Sticker Shock

How David Murdock’s real estate holdings made him the second wealthiest landowner

November, 2004

You know that feeling of dread when you open an envelope from the tax office with your name on it? Think of how the senior Hawaii managers at companies owned by David Murdock, such as Castle & Cooke Inc. and Dole Inc., must feel. Over the past year, the City and County of Honolulu’s assessment of his companies’ total assets increased by 77 percent, from $682 million to $1.2 billion. Even though no land was added in this category, the biggest increase came in the value of agricultural lands: 1,482 percent, from $30.3 million to $480 million. By comparison, the white-hot residential real estate market of the past year caused only an 88 percent increase in the assessed value of the companies’ improved residential lands, from $78.5 million to $147.9 million.

Credit the political football best known as Bill 10, which changed the way the County assessed the value of agricultural lands in 2002. The bill was designed to close the loophole on “gentleman estates” that were zoned agriculture. Previously, agricultural lands were assessed according to a per-acre flat rate based on the value of crops: $2,500 per acre for agriculture, $600 for pineapple, and $50 for pasture. Bill 10 based the value of agricultural land on fair-market assessment, which is closer to how the county assesses the value of other categories of land.

Farmers who dedicated their lands to agriculture were given significant tax breaks, based on the number of years they dedicated their lands to agriculture. Farmers later reported 20-fold increases in their assessments. Instead of encouraging agricultural use, the bill made farmers fear for their livelihoods.

“Ag land didn’t all of a sudden become more valuable,” says Dean Uchida, executive director of the landowners’ lobbying group Land Use Research Foundation. “Some of the comps [comparable sales values] they were using were like $35,000 to $50,000 an acre … so you can see the dramatic change,” Uchida says. “It’s ironic, because the very reason they made the change was to go after those gentleman estates, but they’re using the sale of gentlemen estates as a comp for agriculture.”

Uchida says that the real estate industry uses three standards for appraising land: income, comparable sales and replacement costs. Uchida says, “The City and County, in general, have basically eliminated income as one of the approaches in determining valuation. And they do it across the board for residential, commercial, industrial, resort, everything.” He says that might result in consistent values across zones in urban lands, but that doesn’t hold water for agriculture and natural resource lands, whose values are tied to their productivity, or yield.

Eventually, outraged farmers lobbied the County to give them relief. This September, a compromise between the County Council-appointed Task Force on Agricultural Real Property Taxes and Mayor Jeremy Harris’ administration changed the formula into one that incorporated both land and crop values.

Lands dedicated for one year would be assessed at 5 percent of fair-market value; for five years, 3 percent, and 1 percent for 10 years. Pasture land would also be assessed at 1 percent of fair-market value. In addition, agricultural production values formed the basis for a per-acre cap on assessments. So while the assessments on Castle & Cooke Inc.’s and Dole Inc.’s ag lands may remain high, a simplistic, rough calculation shows that, if the companies dedicate all of their land to agriculture for 10 years, the actual tax it pays could be based on as little as $4.8 million, 1 percent of the fair market-assessed value of $480 million, significantly lower than the $30.3 million value from last year.

That picture could be complicated by the value of any vacant lands, which were previously assessed at full fair-market value. Unused agricultural land, a new classification, would be assessed at half its fair-market value if it was dedicated to agriculture for 10 years. Other vacant land, including wasteland, would continue to be assessed at 100 percent of fair-market value. “It’s not entirely fixing the problem, but it does provide the necessary fairness for agriculture that was lacking before the change,” Uchida says.

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Author:

Maria Torres-Kitamura