pin down violators, assessors say. Land could lay fallow for two years, then be farmed the third.

"By the time it gets into the appeal process, it could be being used (as farmland)," said Knox County's Lewis.

The law does prohibit developers from receiving tax breaks on land with "a recorded subdivision plat." The loophole: An exemption is allowed if development occurs in phases and the exempted land is located in a phase not yet under development.

The parcels also are supposed to be at least 15 acres. That was the requirement that ended the greenbelt exemption for Sam Furrow's ripe acreage.

The auctioneer and developer extended Outlet Drive 1,800 feet in 2011 to run beside his property in an area that's primed for development. Just across Interstate 40 is Turkey Creek, the West Knox County shopping destination with big-box stores, acres of asphalt parking lots, chain restaurants and strips of shops.

Furrow said his lots would be ideal for a Costco or similar project.

"I put the sewer in, the underground utility, the site is prepped," Furrow said.

After he made the land ready for development and split parcels, the property was too small to meet the minimum size for greenbelt credits.

At one time his subsidy had been worth more than $7,400 a year, but no more. Now Furrow is waiting for investors and the right project.

"So far I've paid a lot of taxes on it," he said. "It's good for gardening."

But it no longer qualifies as agricultural greenbelt.

NATIONAL CONCERNS

Nationally, preferential tax laws benefiting farming are abused by businessmen holding land for development despite scant evidence the programs actually prevent development, said Richard W. England, a professor of economics and natural resources at the University of New Hampshire.

"The original argument going back to the 1950s was to save the family farmer. And obviously that hasn't worked," said England, who questions the effectiveness of such laws in an April article of the Lincoln Institute of Land Policy's Land Lines magazine.

Stan Chervin, who authored a critical report of Tennessee's law for state government in 2009, said greenbelt's steep discounts place an extra tax burden on those not in the program.

"There (at times is) such an extreme difference it was just remarkable," he said.

"It's a backdoor subsidy," said Chervin, a senior research associate for the Tennessee Advisory Commission on Intergovernmental Relations, a division of state government that helps elected officials shape public policy. "If somebody's property is not valuated on the same basis ... it's just a tax burden to people who don't enjoy greenbelt assessments. There's no way around it."

Among proposed changes, Chervin recommended the state curb the dollar amount of discounts and limit the tax breaks to "those who actually depend" on farming for a living. His recommendations went nowhere.

"Agriculture has a very large presence in the Legislature in this state," Chervin said, explaining his report's lack of impact.

Tennessee Farm Bureau spokesman Pettus Read said he believes the law is fine as it is.

"We don't want it really altered at all," he said. Despite some abuses, the program is needed because farmers receive relatively few public services, such as police and fire protection, and should pay less in taxes, Read said.

Yet other states have adopted measures to cut down on abuse.

To receive a farming tax break in Minnesota, owners must either have a homestead, meaning they must live on or near the farmland, or they must have owned the land for at least seven years.

"It really limits the developers from using it," said John Hagen, state property tax division director, who oversees Minnesota's "Green Acres" preferential farm tax program.

Some states, including Maryland and California, require participants to sign long-term contracts with hefty penalties for violations. Participants in California sign 10-year contracts and face penalties up to 25 percent of the cost of the improvements plus 25 percent of the property's increased market value for development.

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How it works

Rather than being appraised at its fair market value -- the amount defined as what a willing seller would pay a willing buyer -- property is valued based on its use as a farm, woods or open space. Resulting taxes are often dramatically lower.

Going green

Tennessee's "Greenbelt Law" allows tax breaks for three types of properties.

Agricultural: At least 15 acres "engaged in the production or growing of agricultural products'' or farmed by the owner, owner's parent or spouse for at least 25 years and is used as a residence and not used "for any purpose inconsistent with an agricultural use.''

Forest: Tracts that constitute "a forest unit engaged in the growing of trees under a sound program of sustained yield management'' or at least 15 acres "having tree growth in such quantity and quality and so managed as to constitute a forest.''

Open space: At least three acres "characterized principally by open or natural condition, and whose preservation would tend to provide the public with'' benefits such as conservation of natural resources, wildlife and "relief from the monotony of continued urban sprawl.''

Restrictions in other states

Pennsylvania: Change from farm use costs violators seven years of back taxes (rollback) plus 6-percent interest.

Maryland: Participants signing a five-year letter of intent to farm who sell for development are subject to a charge equal to 5 percent of the sales price plus penalties up to 37 percent.

California: Developers violating 10-year farming contracts are subject to penalties up to 25 percent of the cost of the improvements plus 25 percent of the property's increased market value.

Washington: Violators charged with seven-year tax rollback.

Texas: Violators charged with five-year tax rollback plus 7 percent interest.

Related stories

Knox County greenbelts will be reviewed

Growing Uncertainty: Recent legal battles over the 'Greenbelt Law'

Greenbelt enforcer: Assessor says his attack on tax break misuse cost him election

Related databases

East Tennessee greenbelt properties listing

State greenbelt property listings

Greenbelts by county

(c) 2012, Knoxville News Sentinel Co.

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