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Feb
17

Lighten the Load - How to Ease a Threat to Affordable Housing

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.

Wanted: Consensus

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.

Emily Betsill Emily Betsill is a partner in the Washington, D.C. law firm of Wilkes Artis Chartered.  The firm is the District of Columbia, Maryland and Virginia member of American Property Tax Counsel, the national affiliation of property tax attorneys.  You may reach Emily via email at This email address is being protected from spambots. You need JavaScript enabled to view it.

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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..

 

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