"Wisconsin Supreme Court reaffirms subsidized housing valuation methods."

In a major victory for subsidized housing developers and investors, the Wisconsin Supreme Court has reaffirmed longstanding principles governing the assessment of these properties.

The Dec. 22, 2016 decision in Regency West Apartments LLC v. City of Racine confirms that the assessment of a subsidized housing project is a property-specific exercise that must take into account the type of federal program involved, specific restrictions on the property and actual property income and expenses.

The decision also affirms that the value of a subsidized property cannot be determined by comparison to conventional apartment properties that have no restrictions and can charge full market rents.

Historical context

The Wisconsin Supreme Court first upheld these principles in a 1993 case involving a Milwaukee apartment project subject to rental and other restrictions imposed by the U. S. Department of Housing and Urban Development (HUD).

The assessor had valued the property based on market rents at conventional apartments, ignoring the property owner’s inability to legally charge market rents. The Supreme Court nullified the assessment, stating that the assessor had illegally assessed the property by “pretend[ing]” that the HUD restrictions did not apply.

The new decision

In the December 2016 decision, the Supreme Court reaffirmed the 1993 decision and announced additional rules governing what assessors cannot do in assessing subsidized housing.

That case involved 72 rental units regulated under Section 42 of the Internal Revenue Code, which provides federal income tax credits for investors in affordable housing. Regulations governing the property restricted both rent and tenant income levels, and required the owner to enter into a 30-year land use restriction agreement.

For the first of the two tax years in issue, the assessor valued the project under an income approach but failed to consider the owner’s actual income and expense projections. Instead, the assessor estimated vacancy and expenses using a mass-appraisal model comprised of market vacancy rates and market expenses for unrestricted properties.

The assessor also used a low 6 percent base capitalization rate, likewise derived from a mass appraisal model consisting of market-rate properties.

For the second year in issue, the assessor used a comparable sales approach based on sales of three properties that the assessor claimed were comparable to the subject property. However, none of those properties was a Section 42 project: Two were rent-subsidized HUD Section 8 properties, and the other was a mixed-use property consisting primarily of market-rate apartments with a few Section 42 units.

The Supreme Court nullified the assessments for both years, concluding that neither approach the assessor used complied with the rule that an assessor cannot value subsidized housing by “pretend[ing]” that the restrictions on the property do not exist.

For the income-based assessment, the Supreme Court found two fatal flaws in the assessor’s methodology.

First, the court found that the assessor violated Wisconsin law by using estimated market-based vacancy and expenses instead of the property’s projected actual vacancy and expenses. The court reaffirmed that its 1993 decision “unambiguously” requires assessors to use actual income and expenses when valuing subsidized housing under an income approach.

The court further held that by using mass appraisal estimation techniques instead of income and expense information specific to the subject property, the assessor violated the statutory requirement that assessors must use the “best available” information.

Second, the court found that the assessor violated Wisconsin law by deriving a capitalization rate from market-rate properties instead of from the specific market for Section 42 properties. The court explicitly held that Wisconsin assessors valuing federally regulated properties “may not” derive a capitalization rate from market-rate properties.

For the comparable sales-based assessment, the court likewise concluded that the three sales the assessor relied on were not “reasonably comparable” to the subject property, as Wisconsin law requires. The court definitively rejected the assessor’s claim that Section 42 properties and Section 8 properties have similar restrictions and similar rates of rent and are there-fore comparable.

In rejecting the assessor’s claim that those two programs have similar restrictions, the court engaged in a lengthy analysis of the fundamental differences between them.

The court emphasized that the two “are vastly different” programs with “different risks for the owners,” since Section 42 is an income tax credit pro-gram while Section 8 is a rent subsidy program; thus, Section 42 properties are “riskier investment[s]” because the government does not insure against nonpayment of rents.

The court likewise rejected the assessor’s claim that the two programs have similar rents, holding that the comparison was invalid because the assessor failed to recognize that Section 8 rents are subsidized by the government while Section 42 rents are not. The Court thus concluded that as a matter of law, Section 8 and Section 42 properties are not reasonably comparable because they do not have the same restrictions.

Key takeaways

The decision is a major victory for subsidized housing developers and investors for several reasons. First, it reaffirmed the 1993 decision that subsidized housing cannot be valued under an income approach based on the income and expenses of conventional apartments. It also provided additional guidance as to what assessors cannot do, including developing a capitalization rate from sales of non-subsidized properties.

Second, the decision addressed for the first time what assessors cannot do in assessing subsidized housing under a comparable sales approach, since the 1993 case only addressed assessment under an income approach.

Finally, and perhaps most significant for investors in these properties, the decision specifically held that different types of subsidized housing programs – Section 42 and HUD Section 8 in particular – are vastly different, and that assessors cannot consider a property under one program to be reasonably comparable to a property in a different program just because they both involve a form of subsidized housing.

Robert Gordon is a partner in the Milwaukee office of Michael Best & Friedrich LLP.  He is also the designated Wisconsin member of Amercican Property Tax Counsel.  Robert can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

The big-box concept changed the face of retail in the 1960s. It also skewed the way that assessors value retail property for tax purposes. To this day, taxpayers across the United States have been fighting back—and in Wisconsin, Kansas and Michigan, they are winning.

The problems arose out of financing arrangements such as prearranged sale-leasebacks or build-to-suit transactions to construct or develop a big box. Companies used these methods to keep cash available for core business purposes, and repaid the sale proceeds as rent.

These arrangements created financing rents that assessors mistakenly adopted as market rents. Further, once the above-market lease was in place, owners typically sold the lease and property to an investor at a sales price reflecting the value of the longterm, above-market lease in place to a high-credit tenant. The sales never reflected the fair market value of bricks and sticks alone, because the transaction transferred more than real estate.

Assessors then relied upon these sales without adjustment to calculate fee-simple value. Finally, assessors used the above-market rents and leased-fee sales to value owner-occupied retail stores, spreading the problem to all retail.

Guiding Principles

The concept of valuing property at its fair market value of the fee simple vanished in many locations as governmental assessors adopted this leased-fee concept, occasioning substantial valuation increases for property tax purposes. The user of the property and their contract rent trumped longstanding appraisal concepts of use and market rent. The trend eroded the requirement for a uniform and equal rate of assessment and taxation at fair market value. The same land and building could now have vastly different real property values, depending on the tenant.

For instance, a building leased to Walmart would have a higher value than if the same were leased to a local department store. How was it possible that the value of a building depended on the name of the tenant? Assessors could not distinguish between sales of properties with an income stream related to the property and sales of properties with an income stream related to the business value of the tenant.

Taxpayers successfully fought back in Wisconsin, Kansas and Michigan.

In 2008, the Wisconsin Supreme Court agreed with Walgreens that the assessor had not valued its properties in fee simple. The court focused on the issue of an above-market lease and the impact on valuation, and concluded that a “lease never increases the market value of the real property rights to the fee simple estate.”

The ruling directed assessors to use market rents, not the contract or financing rents. The court was not persuaded to move away from fee-simple valuation to a business valuation, as argued by the assessor. The assessor’s methodology could cause “extreme disparities and variations in assessments,” something the court was not willing to tolerate.

The Kansas Court of Appeals case followed in 2012, prosecuted by Best Buy, the single tenant in the building. The decision made three things clear for commercial property owners. First, Kansas is a fee-simple state. The court rejected the county appraiser’s argument for a leased-fee value. Second, build-to-suit rates are not market rents and cannot be used unless after review of the lease it can be adjusted to market rental information. Finally, market rents are those rents that a property could expect to pay in an open and competitive market. Market rent is not whatever financing arrangements a tenant can procure based on their costs and credit ratings.

Most recently, the Michigan Supreme Court addressed how these financing arrangements are impacting valuations of owner-occupied big-box retail. In 2014, the court ruled on cases brought by Lowe’s Home Improvement and Home Depot, both owner-occupants.

The court dismissed the township’s argument to consider the user of the property, rather than the use of the property. The county method would mistakenly arrive at a value in use, rather than a market value, the court found.

The court concurred with the taxpayers that the sales comparison approach to value was the most appropriate method to value owner-occupied properties, noting the approach must be developed using market sales of fee-simple interests. Leased fee sales may only be used if adjusted to reflect fee simple. The court was unimpressed by the township appraiser’s conclusion that no adjustments were necessary, with the court finding his report to be shockingly deceptive on this point.

Whether it was failing to understand basic appraisal theory or the desire to inflate values, assessors plugged bad information into market-based valuation models, and it has taken years to begin unwinding the damage and restoring basic appraisal concepts of fee simple, uniformity and equality. Taxpayers are taking the lead from Wisconsin, Kansas and Michigan, and have cases pending in many, if not all, jurisdictions.

Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Updated March 2025

Wisconsin Tax Appeals Commission Rejects State’s Attempt To Divest It Of Jurisdiction Over Large Tax Appeals

In a decision issued on March 11, 2025, the Wisconsin Tax Appeals Commission rejected an attempt by the Wisconsin Department of Revenue to divest it of subject matter jurisdiction over a large group of manufacturing assessment appeals involving millions of dollars in value.

The jurisdictional statute (Wis. Stat. 70.995(8)(c)1) states that objections to manufacturing assessments must be made “on a form prescribed by the department of revenue that specifies that the objector shall set forth the reasons for the objection … and the basis for” the objector’s opinion of value. The appeal form the Department of Revenue created under this statute includes a section for the objector to provide these two pieces of information. That section contains two adjacent boxes, one designated for the reason for the taxpayer’s objection and the other for the basis of the taxpayer’s opinion of value.

In the appeals in question, the taxpayers’ agent had placed text encompassing both pieces of information in the first box and left the second box blank. The State argued that leaving the second box blank per se divested the Commission of subject matter jurisdiction irrespective of whether all the required information was in the other box or elsewhere on the form.

The Tax Appeals Commission firmly rejected the State’s position, holding that as long as a taxpayer provides all the information required by the statute on the Department’s form the taxpayer has satisfied the jurisdictional requirement, whether or not the taxpayer has placed text in every box. The Commission’s decision was unusually harsh, finding one of the Department of Revenue’s arguments to be “frankly ridiculous,” and admonishing the Department to “restrain itself from making such frivolous and overreaching arguments” in future cases.

The case is Badger Mining Corporation and Smart Sand, Inc v. Wisconsin Department of Revenue.

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Hansen Reynolds LLC
American Property Tax Counsel (APTC)

How Wisconsin Supreme Court decision on assessments of specialized manufacturing plants affects owners

"The critical aspect of the case for property owners is the Supreme Court's conclusion that there was a market for continued use of the property, when neither party could identify an example of such a sale..."

By Robert L. Gordon, Esq., as published by Heartland Real Estate Business, July 2012

Wisconsin tax law requires assessors to assess real estate at its fair market value. Whenever possible, that value must reflect recent sales of reasonably comparable property. Longstanding Wisconsin Supreme Court decisions have held that real estate cannot be assessed based on an imaginary or hypothetical market, or at its intrinsic value to the current owner, if that value differs from fair market value. Under those decisions, real estate can only be assessed at what market evidence indicates a third party would pay for the property in the open market.

In the recent case of a specialized plant, the Wisconsin Supreme Court rejected the property owner's argument that the plant was assessed at its intrinsic value to the owner's manufacturing business and not at its fair market value as real estate.

The Background

The plant was built to manufacture a highly specialized food product, using a process regulated by the U.S. Food and Drug Administration. The manufacturer incorporated unique real estate features — at tremendous cost — to meet FDA standards. These included a spray dryer more than 100 feet tall housed in an 8-story tower, as well as concrete surfaces specially treated to eliminate any air pockets where moisture with microbial growth could reside.

At trial before the Wisconsin Tax Appeals Commission, neither the assessor with the Wisconsin Department of Revenue nor the manufacturer's appraiser could identify a single instance anywhere in the United States where a similar plant had sold for continued use to manufacture the same product. The manufacturer's appraiser concluded that there was no market to sell the property for continued use, and that the highest and best use of the plant was as an ordinary food processing plant.

The assessor, however, speculated that one of the manufacturer's few competitors could be a likely purchaser of the plant, and that there was a market for the plant for continued use. The assessor thus valued the property based on its cost to the manufacturer, including the expensive features added solely to support production of its one specialized product, but disregarding the lack of value of those improvements to a purchaser buying the plant for any other use.

The Decision

The Tax Appeals Commission upheld the Department of Revenue's conclusion that there was a market for continued use of the property to manufacture the same specialized product, thereby upholding the assessment based on the plant's cost to the manufacturer.

The Wisconsin Supreme Court affirmed the Tax Appeals Commission and rejected the manufacturer's arguments that the plant was being assessed at its intrinsic value to the owner's manufacturing business and that this was inconsistent with prior Supreme Court decisions.

The critical aspect of the case for property owners is the Supreme Court's conclusion that there was a market for continued use of the property, when neither party could identify an example of such a sale. The court held that a "market can exist for a subject property, especially a special-use property, without actual sales data of similar properties being available." The court further stated that "markets are necessarily forward-looking" and that "empirical evidence of past sales activity is certainly informative, but it is not conclusive."

The Net Effect

Traditionally, owners of properties with expensive features included solely to support the business conducted on the property have pointed to a lack of comparable property sales as evidence that the features do not translate into real estate value.

Because of the Wisconsin Supreme Court's conclusions that markets are forward-looking, that lack of evidence of sales is not conclusive, and that a market can exist without actual sales data, it may now become more challenging for taxpayers to contest assessments. This may be especially true for assessments that are primarily based on the cost of features that are valuable only to the current owner.

In the Wisconsin Supreme Court case, the manufacturer argued that affirming the Tax Appeals Commission decision would place an impossible burden on property owners to prove a negative, which is the absence of a market. The court disagreed, stating that taxpayers are only required to present "sufficient contrary evidence" to demonstrate that an assessor's highest and best use conclusion is incorrect based on the existence of a particular market.

As a result, the Wisconsin Supreme Court has left the door open for property owners to claim that there is no market to sell their plant for continued use. In light of the decision, and the statutory presumption that an assessor's conclusions are correct, property owners should be prepared to make a strong case if they intend to establish the absence of a market.

That case might include an analysis of the industry in which the manufacturer operates. Such analysis could attempt to show that there is no one who would purchase the plant to manufacture the same product. Thus, no one would pay what the plant is worth to the current owner to buy the plant as real estate.

Robert L. Gordon is a partner at the Milwaukee law firm of Michael Best & Friedrich LLP, the Wisconsin member of the American Property Tax Counsel. You can contact him via email at This email address is being protected from spambots. You need JavaScript enabled to view it..

"...whenever the assessor seeks income information, the property owner should ensure that only income attributable to the real estate is provided."

By Robert L. Gordon, Esq., as published by Midwest Real Estate News, April 2008

Throughout the United States, assessors constantly search for new ways to squeeze value from commercial property. Assessing the business value of the property rather than just its real estate value has become one of the most common stratagems assessors employ. They do this by purporting to value the property on a traditional income approach, but then use the income generated from a business conducted on the property to derive the property's value. This violates the fundamental rule of ad valorem taxation, which states that only value generated by the real estate itself can be taxed.

This generally causes no problem for leased property. To take a simple example, a commercial office building clearly can be assessed based on the rental income it generates to the owner. Unquestionably, such income represents pure real estate income, generated by the real estate itself. No assessor would seriously seek to assess an office building by including income generated by the law firms, accounting firms and other commercial tenants who rent the office space.

The problem arises for owner-occupied property, where no rental income stream exists that the owner can identify as income generated by the real estate itself. In such cases, it becomes easier for the assessor to take the income generated by the business the owner operates at that location and try to portray that business income as income generated by the property.

In some cases, it should be obvious that the assessor cannot do so. For example, a successful retailer may generate several hundred dollars of retail income per square foot by selling high-end consumer electronics at its owner-occupied location. It would be difficult in that case for the assessor to claim that the income was attributable to the real estate and not the retailer's business skills. On the other hand, as we will see, where a business operated by the owner is less clearly separable from the real estate, the assessor will have an easier time trying to ascribe the income to the real estate.

Court weighs in on business value

Three Wisconsin appellate court decisions on this issue prove instructive and provide a fairly universal guide to steps property owners in any jurisdiction can take to ensure that assessors capture only the value of their real estate, and not the value of a business conducted on that real estate.

Wisconsin courts require that the real estate itself must have the "inherent capacity" to produce income before that income can be considered in assessing the property. In the first Wisconsin case on this issue, the Court of Appeals rejected a regional mall owner's argument that the mall should be assessed at less than its purchase price on the theory that the purchase price included a business value independent of the real estate. The court held that since regional malls exist for the purpose of leasing space to tenants, all the income generated by leasing this space is "inextricably intertwined" with the real estate and, thus, assessable.

In a second case, the Wisconsin Supreme Court found that income generated by a state-licensed, owner-operated landfill could be included in the property's assessment. The court stated that since the license was "specific to the site" and could not be transferred to any other property, the land itself had " an inherent capacity to accept waste that would not be present" in sites without licenses. The court noted, however, that neither side had been able to find evidence of leases in the local market, that is, instances where landfill operators paid the property owner market rent to lease a landfill site. The court indicated that had such market information been available, it likely would not have permitted the landfill income to be used in formulating the assessment.

Actions Owners Should Take

Property owners in any jurisdiction can glean several lessons from these decisions. First and foremost, whenever the assessor seeks income information, the property owner should ensure that only income attributable to the real estate is provided. For example, this will be relatively easy in the case of a retail sales location, since retail sales income is not properly attributable to real estate.

In more difficult cases, some income may be attributable to the real estate and some may not. In such instances, owners need to carefully structure their operating statements so that income sources not directly pertaining to the real estate are reported and categorized separately, and not intermingled with the real estate income. The more the owner blurs the real estate and other income together in a single operating statement, the easier it will be for the assessor to cite that statement as proof that the income in question is "inextricably intertwined" with the real estate income.

Finally, as the Wisconsin landfill decision makes clear, the best defense against an assessor seeking to include business income in a property assessment is actual evidence of local market rental rates for similar properties. Property owners need to exhaust all possibilities for finding like businesses that lease their space, since such market evidence makes it next to impossible for the assessor to claim that business income which exceeds those market rental rates is attributable to the real estate.

In sum, property owners who carefully review and understand the basis for their property tax assessments, and who regularly focus their attention on how their business income is reported to the assessor, stand the best chance of avoiding unlawful property taxation of their business income.

Robert L. Gordon is a partner with Michael Best & Friedrich LLP in Milwaukee, where he specializes in federal, state and local tax litigation. Michael Best & Friedrich is the Wisconsin 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..