Menu

Property Tax Resources

Jun
06

Actual Expenses Establish Low-Income Housing Value in Dispute

"The actual expenses, coupled with the rent restrictions, would cause a willing buyer to pay less for this type of a housing project as opposed to a market-rate apartment complex. Thus, the taxpayer carried its burden in proving that its property tax assessment was excessive..."

By Gregory F. Servodidio, Elliott B. Pollack as published by Affordable Housing Finance Online, June 2013

Property owners and assessment authorities continue to clash over the proper valuation for property tax purposes of rent-restricted, low-income housing. One of the most recent disagreements flared up in the small town of Beattyville, the county seat of Lee County in east central Kentucky.

A developer had converted a former Beattyville school into 18 units of low-income housing apartments. In connection with that conversion, authorities placed a restrictive covenant on the land use, to remain in place for 30 years. Under the restrictions, the Beattyville School Apartments could only take in tenants with incomes equal to or less than 50 percent of the local median income.

The Lee County property valuation administrator valued the property for tax purposes at $662,700, or about $37,000 per unit, in 2011. This value appropriately excluded any value attributable to the issued tax credits. Nevertheless, it was still well above the value of $130,000, or about $7,200 per unit, that the taxpayer presented on appeal. What created such a dramatic gap between those opinions?

The Kentucky Constitution mandates that assessors must value all property for tax purposes at fair cash value, meaning the price that the property is likely to bring at a fair voluntary sale. In arriving at fair cash value, the assessor is not obligated to consider every characteristic of a particular property, but the law requires her to consider those factors that most impact the property's value. In the case of rent-restricted, low-income housing, this requires considering those property characteristics that differentiate the asset from market-rate housing.

Interestingly enough, Lee County's assessor and the taxpayer agreed on just about all of the steps in estimating the property's fair cash value. Specifically, they agreed that the income approach to value was the most appropriate valuation methodology for this property type. They further agreed that the property's actual restricted rents should be used in the development of the income approach. They even agreed that the income approach should use a 10 percent capitalization rate, which is surprising, considering that capitalization rate selection is often a subjective determination and a point of contention between opposing valuation professionals.

The consensus broke down on the issue of expenses. The county's assessor had obtained the property's actual audited expenses as reviewed and approved by both the Department of Housing and Urban Development and the Kentucky Housing Corp. The assessor deemed those expenses to be excessive and decided to cap the expenses used in her valuation model at 35 percent of income. The assessor used the same expense ratio to value other businesses in Lee County. Using lower, capped expenses as opposed to actual expenses produced a value that was five times higher than the taxpayer thought it should be.

On appeal, the hearing officer for the Kentucky Board of Tax Appeals sided with the property owner on the expense issue. He concluded that it was inappropriate to cap the expenses used in the income approach since these expenses are to a certain extent a function of applicable state and federal law, which pushes them higher than those at market-rate apartments. To ignore the actual expenses is to overlook an important characteristic of the property that has a significant impact on its value.
If the assessor felt that the actual expenses were excessive for specific reasons, she could have provided evidence to that effect at the appeal hearing. Simply arguing that they were too high, however, was insufficient to convince the hearing officer to reject the use of audited and approved expenses.

The actual expenses, coupled with the rent restrictions, would cause a willing buyer to pay less for this type of a housing project as opposed to a market-rate apartment complex. Thus, the taxpayer carried its burden in proving that its property tax assessment was excessive.

In concluding that the complex should be valued at $150,000, the hearing officer and in turn the Board of Tax Appeals were mildly critical of the taxpayer's valuation presentation. The hearing officer noted that the taxpayer's appeal petition valued the property between $110,000 and $150,000. During the hearing, the taxpayer refined its value position to $130,000, but in a way that was not entirely clear from the record.

Citing an earlier Kentucky court ruling, the Board of Tax Appeals refused to put the taxpayer in a more advantageous position on appeal than the position it had staked out in its filing. This serves as yet another confirmation that a taxpayer should place the lowest supportable value on its appeal form, so as not to place a floor on its value position during the appeal process.

 

GServodidio pollack

Gregory F. Servodidio, CRE, and Elliott B. Pollack represent clients in property tax appeals and eminent domain matters at the Connecticut law firm of Pullman & Comley, LLC, the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Servodidio can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Pollack at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Continue reading
Nov
20

Is a Consensus Emerging on LIHTC Property Valuations?

"Rental rates and asset values have fallen to staggering lows, while snowballing vacancy has sapped income from commercial projects across property types and markets. And with local governments determined to maximize revenue from shrinking tax bases, it is more important than ever that property owners know the best recipes to minimize tax bills..."

By Douglas S. John, Esq., as published by Affordable Housing Finance, November 2011

For two decades, owners and managers of low-income housing tax credit (LIHTC) projects have labored to control property taxes that for many are their single largest expense. It has been a hard fight, as local assessing authorities, state legislatures, and courts have struggled to develop clear policies on the many complicated valuation issues that LIHTC properties create.

The last 10 years have brought significant clarification in many jurisdictions. At least 32 states have established some statewide guidance to taxpayers on LIHTC valuation, with 17 states passing legislation and nine state courts issuing decisions clarifying some aspect of the law related to the methodology used to value these assets.

There is still a significant number of jurisdictions without a clear policy, but a consensus may be emerging. Here is a rundown on progress­ and remaining challenges ­in those states that have addressed the valuation of LIHTC properties.

Differing valuation methods

Few jurisdictions prescribe a valuation methodology for LIHTC projects, but the vast majority of assessing authorities use the income capitalization approach rather than sales comparison or cost method.

Almost all jurisdictions and appraisal literature agree that the sales comparison method is inapplicable to LIHTC properties because these assets rarely, if ever, are sold. When LIHTC transactions occur, finding similarly situated properties is difficult because land-use restrictions can vary greatly from project to project.

Similarly, the cost approach is a poor indicator of LIHTC property values for several reasons. First, the actual development costs for these assets typically exceed those for an otherwise comparable, market-rent property. Most LIHTC projects include additional amenities to serve the elderly and disabled, and comply with federal regulations for subsidized housing.

Second, tax credit projects preclude the principle of substitution that is an underlying assumption of the cost approach. Substitution holds that a knowledgeable buyer would pay no more for a property than the cost to acquire a similar site and to construct similar improvements. But without federal tax credits, most low-income housing would be financially unfeasible, and thus never constructed.

Finally, taxpayers and assessing authorities continue to argue over the question of how to estimate depreciation or economic obsolescence due to the restrictive covenants and federal regulations imposed on LIHTC operations.

By default, then, the income capitalization approach is the most common method used to assess LIHTC properties. Even with the income capitalization method, however, significant disagreement persists among jurisdictions regarding its application, primarily because of the rental restrictions and tax credits associated with LIHTC properties.

An assessor valuing a LIHTC complex using the income capitalization method must choose between market rent and the property's restricted rent to derive gross potential income. A clear consensus among jurisdictions has emerged that the property's restricted rents should be used.

Currently, 30 jurisdictions mandate the use of restricted rent amounts in valuing LIHTC properties. Remaining jurisdictions provide no clear guidelines.

Credit for tax credits

There is less clarity, however, on the valuation of the federal tax credits given to owners of LIHTC properties.

Nine jurisdictions include the value of the LIHTC allocation as part of a property's net operating income. Those authorities contend that the tax credit enhances a project's value and becomes something a prospective buyer would take into account when estimating the project's value.

By contrast, 21 jurisdictions exclude tax credits from property income. The proponents of excluding tax credits point out that excessive tax assessments make low-income housing less economically feasible, and thereby undermine the credit program's goal of encouraging the development of such projects.

The courts also have emphasized that a buyer would receive only the remainder of the tax credits, if any, and a seller might be subject to a recapture of the tax credits. Thus, if the project is sold near or at the end of the 10-year period when the tax credits expire, the tax credits would not add to the value of the project.

In many jurisdictions, the decision to include or exclude tax credits from income hinges on the tax credits being categorized as intangible property under state law. The courts in Arizona, Missouri, Ohio, Oklahoma, and Washington have ruled that the tax credits are intangible and should not be considered part of income for purposes of valuation. By contrast, the courts in Georgia, Idaho, Indiana, Illinois, Pennsylvania, South Dakota, and Tennessee have reached the opposite conclusion.

Of these jurisdictions, the legislatures of Georgia, Idaho, Indiana, Pennsylvania, and South Dakota have since acted to overturn those court decisions. And in a few places including Connecticut and Michigan, tax credits were found to be intangible, but the courts nevertheless found that the value of the intangible tax credits must be taken into account for purposes of assessing an LIHTC project.

Consensus and dissent

There is certainly a greater consistency and clarity today than there was 10 years ago on the complex legal and valuation issues affecting LIHTC projects. Yet significant disagreements remain in the ways jurisdictions handle these assets.

Each state has a complex property tax system. For LIHTC project owners and managers, working with local counsel is the most effective way to understand how a jurisdiction's policy toward LIHTC valuation will affect their property tax assessment.

dough_johnsmall Douglas S. John is an attorney in the Tucson, Ariz. law firm of Bancroft, Susa & Galloway, the Nevada and Arizona member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Continue reading
Mar
25

Don't Be Afraid to Protest Property Tax Assessments

"Analyze the costs and potential tax savings associated with an appeal to ensure that the protest makes economic sense... ."

By Gilbert D. Davila, Esq. - as published by Affordable Housing Finance - News Headlines Online, April 2010

Low-income housing tax credit (LIHTC) property owners must monitor their tax valuations without fail, especially given the current economic climate. When they receive their property tax assessments, owners should ask themselves the following questions:

Should I appeal?

LIHTC owners should familiarize themselves with valuation laws and the definition of market value in their taxing jurisdiction before deciding whether to appeal an assessment. Taxable value can hinge on how the assessor treats tax credits.

Analyze the costs and potential tax savings associated with an appeal to ensure that the protest makes economic sense. Most successful valuation appeals consist of attacking errors made by the assessor, so consider the time, resources, and documents that will be required to make an effective case.

Is my data correct?

Assessors' records frequently misstate a property's age, square footage, net leasable area, number of rental units, unit mix, and amenities. Such errors can significantly increase an assessment.

Providing a current rent roll and perhaps a site plan to the assessor can help to correct these common inaccuracies. Improving the accuracy of the assessor's records is the simplest path to a lower tax assessment.

How did the assessor arrive at my valuation?

Owners must question the assessor's approach to determining value and help the assessor appreciate the unique challenges facing LIHTC owners. The most common mistake an assessor will make when deriving an LIHTC property's market value is to treat the asset like a traditional multifamily complex.

The following are talking points to help property owners and their assessors to distinguish LIHTC properties from a typical apartment complex:

Restrictions: The Land Use Restriction Agreement (LURA) and LIHTC regulations limit the property's income potential, and penalties for violations are severe. Rental restrictions cap rent per unit at much lower rates than comparable conventional properties are able to charge. Resident restrictions increase vacancy risk and complicate marketing efforts.

Expenses: Overhead is higher for LIHTC owners because they must meet certain reporting, record-keeping, and documentation edicts beyond conventional practice. The median income growth rate dictates rental rates, so when expenses growing at the rate of inflation rise faster than median incomes, a property's net operating income can decrease.

Illiquidity: Tax credits come with many restrictions. An owner cannot sell, transfer, or exchange the property unless they obtain government approval and meet certain conditions. In addition, the LURA dictates who the property can be sold to, and the property's restrictions survive a sale. The income tax benefits associated with the tax credits expire after 10 years, but the transferability restrictions may continue for another 20 years. These factors make for an extremely illiquid asset especially in today's economic environment.

Intangible value: Tax credits are not a benefit attributable to the real estate and are thus intangible value that should not be a component of the market value assessment. Owners should be prepared to provide the assessor with a copy of the LURA for the property and argue that the unique characteristics of the LIHTC project warrant a deviation from conventional appraisal methods.

Did the assessor consider equality and uniformity? Most jurisdictions require that assessments among comparable properties be equal and uniform. The fact that assessors often value LIHTC properties without considering the assessment of like projects presents an additional opportunity for owners to argue for a reduced value.

A tax credit property should fall within a uniform range of values when compared with other LIHTC properties and not with conventional apartment projects. Owners should compare their property's assessment to other LIHTC properties on a square-footage basis. If an owner's property is assessed disproportionately higher, then the owner can argue for a value reduction based on equality and uniformity, regardless of the assessor's "market value" claims.

The decision to appeal a tax assessment can yield significant tax savings when owners ask themselves the appropriate questions, identify inaccuracies, and show assessors the error of their ways.

DavilaPhoto90Gilbert Davila is a partner with the Austin, Texas, law firm Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Continue reading
Sep
23

The Tax Credit Conundrum

States moving to address proper valuations of LIHTC projects

"The cost approach calculates the expense of replacing a building with a similar one. That doesn't work in this context because without the tax credit subsidy, LIHTC projects could not be built in the first place..."

By Michael Martone, Esq., and Michael P. Guerriero, Esq., Affordable Housing Finance, September 2010.

An unfair property valuation by a local tax assessor can cripple the operation of a low-income housing tax credit (LIHTC) operation. Unfortunately, the inconsistency and uncertainty of how assessors value completed developments is a common impediment to financing LIHTC projects.

Without guidance at the state level, local assessors may value projects without consideration of the regulations that encumber the property and limit its income producing potential. Tax assessments based upon the highest use, rather than the actual use, of the property can even prevent development altogether.

The majority of states base their property tax valuations on fair market value. Typically, assessors value real estate by one of three methods—the market approach, the cost approach, or the income approach—and each presents challenges in relation to LIHTC assets.

The market approach of analyzing comparable sales is difficult to apply because there exists no market of tax credit property transactions to rely upon.

The cost approach calculates the expense of replacing a building with a similar one. That doesn't work in this context because without the tax credit subsidy, LIHTC projects could not be built in the first place.

The income approach is generally favored when valuing income-producing property, such as an apartment building that generates a cash stream of paid rent. However, conflict exists over whether to value the property based upon estimated market rents or the actual restricted rents that are inherent in an LIHTC operation.

For example, in New York, just as in many states, there existed no clear statutory guidance or case law to provide a uniform method of assessment for affordable housing. Many times assessors took the position that these properties should be assessed on an income basis as though they operated at market rents. The result was inflated property tax bills based on market rents that LIHTC projects cannot charge due to rent restrictions.

State legislation has slowly matured in this area. In 2005, New York became the 14th state to address the proper valuation of LIHTC properties. Other states that have passed legislation adopting a uniform method of assessment include Alaska, California, Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Maryland, Nebraska, Pennsylvania, Utah, and Wisconsin.

New York's Real Property Tax Law directs local assessors to use an income approach that excludes tax credits or subsidies as income when valuing LIHTC properties.

To qualify, a property must be subject to a regulatory agreement with the municipality, the state, or the federal government that limits occupancy of at least 20 percent of the units to an "income test." The law requires the income approach of valuation be applied only to the "actual net operating income" after deduction of any reserves required by federal programs.

The New York statute is representative of other states, such as California, Illinois, Iowa, Maryland, and Nebraska.

Maryland's tax code states that tax credits may not be included as income attributable to the property and that the rent restrictions must be considered in the property valuation.

Likewise, California mandates that "the assessor shall exclude from income the benefit from federal and state low-income tax credits" when valuing property under the income approach.

However, there are still many states without legislation, leaving the valuation of these projects to the whims of a local assessor who may not understand the intricacies of an LIHTC project.

MMartone_ColorMichael Martone is the managing partner of law firm Koeppel Martone & Leistman LLP in Mineola, N.Y. Michael Guerriero is an associate at the firm, the New York member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Michael Martone can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Continue reading
Jun
04

Controlling LIHTC Property Taxes

Tips to help affordable housing owners control their tax burden

"Being a unique property type established largely as a creature of government funding/subsidy programs, affordable housing assessment challenges should not take a cookie-cutter approach."

By Elliott B. Pollack, Esq. as published by Affordable Housing Finance, in a Web Exclusive AHF Newsletter, June 2009

When it comes to property tax considerations for affordable housing, one expert summed it up well. He wrote: "Opinions on the proper assessment of affordable housing real property are varied, and decisions on the best method to use in developing these assessments vary from jurisdiction to jurisdiction."

Thus, controlling the tax burden of affordable housing properties is a difficult matter about which to generalize. However, based on available guidance and experience, a number of questions should be researched by owners in all jurisdictions:

  • Is there a state statute of general application that addresses the valuation of affordable housing for ad valorem purposes? If so, is the statute applicable to the type of financing/subsidy arrangement in place at the property? For example, what income or asset tests must be met by residents for the project to qualify?
  • Has the local assessment authority issued any regulations dealing with this issue?
  • Has a state agency with oversight authority over the local assessment practices carried out its duties?
  • What restrictions are imposed on the owner? How long are these restrictions in place?
  • If the nature of the financial benefit derives from mortgage financing, when do these restrictions expire?
  • How have the courts of the applicable jurisdiction ruled on valuing these properties? What are the reported decisions from the highest appellate court or various trial courts?

Finding highest and best use

With those questions in mind, let's look at the approaches to real estate valuation: costs, sales, and income. With each methodology, determination of value requires understanding, first, and concluding what the highest and best use may be.

In this analysis, the highest and best use finding must be able to include the fact that the property is in some fashion or other rent-restricted and/or return on investment (ROI) limited and dependent on the government subsidy, guaranty, or concession for its creation and ongoing existence.

The cost approach is usually not helpful to value an affordable housing property. For older developments, depreciation and obsolescence generally become difficult to measure. For newer properties, construction cost is irrelevant unless the same government subsidy or program can be determined to be in place to support a new property. In these economically stressed days, that assumption may not hold.

The sales approach contains many of the same deficiencies since most market transactions will not be government-subsidized properties, but rather market-rate projects. Affordable housing projects tend not to trade frequently. By the same token, lack of comparable rent structures and locations will usually render the sales approach of little help.

In most circumstances, the income approach is the best methodology. As Richard E. Polton, MAI, points out, a property in the early years of its rent/net operating income (NOI) restriction covenants is probably best valued using a direct capitalization methodology. However, he continues, a project nearing the end of these restrictions, with a reasonable opportunity to revert to a market rental structure, might be better valued using a discounted cash flow approach.

In order to keep property assessment (and therefore taxes) as low as possible, a very careful analysis of the regulatory regime in place must be undertaken by the expert appraiser. Extraction of relevant provisions from the project documents, which support the restricted rent/NOI theme, usually constitutes a wise approach. Inclusion of applicable federal/state statutes and regulations to support the highest and best use conclusion will make the appraiser's report more credible and readable.

What's the cap rate?

Since the NOI of an affordable housing project should be fairly easy to establish, the key analytical challenge becomes developing and supporting a cap rate in order to express the correct market value.

The most convincing data are cap rates extracted from the sales of other affordable housing projects. If sales cannot be located in the immediate or surrounding jurisdictions, regional or national data should be obtained and examined since many larger affordable housing developments trade in the national market. This national activity typically takes place after the original developer extracts development fees and any applicable tax credits for itself and its investors.

Many experts do not think cap rates derived from market sales of non-restricted properties are terribly relevant in developing rates for income/NOI-restricted units. While restricted projects tend to be perceived as carrying lower risk due to assured income streams, appreciation is nonexistent, and major value upgrading potential such as condo conversion is usually impossible. Therefore, non-restricted properties as a group tend to sell at lower cap rates, meaning higher unit values because of the far greater upsides. Affordable housing owners should determine whether the assessing jurisdiction has attempted to place a separate value on the federal housing assistance contract, low interest rate mortgage, or rent subsidy. While these efforts may inflate value, they usually fail to meet state assessment law requirements, which reject adding the value of intangible financial assets to real estate assessments. In most jurisdictions, an attack on the effort by the authorities to assess intangibles will produce a winning assessment appeal.

The devil's in the details

Everyone would agree that a "fair" assessment should be accepted by an affordable housing project. The "devil" of achieving this goal is in the nitty-gritty associated with relating assessments to the ability of a property to carry a particular tax load.

An owner's inability to pass tax increases through in the form of rent subsidy increases or other financial offsets frequently can convince the assessor to reduce his or her expectations. In one circumstance, a tax professional found it very helpful in the prosecution of an affordable housing tax appeal to ask the owner to send leaflets to the property's 300-plus elderly residents about the tax increase concerns. The dozens of letters to the local assessor expressing concern about potential rent increases presumably had some impact in enabling the case to be settled.

Owners should also review for compatibility and consistency the assessments of affordable housing in their jurisdiction or neighboring communities. Occasionally, a tax appeal asserting lack of equalization will be victorious.

Being a unique property type established largely as a creature of government funding/subsidy programs, affordable housing assessment challenges should not take a cookie-cutter approach. An intimate knowledge of the property, applicable financing and restrictions, and market conditions become critical to keeping an assessment under control and thereby bringing taxes down. In the absence of legally binding guidelines or assessment practices and protocols applicable to affordable housing projects, an owner seeking assessment justice has much homework to do.

Pollack_Headshot150pxElliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley, LLC. The firm is the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Continue reading
Jan
05

Gain Control of Property Taxes

"Buyers of completed projects have potentially the most difficult assessment problem to overcome. In the eyes of the assessment community, the purchase price proves the market value of the property."

By Kieran Jennings, Esq. as published by Affordable Housing Finance Newsletter, January 2009

Local tax assessment rules and practices have a lasting effect on returns to developers and owners of affordable housing. Investors face many difficulties—uncertainty about property taxes should not be one of them. A developer who builds a property is subject to a different set of risks than a buyer who purchases a property as an ongoing project or for rehabilitation.

When a builder constructs affordable housing, in many cases, taxing authorities have reasonably good records regarding land sales and construction costs. Therefore the assessor's knee-jerk reaction is typically to value the property at the total cost of land and construction. For the assessor, it's fast, easy, and makes some sense; for the developer, it often means paying significantly more property tax than comparable properties. Affordable housing requires additional support to make the project viable, and an unfair tax burden can be the difference between a stable, viable property and one that fails

New projects

Prior to beginning a project, the developer should have a discussion with the assessor regarding the assessment laws and local practices. If aggressive, intervening taxing authorities, such as a local school district, exist in the jurisdiction, then prior to building it may be wise to seek payments in lieu of taxes (PILOT). Ideally the tax would be based on the prevailing taxes paid by like properties and incorporated into the budget for the project. In this way the developer has already agreed with the taxing bodies as to the amount of taxes to be paid, often over a period of five to 10 years.

Rehabilitated projects

Buyers who acquire property for rehabilitation may find that some taxing bodies tend to overreach. This tends to happen when a property is purchased at or below the assessed market value, and then the buyer immediately invests a large percentage of the project costs into refurbishing the property. These costs are public record, and because the tax credits are based on capital costs, the costs are known and well documented. What most assessors would like to do is simply add up all the land and construction costs to derive an assessment value. However, unless a fair PILOT agreement can be arranged, the property owner must not sit idly by and take costs as a measure of assessment.

Owners can make two arguments against this approach. First, assessed market value should be based on the income generated from the project. The concept of income as a measure of value enjoys almost universal acceptance in the assessing community, so the likelihood of success with this strategy is higher.

However, the second argument, "obsolesce," needs to be well-presented in order to persuade an assessor of its merit. Simply put, when buildings are rehabilitated, project costs include demolition and subsequent rebuilding of many building components. This drives the cost up significantly, yet at the end of the project the tenant can still only afford to pay what the market (subsidized or not) can bear. Therefore, for example, walls, plumbing, and wiring purchased initially, and later demolished, disposed of, and subsequently rebuilt are no more valuable to the tenant than they were initially. Finally, when discussing obsolescence with an assessor, don't use that term; merely explain that your costs do not necessarily equate to increased value. Assessors almost universally have an aversion to terms such as obsolescence.

Completed projects

Buyers of completed projects have potentially the most difficult assessment problem to overcome. In the eyes of the assessment community, the purchase price proves the market value of the property. Assessors tend not to take into account arguments such as 1031 tax deferral, purchase of reserves, or any host of non-real estate issues that actually drove the deal. As a result it may be better to set forth the argument in the closing statements by recording the properly allocated purchase price. For example, buying an operating housing project includes not only the purchase of the land and building, but also the in-place leases (no lease-up costs/concessions), the management contract, the HAP contract, and the reserves. All of these assets should be separately quantified, and only the land and building should be recorded as real estate. Note, however, that allocations and proper recording vary from state to state. Furthermore, changes in classifications may also affect federal taxes, so your federal tax adviser should be consulted prior to closing.

Or, an owner may acquire the business entity rather than the actual asset. In some jurisdictions it is permissible and advisable to buy the corporate shell, meaning the LLC or partnership interest. In such a transaction, the deed is not recorded, which may avoid the conveyance tax or transfer tax and also shield the purchase price from the public as well as the assessor. The assessor would be forced then to treat the acquired property in the same manner as any similar property. Of course, a number of states require buyers and sellers to disclose the purchase price regardless of how the property is acquired. On the other hand, some states do not require disclosure of the purchase price, even if it is a typical asset acquisition.

Finally, all owners, regardless of how they acquired or developed their properties, should understand the nuances of their taxing jurisdiction. Within the same state and county, there can be differences in how a taxpayer should plan. For instance, where the jurisdiction is friendly, it may be advisable to meet the tax authorities personally and discuss all aspects of the project. Conversely, you may be faced with aggressive assessors and equally aggressive school boards, where sales or new mortgages are sought out and records subpoenaed. By engaging local tax counsel, an owner can learn what to expect and can better plan for the long term. Assessments that go up tend to stay up and are difficult to reduce and those that are low tend to stay low. Possessing knowledge about the taxing jurisdiction makes all the difference.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Siegel Johnson & Jennings, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Continue reading
Jun
13

Tips for Reducing Affordable Housing Property Taxes

"The first thing any taxpayer needs to know to determine if they want to appeal their taxes is whether a reduction in assessed value yields tax savings. In states that place no limits on the amount of tax increase possible, owners can be certain that reduction in assessed value will generate a tax savings. However, several states' laws require the taxes rise by only a limited percentage in a given year."

By J. Kieran Jennings, Esq., as published by Affordable Housing Finance, Summer Special Edition 2007

Affordable housing owners looking for ways to save money and eliminate non-productive overhead should start by examining their property taxes. That doesn't require taxpayers to become experts in real estate tax law; they need only a working knowledge of the issues to identify when or if should hire an expert .

The basic issues

The first step in this process is to learn how assessors determine property taxes. One of the main indicators of fair market value that assessors use is the income that could be produced from the property using current rents, vacancies, and market expenses. In most states, real estate assessments are based on some percentage of a property's fair market value. Most often, the actual taxes are calculated using a millage rate (for example, $.001) multiplied by the assessment.

Right now owners of affordable housing face unprecedented increases in fuel and utility costs. And, because net income is a key indicator of market value, an increase in operating expenses likely causes a decrease in value. That means an owner's property might not be worth what the taxman says it is, and an appeal may be necessary.

Where does the taxpayer begin?

The first thing any taxpayer needs to know to determine if they want to appeal their taxes is whether a reduction in assessed value yields tax savings. In states that place no limits on the amount of tax increase possible, owners can be certain that reduction in assessed value will generate a tax savings. However, several states' laws require the taxes rise by only a limited percentage in a given year. In such states, a complex analysis is required to determine whether a reduction in assessed value actually results in a tax savings. This type of analysis calls for the skills of a property tax professional.

Some states' assessments may be based on ratios sometimes known as sale ratios or common-level ratios. In states such as New Jersey and Pennsylvania, an assessment may have originally been based on 100 percent of the appraised market value of the property, but over time that 100 percent assessment no longer reflects market value. So, at regular intervals, each county in these states conducts a study comparing the sale prices of all properties sold in a given period with the last assessed value of these same properties. For example, if the assessed values of properties sold for an average of 50 percent of the sales prices of those same properties, then the sales ratio for that period of time will be 50 percent for all properties in the municipality. This ratio then is used to convert the assessed value back to market value. Owners will want to track down the current-year ratio percentage and then review their assessment to ensure that the correct ratio has been applied in developing their assessment.

Finally, many states establish predetermined ratios. Ohio, for instance, places its predetermined ratio of assessment at 35 percent of the appraised market value every year in all counties. Assessed market value is determined by dividing the assessed value by the ratio percentage. As an example, a $35,000 assessment divided by 35 percent yields an assessed market value of $ 100,000, which then can be compared to the actual fair market value of the property. If the assessed market value appears to be higher then the actual fair market value (what a willing buyer would pay a willing seller in an arm's length transaction), then the taxpayer should consider contesting the assessment.

What can taxpayers do when over-assessed?

If you determine that your property has been over—assessed, file an appeal to reduce your real estate taxes. In some states, that will mean filing a formal complaint by a particular date. In other jurisdictions, the filing deadline depends on the mailing date of the assessment notices. Some jurisdictions mandate that parties must appeal their assessment within 15 days of receiving notice. If the deadline passes, in most jurisdictions, the taxpayer is prohibited from contesting their taxes until the following year. It is, therefore, imperative to know the local rules.

How does the taxpayer prove the case in an appeal?

As with every aspect of assessment law, proving the case varies from jurisdiction to jurisdiction. Most typically, an appeal that has merit can be proven with a qualified appraisal. However, the rules regarding how that appraisal is prepared can vary from state to state. For instance, some states mandate that actual income and expenses be used to determine the market value of the property. In other states, an appraiser or property owner must prove the value based on unencumbered market conditions. An unencumbered market condition exists when a property built under Sec. 42, with a majority of its rents restricted, is appraised as if the property were conventional apartment. However, a property that enjoyed greater occupancy or rents because of Sec. 8 rent subsidy may be able to use a lower income figure based on prevailing market conditions. The income approach to value represents the common thread across exists the country for establishing market value.

Must an attorney file a property tax appeal?

Rules governing appeals vary greatly from state to state. In most states, an attorney is not required to file an appeal at the local level, but an appeal in court almost always requires an attorney. However, in a number of states, the courts have determined that the filing of property tax appeal is the practice of law, requiring an attorney

What risks and benefits come with contesting taxes?

Risks come into play when the appeals process is poorly handled, as that can impair a taxpayer's ability to reduce a property's value to its proper level in the future. Evidence poorly presented often remains in the record and is not retractable. Furthermore, in several states and with increasing frequency, school districts participate in the appeals process. In those states, the hearings may put the taxpayer at risk for an increase in assessment, if such is warranted.

The benefits of controlling real estate taxes far outweigh any risks involved, and by spending a little time learning the process, taxpayers can all but eliminate those risks. A newly established assessment often forms the basis for future assessment. Thus, a reduced tax this year positions an owner for future years because tax increases compound over the years. Even if assessments steadily climb in future years, having started at lower base can save money indefinitely.

Keeping real estate taxes and all non-productive expenses down becomes crucial to the economic health of an affordable housing property.

KJennings90J. Kieran Jennings, partner at Siegel Siegel Johnson & Jennings Co., LPA, with offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania member of the American property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Continue reading
Feb
15

How Owners Can Keep Property Tax Bills in Check

"Creating an ongoing dialogue with the assessor becomes the key to avoiding excessive property tax valuations. This dialogue should educate the assessor about the distinctive nature of LIHTC properties and send the message that the LIHTC owner will be cooperative, yet aggressive in protesting excessive property valuations."

By Gilbert D. Davila, Esq., as published in Affordable Housing Finance, February 2007

The unique characteristics of low-income housing tax credit (LIHTC) projects make it difficult for assessors to appraise these properties for property tax purposes, and can ultimately lead to excessive valuations. However, LIHTC owners need not despair, as they can use several methodologies to determine whether property taxes are excessive and challenge those assessments.

How to recognize excessive taxation: Errors in basic data

The initial step calls for a review of the basic data contained in the taxing authority's property records. This examination offers the LIHTC owner the first and easiest place to determine the appropriateness of levied tax assessments. Assessors' records commonly contain errors in one or more of the following areas: a property's age, square footage, unit mix, and/or facility amenities. An error in even one of these fundamental property characteristics can significantly increase a property's overall assessment.

A more significant error commonly made by assessors results from their assessing a LIHTC project as if it were a traditional multifamily complex. Property codes are commonly assigned to property types, which dictate what criteria will be used in arriving at the property tax assessment. A simple coding error can result in an excessive valuation in the millions of dollars. LIHTC owners should verify that their projects have been coded as low income housing properties.

Most jurisdictions provide taxpayers with specific protest avenues to correct these common mistakes. LIHTC owners should be prepared to share a current rent roll with their assessor in order to document the property's square footage and unit mix. Owners should also provide the assessor with a copy of the property's Land Use Restriction Agreement (LURA) to confirm its LIHTC status.

Lack of equality and uniformity

LIHTC owners should ensure that their property has been valued fairly and equally in comparison to other LIHTC projects in the taxing jurisdiction. Many states require that assessments among comparable properties be equal and uniform. A LIHTC owner's assessment should fall within a uniform range of values when compared to other LIHTC properties.

For example, if an owner's project is valued at $60 per square foot and there are 10 other comparable LIHTC projects in the taxing jurisdiction valued between $40 and $45 per square foot, the owner's property should also fall within the $40 to $45 range.

This example clearly demonstrates the importance of assessors properly categorizing and coding a LIHTC project in its records. A low-income housing project should not be valued at the same level as a traditional market project.

Owners need to compare their property's assessment to other LIHTC properties on a square footage and per-unit basis. If an owner's property is assessed disproportionately higher than comparable properties on these two factors, an argument can be made for a value reduction based on equality and uniformity, regardless of the assessor's "market value" claims.

Educating the assessor about LIHTCs

In most jurisdictions, the assessor's statutory responsibility is to value a property as its "market value" as of a particular valuation date. Assessors commonly derive a market value using one or more of the three classic approaches to value: the cost, income, or sales comparison. They will encounter difficulty in applying these valuation methodologies to an LIHTC property because of the unusual restrictions imposed by the LURA.

The cost approach presents inherent obstacles for the assessor due to the need to quantify functional and, in particular, economic obsolescence brought about by the LURA restrictions. Under the income approach, the assessor experiences problems with the quantification of income (actual versus market), the extraordinary expenses incurred by LIHTC projects and the calculation of a reasonable capitalization rate. Finally, the sales comparison approach will be difficult to apply when there are no sales of comparable properties and because of the restrictive covenants that run with the land.

LIHTC owners find it beneficial to educate themselves about the difficulties assessors face when valuing projects. This helps the LIHTC owner educate the assessor about the unique characteristics of the project and helps to inspire confidence in the appraisal methodologies proposed as a solution to the valuation difficulties.

Points to discuss with the assessor

Creating an ongoing dialogue with the assessor becomes the key to avoiding excessive property tax valuations. This dialogue should educate the assessor about the distinctive nature of LIHTC properties and send the message that the LIHTC owner will be cooperative, yet aggressive in protesting excessive property valuations. The following points provide owners with arguments to prove to the assessor that they should deviate from their normal appraisal methods.

Intangible value

A debate continues among assessors concerning whether tax credits should be considered when valuing a LIHTC project. A LIHTC property's total value derives from two primary components: the real estate and the tax shelter benefits. Appraisal scholars argue that, for tax assessment purposes, these benefits should be segregated into tangible value (that is, the benefits attributable to the real estate) and intangible value (that is, the benefit attributable to the LIHTC). this classification is crucial because, in most jurisdictions, assessors cannot include intangible values in their property tax assessments.

If a LIHTC owner's property is located in a jurisdiction that does not give the assessor guidance on the tangibility issue, owners should always argue that the credits are not a benefit attributable to the real estate but rather, comprise intangible value that should not be a component of the market value assessment. This argument will always lead to reduced property values. To help bolster this argument, an owner should show the assessor sample legislation from other jurisdictions that dictates that tax credits are intangible. Even better, LIHTC owners should join forces and lobby their state legislators to enact statutes that direct assessors to exclude tax credits from the valuation equation.

Illiquidity

A LIHTC owner cannot sell, transfer, or exchange the property without meeting certain conditions and obtaining government approvals. In addition, the LURA dictates whom the property can be sold to, and whether the property's restrictions survive a sale. These factors make for an extremely illiquid asset. Most "market value" definitions assume a willing buyer and willing seller in the open market. Such a definition cannot be easily applied to a LIHTC project. Owners should argue that the illiquidity of a LIHTC project be accounted for in the property tax assessment. One suggestion is to recommend a 15percent to 25 percent discount off the indicated value via the income approach to account for the illiquidity of the investment.

Restrictions and expenses

A LIHTC property operates under limited potential due to the restrictions associated with the LURA. The restrictions are long term, with severe penalties for violations. Resident restrictions result in additional risk and effort.

In addition, LIHTC owners experience higher expenses because they must meet certain reporting, record-keeping, and documentation edicts beyond conventional practice. Rental rates are limited, but expenses are not.

Owners should insist that the assessor take into account the effects of these restrictions and expenses on a property's tax assessment. An owner could argue that the restrictions, risk, and expenses that distinguish a LIHTC project from a typical market complex support the use of a higher capitalization rate in an income analysis. This will, in turn, produce a reduced taxable value. Armed with methods of recognizing excessive tax assessments and arguments to thwart these excesses, LIHTC owners will be in a good position to gain fair taxation of their properties.

DavilaPhoto90Gilbert 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. Mr. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Continue reading

American Property Tax Counsel

Recent Published Property Tax Articles

Big Property Tax Savings Are Available

Millions of property tax dollars can be saved by understanding seven issues before buying real estate.

We asked property tax lawyers around the country for tax advice they wish their clients would request before an acquisition to avoid excessive taxation. Their responses, like tax laws, vary by state:

Ask Early. Transaction...

Read more

Use Restrictions Can Actually Lower A Tax Bill

​Savvy commercial owners are employing use restrictions as a means to reduce taxable property values.

Most property managers and owners can easily speak about their property's most productive use, in addition to speculating on a list of potential uses. Not all of them, however, are as keenly aware of their property's...

Read more

Nothing New About The Old ‘Dark Store Theory’

Statutory law continues to require that assessors value only the real estate, not the success or lack thereof, by the owner of the real estate.

Assessors and their minions frequently take the position that an occupied store is more valuable than an unoccupied store, a conclusion commonly referred to as the...

Read more

Member Spotlight

Members

Forgot your password? / Forgot your username?