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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..

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Sep
23

Golf Course Owners Teed Off Over Taxes

"Taxpayers are left to rely on the courts to compel assessors to value golf courses by present use and condition only..."

By Michael Martone, Esq., and Michael P. Guerriero, Esq., National Real Estate Investor, September 2010

A battle is raging in New York and across the country between assessors and taxpayers at odds over the market value of golf courses and their associated membership clubs.

The front lines in this conflict are clearly demonstrated in Nassau County, N.Y., home to 400 overlapping tax districts and a population suffering the highest taxation burden in the state. The recession and nationwide decline in property values for golf courses have pushed many clubs into severe financial straits as thinning rosters force them to lower dues or scrap fees.

Golf_Courses_graph2One prominent Long Island club recently sold to a developer. Another declared bankruptcy, and surviving golf courses are fighting to avoid similar fates. Closures outpace new openings as demand for golf declines and revenue growth remains flat in the face of rising costs especially property taxes.

Exacerbating the tax problem are assessors who turn a blind eye to the economic forces threatening the survival of private clubs, and who instead pay undue attention to alternative land uses. Taxpayers are left to rely on the courts to compel assessors to value golf courses by present use and condition only.

In most all cases a golf course sells for a price that includes its business operation and personal property, but only the value of the real estate may be considered in setting the property tax assessment.

Development factor

Many courses are bought and sold for their development potential, grossly inflating values. Where developable land is at a premium, reliance on comparable sales could tax private golf courses from existence. The cost approach, too, is generally reserved for specialty property.

For these reasons, courts require the assessor to value the private golf course based on its value in use when employing the income capitalization approach. With this approach, a not-for-profit private club is valued as if it were a privately operated, for-profit, daily fee operation.

The courts tend to determine a golf course's income stream by capitalizing the amount a golf operator would pay a property owner as rent for the course. They use this methodology because golf course operators typically pay a percentage of gross revenues as rent. That amount can be capitalized to arrive at a value. The capitalization of golf rent to value is a hotly litigated issue and influences the percentage rent to be used.

 

Conflicting formula

Rents for golf course leases are influenced by differences in tax burdens from one location to the next. Similar golf courses operating under a similar operating basis, yet in differing locations with disparate tax burdens, must be equalized to arrive at a fair and uniform tax value. In a recent case, the court sought how best to keep the influence of high tax burdens from unfairly distorting value.

In that case, the assessor preached the application of an ad-hoc, subjective adjustment to the percentage rent to reflect a greater or lesser tax burden. This approach assumes the rental amounts would be triple-net. In a triple-net lease the tenant pays the real estate taxes, and the percentage rent is adjusted to reflect local taxes on a case-by-case basis.

The taxpayer offered another, more reliable method, the "assessor's formula". This formula lets the assessor follow the law, which calls for like-kind properties to be equally and uniformly assessed. The formula takes into account the income stream, the cap rate and the tax rate.

For example, consider two identical properties a city block apart, but in separate tax districts. One district has high tax rates, and the other a low tax rate. Because the assessor's formula weighs all three elements used to arrive at market value, it produces fair tax assessments as opposed to a subjective adjustment that is not computed on a scientific basis.

The accompanying chart shows the difference in assessments when the assessor's formula is used instead of an ad hoc, subjective tax adjustment. The assessor's formula provides a superior method that both assessor and taxpayer can rely on.

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

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Jul
24

New York Wrestles with 'Takings' Rulings

"In Kelo, the Court held that while government may not take one's property for the sole benefit of another private party..."

By Michael R. Martone, Esq., as published by Globest.com - July 2010

Constitutional limits on the government's power to take property for use by private entities for the public purpose of economic revitalization have been the subject of much debate in New York. The state has struggled to define itself in the wake of the Supreme Court's controversial 2005 ruling in Kelo v. City of New London, which sparked a national debate about the eminent domain power.

In Kelo, the Court held that while government may not take one's property for the sole benefit of another private party, it may do so for the public purpose of economic revitalization. The ruling deferred to the City's taking of private property for inclusion in its redevelopment plan, hoping to revitalize its depressed economy.

The Takings Clause of the Fifth Amendment of the Federal Constitution mandates "nor shall private property be taken for public use, without compensation." Kelo says that where a legislature adopts a comprehensive economic plan it determines will create jobs, increase revenues and revitalize a depressed area, the project serves a public purpose and qualifies as a permissible public use under the Takings Clause.

An outraged public ridiculed Kelo as a gross violation of property rights for the benefit of large corporations at the expense of individual property owners. Since the ruling, 43 states have taken legislative action limiting the use of eminent domain. New York, however, has been criticized for failing to take similar action.

Condemnation in New York

Under New York's Eminent Domain Procedure Law, the State must first conduct a public hearing and determine that a taking would serve a public purpose so as to qualify as a public use. Next, the State must provide the property owner with just compensation for property taken. Each step is subject to judicial review.

Historically, it is extremely difficult for affected property owners to challenge a finding of public necessity to prevent a taking. Courts generally defer to a legislative prerogative, and vague definitions of public purpose can be used to justify most seizures. The courts have scrutinized economic revitalization as a justifiable cause for seizure, however, property owners have challenged the power of the Empire State Development Corp. (ESDC) to force the sale of private property.

The ESDC, the state's development arm, can force the sale of property either for a civic purpose or to eradicate urban blight - amorphously defined as substandard and insanitary. Two recent decisions closely examined the ESDC's involvement with private development projects in the name of economic revitalization.

Atlantic Yards Project

In Goldstein v. NYS Urban Development Corp., the Court of Appeals upheld the ESDC's taking of private properties in Brooklyn for inclusion in a 22-acre mixed-use development project known as the Atlantic Yards. The project includes a basketball arena for the New Jersey Nets and 16 commercial and residential high-rise towers.

The ESDC relied upon studies finding that the area was blighted and warranted condemnation for development. The Court noted that the removal of blight is a sanctioned predicate for the exercise of eminent domain and rejected the challenge to the blight findings, accepting as reliable the comprehensive studies supporting the ESDC's determinations.

The Court said it must defer to what is the legislature's prerogative and may intervene only where no reasonable basis exists, which was not the case in Goldstein. The dissent invited close scrutiny of blight findings, arguing that the courts give too much deference to the self-serving determinations of the ESDC.

Columbia University Expansion

Meanwhile, in Kaur v. NYS Urban Development Corp., the Appellate Division rejected as unconstitutional the ESDC's takings to assist Columbia University in building a satellite campus in the Manhattenville area of West Harlem. The court denounced the ESDC's blight determination as mere sophistry that was concocted years after Columbia developed its plans. Citing a conflict of interest, the Court chastised the ESDC for hiring Columbia's own planning consultant to conduct the blight study.

The Court declared that as a private, elite institution, Columbia could not claim a civic purpose to its expansion sufficient to meet the public use standards. That the University was the sole beneficiary of the project is reason alone to invalidate the taking, the Court wrote, especially because the alleged public benefit is incrementally incidental to the private benefits of the project.

The State appealed and it remains to be seen how the Court of Appeals harmonizes the Appellate Division's aggressive Kaur approach with its own deferential Goldstein holding. The rights of property owners throughout the state hang in the balance.

MMartone_ColorCorrected

Michael R. Martone is the Managing Partner in the Mineola law firm of Koeppel Martone & Leistman, L.L.P., the New York State member of American Property Tax Counsel, 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.. Michael Guerriero contributed to this column. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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