Decisions about how to assess subsidized housing for property tax purposes are being made in local, state and federal courts across the country, and there's little common ground.

Contrary to conventional thinking, most states do not exempt low-income housing properties from local taxation. As a result, it is critical to determine how this property type should be equitably valued on town and county tax rolls. A Connecticut superior court judge recently had a chance to take a fresh look at this issue (Saranor Apartments Limited Partner v. City of Milford).

Developed in the lovely shoreline town of Milford, Saranor Apartments was built for seniors under the low-income housing tax credit (LIHTC) program. Rents are significantly below market. Although rents can be adjusted periodically with regulatory approval, they must run approximately 20% below rents for comparable market-rate units over the 40-year life of the rental restrictions. In return, the developer obtains below market financing, which pretty much assures virtual break-even with no cash flow after debt service.

The most significant element in valuing Saranor Apartments was the fact that it was a LIHTC project. The project had been awarded almost $3 million in tax credits, or about $300,000 annually over 10 years.

How should courts set the value of LIHTC housing?

Surprisingly, the appraisal experts called by each side in Saranor were in agreement about virtually every salient feature of their assignment - except for one.

• Both experts, well-known and competent real estate appraisers, concluded that the use of the cost approach to value the property made no sense because the property would not have been built but for the subsidies and tax credits.
• Both concluded that it would be improper to find value in intangibles such as the Sec. 8 contract, or the below market mortgage or the tax credits.
• Both also concluded that there had been no sales of LIHTC properties for a number of years prior to the valuation date, and therefore resolved that the comparable sales approach was not applicable.
• Both relied entirely on the income-capitalization approach. Their gross income calculations, operating expenses and net operating income were so close as to be scary.

However, as the trial judge put it, the appraisers "disagreed on the applicable capitalization rate, and that is what this case is really about."

The owner's appraiser believed that the capitalization rate could and should be drawn from market data and that investors in LIHTC projects would seek to obtain the same returns as in market-rate projects, and perhaps even a bit better because the property lacked potential for equity and income growth.

The city's appraiser argued that the capitalization rate should be based on the subsidized mortgage interest rate granted to the property, his argument being that LIHTC investors should be willing to accept lower capitalization rates in return for the greater security of the investment. Notably, however, he offered no support for this opinion in peer reviewed literature, cases or authoritative appraisal texts.

Faced with these divergent views, the trial judge looked at other decisions including, most importantly, a 2003 ruling of the Oregon Tax Court (Wilsonville Heights v. Department of Revenue). With facts very similar to Saranor, the Oregon court criticized the state's appraiser's use of the same capitalization rate methodology employed by Milford's appraiser. It ruled that such an approach "prevents any fluctuation in value based on shifting expectations of the capital markets over time... It is fundamentally at odds with the fact that property values do, in fact, vary over time." Thus, the Connecticut trial court observed that the city's appraiser's "approach falls squarely in the line of criticism articulated by the Oregon Tax Court."

As a result of the decision, the owners' property taxes were reduced by more than $30,000 annually. This case, and the Oregon case, prove that it's possible to fight property tax assessments when assessors do not apply correct appraisal methodologies.

Elliott B. Pollack is a senior member of the Connecticut law firm Pullman & Comley, LLC, and chair of its valuation section. the firm is the Connecticut member of American Property Tax Counsel, the national affiliation of property tax attorneys. Pollack can be reached at ebpollack@pullcom.com