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No Consistency in Valuing Housing Tax Credit Properties |
By Gilbert D. Davila, Esq., as published by Affordable Housing Finance, January 2006
The unique characteristics of low inome housing tax credit (LIHTC)
properties make it difficult for assessors to agree on how to value them for
property tax purposes. Vagueness in state statutes and conflicting court
decisions across the country provide little guidance to either assessors or
property owners.
It's important for owners to find out if their state directs
assessors in how to value LIHTC properties. If it does, what kind of direction
are assessors given? Does the state want assessors to apply case law (court
opinions) or statutory law (codes)?
Debates continue in the appraisal community about how assessors
should value a tax credit project. First, assessors grapple with whether to use
LIHTC property's restricted rents or to use conventional market rents when
applying the income appraoch to value a project. Another matter is whether the
tax credit benefits should be treated as tangible or intangible value in the
valuation equation. Tangible versus intangible becomes a crucial factor because,
in most jurisdictions, assessors cannot include intangible values in their
property tax assessments.
Because most states still do not have court cases or statutes on
the books that provide guidance about what rents to use and whether tax credits
have a tangible or intangible value, the debate between assessors and LIHTC
owners rages onl Even among the states that do address these issues via case
law, no uniformity exists about how to value LIHTC properties for assessment
purposes. An examination of varying state court decisions demonstrates this
point and also will prove helpful to owners in determining whether to appeal
their property tax assessments.
Twelve
states have court decisions that address the property tax assessment of LIHTC
properties and can be cited as precedent in other cases. The differences between
the states' decisions hinge on whether the courts feel that the tax credits
provide intrinsic value to the property, and thus should be included in the
valuation equation, or whether they treat them as nontaxable intangible
property.
Recent court decisions like Huron Ridge LP v. Township of
Ypsilanti are proving problematic for LIHTC property owners. In Huron
Ridge, decided in 2005, the Michigan TAx Tribunal deliberated whether the
influence of the tax credit, restricted rents and other requirements imposed
under Sec. 42 must be accounted for when determining the market value of a
142-unit complex. The tribunal decided that the LIHTC value influence must be
part of the valuation equation because the benefits associated with a tax credit
property would be included in a potential buyer's evaluation of the project. The
tribunal stated:
"LIHTC properties can be sold, in which case the purchaser
'steps into the shoes' of the prior owner with respect to the remaining
credit... The tax credits in this case provide a 'considerable benefit to the
owner.' ... The benefits are transferable with the real estate and clearly
would be considered by a purchaser in a market transaction."
Courts in New Hampshire and South Dakota have recently handed down
decisions similar to the Huron Ridge case. In Epping Senior Housing
Associates, LP v. Town of Epping, New Hampshire's Board of Land and Tax
Appeals held that the LIHTCs were one of the bundle of rights that the property
owner enjoyed by the purchase and development of the project, so they should be
included in the property's valuation. Similarly, the Supreme Court of South
Dakota found in Town Square Limited Partnership v. Clay Conty Board of
Equalization that the "tax credits make ownership of the subject property
more desirable ... and enhance the value of the property in the marketplace."
Thus, LIHTCs must be taken into consideration in the property's assessment.
Courts in North Carolina, Connecticut, Kansas, Tennessee and Idaho have also
ruled that assessors should consider LIHTCs in their property tax assessments.
In only five of the 12 states with court decisions on LIHTCs have
those decisions sided with the taxpayer, holding that tax credits should
not be considered when valuing LIHTC properties. For example, in
Maryville Properties, L.P. v. Pat Nelson, Assessor, the Missouri Court
of Appeals reversed a State Tax Commission decision allowing tax credits to be
included in valuing a LIHTC project. The court held that tax credits are
intangible personal property and thus not subject to real property taxation. In
classifying the tax credits as intangible property, the Maryville
Properties court stated:
"LIHTCs are not characteristics of the property. Rather they are
assets having direct monetary value. Their restricted transferability doe snot
destroy their essential status as intangible property having value primarily
to their owner. Objective standards should be used for determining fair market
value in the market place. The particular circumstances of the owner are not a
proper consideration."
The Washington Court of Appeals, in Cascade Court Limited
Partnership v. Scott Noble, King County Assessor, similarly held that
LIHTCs are intangible personal property that could not be considreed by
assessors when valuing real property. In a pending case in Oklahoma, a court
will soon decide whether tax credits are intangible property not subject to
taxation in that state.
An Arizona Tax Court focused on a LIHTC project's restricted
income potential when siding with the taxpayer in a tax assessment suit. In
Cottonwood Affordable Housing v. Yavapai County, the Arizona court
stated that a property's value should be determined from its restricted income
potential, without regard to tax credits. The court further ruled that while
LIHTCs do provide an inventive for an investor or developer to invest in and
construct these low income housing projects, they also act as a disincentive for
a current owner to sell, and provide little or no incentive for a new buyer to
purchase the property. Thus, the court found that LIHTCs add little, if
anything, to the long-term value of a property.
Finally, courts in Montana and Oregon have also come down on the
side of the taxpayer in LIHTC assessment cases. Specifically, the Supreme Court
of Oregon ruled in the Baybridge Associates Limited Partnership v.
Department of Revenue that the LIHTC program was a "governmental
restriction as to use" and thus could not be taken into account in determining
the true cash value of property for ad valorem tax purposes.
It is hard to predict how a court will rule on an issue as
complicated as the valuation of LIHTC properties. Conflicting court decisions
prove problematic for both the owner of a tax credit property and for the
assessor. Nonetheless, everyone's best interests are served when statutes
address valuation issues rather than providing courts the opportunity to make
law.
State statutes
Fourteen
states have passed legislation addressing the valuation of LIHTC properties. All
of these state statutes provide valuation guidance beneficial to both affordable
housing developers and assessors. A majority of the state statutes address the
LIHTC valuation issue from an income perspective. Other statutes reference tax
credit properties on a broader level.
Several states mandate that LIHTC properties be assessed under the
income approach of appraisal and that assessors exclude from income the benefit
associated with the tax credits. The most recently enacted legislation in thi
vein comes out of New York state. In October 2005, Gov. George Pataki signed the
Affordable Housing Property Tax Assessment Bill. The legislation amends the
state's Real Property Tax Law by adding Sec. 581A, which requires local
assessors to assess affordable housing projects under the income approach,
excluding the tax credits from income. This statute grants a victory to LIHTC
property owners. The income approach to property valuation, as opposed to the
coast approach or market approach, often results in reduced assessments because
of the restricted rents received by a tax credit property. This las was not
intended to include new York City properties, but it does currently and will
have to be amended in the next session of the state legislature.
In California, Maryland, Nebraska, Illinois and Iowa, legislatures
enacted statutes similar to New York's. For example, Sec. 402.95 of California's
Revenue and Taxation Code states, "in valuing property under the income method
of appraisal, the assessor shall exclude from income the benefit from federal
and state low-income housing tax credits." Similarly, Maryland's statute gives
assessors perhaps one of the most explicit mandates. Sec. 8-105 of Maryland's
Tax Code states:
In determining the value of commercial real property developed
under Sec. 42 ... the supervisor:
(i) shall consider the impact of applicable rent restrictions
... required by Sec. 42;
(ii) may not consider income tax credits under Sec. 42 ... as
income attributable to the real property; and
(iii) may consider the replacement cost approach only if the
value produced by the replacement cost approach is less than the value
produced by the income approach ..."
Other states like Georgia and Utah address the LIHTC valuation
issue in broader terms. For instance, Georgia's Revenue and Taxation Code
states, "the tax assessor shall not consider any income tax credits with respect
to real property" when determining the fair market value of property.
Pennsylvania, Alaska, Wisconsin, Colorado, Florida and Indiana are the
additional states that have enacted legislation specifically prohibiting the
inclusion of LIHTCs in the valuation equation.
It appears that legislatures, more than most courts, clearly
understand the inherent difficulties in assessing LIHTC properties. Thus, owners
and developers of tax credit properties would be well advised to lobby their
state legislators to enact statutes similar to the ones discussed here,
especially in those states with negative court decisions (seven states) or no
case law at all (23 states).
Gilbert Davila is a partner with the Austin-based law firm of Popp, Gray & Hutcheson, LLP. Popp, Gray & Hutcheson devotes its practice exclusively to the representation of taxpayers in property tax appeals and lawsuits and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Davila can be reached at gilbert@property-tax.com.
