Over the past three decades, the federal Low-Income Housing Tax Credit (LIHTC) Program has proven to be a crucial tool for creating housing for low- and moderate-income residents. Yet the communities created under the program operate on a fine margin that can be jeopardized by unfairly high property taxes. Unfortunately, taxpayers and taxing authorities have yet to reach consensus on how to value LIHTC assets.
In the face of this dilemma, stakeholders can take action by educating assessors on the mission of the LIHTC program and accurate valuation for property tax purposes.
Codified in the Tax Reform Act of 1986, the LIHTC program offers incentives to create rental housing for low-income residents. Eligible developers earn annual tax credits for 10 years, in an amount equal to a percentage of development costs. In order to raise capital for development or renovation, developers typically sell those credits to investors.
The tax credits are the linchpin of the LIHTC program, because the costs of the project far exceed the value it creates. Given the often onerous demands of the federally funded, state-managed program, projects would otherwise be infeasible.
To begin with, the LIHTC program stipulates flat rents tied to the local median income and the average number of bedrooms per multifamily unit. At the same time, developers must pay for mandatory reporting and fund community programs. Failure to meet those requirements during the first 15 years after a project’s completion triggers a federal recapture of the tax credits, with interest. As a result, net operating income at LIHTC properties is often flat for many years and then declines as expenses consume more and more capital.
Sadly, many authorities mistakenly believe that the guaranteed rents generated LIHTC communities reduce the owner’s risk and make the assets more valuable than market-rate properties. This misconception leads to overvaluation, thus inflating tax liability and likely rendering a project infeasible.
When valuing LIHTC properties, taxing authorities should be mindful of the program’s goal: to help communities provide housing for financially challenged people.
The generally accepted approach to valuation is the income method, which applies in-place rents and, for vacant units, LIHTC-approved rents. Gross rents at LIHTC properties are pegged to the local median income, so rent increases tend to be minimal.
On the debit side, assessors should use actual operating expenses, which for LIHTC properties are substantially higher than those of market-rate properties. If assessors instead value an LIHTC property based on market rents or operating expenses, they will overstate NOI and therefore the property’s true market value.
Some authorities advocate including the depreciated value of the tax credits in property tax assessments. Taxpayers have countered that the credits’ only real value is the intangible one of providing good-quality housing for renters with moderate and low incomes. The tax credits merely bridge the gap between construction costs and the value created through development.
Including these tax credits in the assessment erroneously produces above-market valuations and excessive tax liability for properties that are clearly less valuable than those able to charge market rents and are unburdened by LIHTC programming and reporting costs.
Many legislatures have at least partially codified the proper valuation of LIHTC properties. In many jurisdictions where the law is silent, courts have rendered decisions addressing, at least in part, the valuation of LIHTC properties.
Given the lack of consensus on valuation, a taxpayer challenging an assessment of an LIHTC property should know the relevant statutes and case law. In jurisdictions that lack statutory or case law, the taxpayer must make sure that authorities understand the LIHTC program and the need for policies that further its goals.
In jurisdictions where legislation has not overturned unfavorable case law, or where the code is incomplete or silent, taxpayers need to organize and lobby their legislators to act. Ask them to codify assessment principles that lead to reasonable taxes. That step will contribute significantly to the LIHTC program’s mission.