Maricopa v. Hon. viola/el Rancho ( 2021 )


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  •                                IN THE
    ARIZONA COURT OF APPEALS
    DIVISION ONE
    MARICOPA COUNTY, Petitioner,
    v.
    THE HONORABLE DANIELLA J. VIOLA, Judge of the SUPERIOR
    COURT OF THE STATE OF ARIZONA, in and for the ARIZONA TAX
    COURT, Respondent Judge,
    EL RANCHO AFFORDABLE HOUSING, LP, and EL RANCHO
    AFFORDABLE HOUSING II, LP, Real Parties in Interest,
    NORTHERN GARDENS/PHOENIX, LP, Real Party in Interest/Intervenor.
    No. 1 CA-SA 21-0023
    FILED 5-20-2021
    Special Action Appeal from the Arizona Tax Court
    No. TX2017-000566
    The Honorable Daniella J. Viola, Judge
    JURISDICTION ACCEPTED; RELIEF DENIED
    COUNSEL
    Helms, Livesay & Worthington, Ltd., Mesa
    By Roberta S. Livesay, Joshua W. Carden
    Counsel for Petitioner
    Frazer Ryan Goldberg & Arnold, L.L.P., Phoenix
    By Douglas S. John
    Counsel for Real Parties in Interest El Rancho Affordable Housing, LP and El
    Rancho Affordable Housing II, LP
    Quarles & Brady, LLP, Phoenix
    By Dawn R. Gabel, Jared Wayne Miller
    Co-Counsel for Real Party in Interest/Intervenor Northern Gardens/Phoenix, LP
    Dickinson Wright, PLLC, Phoenix
    By Bennett Evan Cooper
    Co-Counsel for Real Party in Interest/Intervenor Northern Gardens/Phoenix, LP
    OPINION
    Judge Maria Elena Cruz delivered the opinion of the Court, in which
    Presiding Judge Jennifer M. Perkins and Judge Randall M. Howe joined.
    C R U Z, Judge:
    ¶1           Maricopa County’s petition for special action asks us to
    overturn the approach the tax court adopted in Cottonwood Affordable
    Housing v. Yavapai County, 
    205 Ariz. 427
     (Ariz. Tax Ct. 2003), to valuing low-
    income housing. Affirming Cottonwood, we agree with the tax court that
    assessors must use actual rents charged when they determine the full cash
    value of low-income housing tax credit (“LIHTC”) properties for taxation
    purposes. For that reason, we accept jurisdiction but deny relief.
    FACTUAL AND PROCEDURAL HISTORY
    ¶2            Congress created the LIHTC program to encourage
    construction, rehabilitation, and acquisition of affordable housing for low-
    income households. The program, administered by the U.S. Treasury
    under 26 United States Code (“U.S.C.”) section 42, allows states to issue
    federal tax credits to apartment owners in exchange for thirty-year
    restrictions on the amount of rent they may charge tenants. The program
    requires a Land Use Restrictive Agreement to be recorded against a
    property to bind the current owner and any subsequent owners. The tax
    credits are granted at the beginning of a project and made available for a
    2
    MARICOPA v. HON. VIOLA/EL RANCHO, et al.
    Opinion of the Court
    ten-year period, and an owner that fails to abide by the restrictions must
    reimburse the Treasury for any credits it has used.
    ¶3           The Arizona Department of Housing (“ADOH”) administers
    the program in Arizona. The ADOH establishes the maximum rent an
    owner may charge based on tenants’ incomes as a percentage of the Area
    Median Gross Income (“AMGI”). For an apartment complex to be eligible,
    either 20% or more of the units must be occupied by households with
    incomes at or below the AMGI, or 40% or more of the units must be
    occupied by households with incomes at or below 60% of the AMGI.
    ¶4            The Arizona Department of Revenue (“ADOR”) issued
    guidelines (the “Guidelines”) for county assessors to use in valuing LIHTC
    properties for tax purposes. The Guidelines instruct assessors to value the
    LIHTC properties based on the market rent charged by “conventional”
    apartment complexes, without regard to the rent restrictions that encumber
    LIHTC properties.
    ¶5            Using ADOR’s valuation methodology, the Maricopa County
    assessor valued one of the LIHTC apartment complexes at issue here, El
    Rancho Affordable Housing, LP (“El Rancho”) at $4,620,000. El Rancho
    filed a complaint in the tax court, seeking to reduce the full cash value to
    $1,300,000, a valuation calculated based on the complex’s actual restricted
    rental rates. Maricopa County filed a motion asking the court to enter an
    order declaring that LIHTC properties must be valued for property tax
    purposes using market rents charged by conventional complexes.
    ¶6             The tax court denied Maricopa County’s motion and held that
    an “LIHTC property [is] to be valued using restricted as opposed to market
    rents to achieve a full cash value,” citing Cottonwood, 
    205 Ariz. at 430
     (“the
    restrictions imposed under the LIHTC program . . . must be taken into
    account” in valuing property). Maricopa County then filed this special
    action petition, and two other LIHTC properties moved to intervene as real
    parties in interest: El Rancho Affordable Housing II, LP (“El Rancho II”)
    and Northern Gardens/Phoenix, LP (“Northern Gardens”). El Rancho, El
    Rancho II, and Northern Gardens (collectively, the “Apartment
    Complexes”) all argue their full cash values should be calculated based on
    their actual restricted rents.
    SPECIAL ACTION JURISDICTION
    ¶7            Special action review is generally appropriate when there is
    no “equally plain, speedy, and adequate remedy by appeal.” Ariz. R.P.
    Spec. Act. 1(a); see generally Sw. Gas Corp. v. Irwin, 
    229 Ariz. 198
    , 201, ¶¶ 5-7
    3
    MARICOPA v. HON. VIOLA/EL RANCHO, et al.
    Opinion of the Court
    (App. 2012). Our decision to accept special action jurisdiction is
    discretionary. State v. Superior Court (Morgan), 
    237 Ariz. 419
    , 421, ¶ 5 (App.
    2015). Acceptance of special action jurisdiction is “appropriate in matters
    of statewide importance, issues of first impression, cases involving purely
    legal questions, or issues that are likely to arise again.” State v. Superior
    Court (Landeros), 
    203 Ariz. 46
    , 47, ¶ 4 (App. 2002).
    ¶8            Here, the issue the petition raises is a pure question of law and
    is of statewide importance. Maricopa County notes that there are at least
    twenty-five similar cases pending in the tax court. Accordingly, we accept
    special action jurisdiction.
    DISCUSSION
    ¶9            For tax purposes, Arizona values property at its “full cash
    value.” Bus. Realty of Ariz., Inc. v. Maricopa County, 
    181 Ariz. 551
    , 553 (1995).
    “Full cash value” generally means “fair market value,” which our supreme
    court has defined as “that amount at which property would change hands
    between a willing buyer and a willing seller, neither being under any
    compulsion to buy or sell and both having reasonable knowledge of the
    relevant facts.” 
    Id.
     (internal quotation marks and citation omitted). As
    prescribed by statute, “[c]urrent usage shall be included in the formula”
    used to determine a property’s full cash value. Arizona Revised Statutes
    (“A.R.S.”) section 42-11054(C)(1).
    ¶10           The legislature directed ADOR to create “guidelines for
    applying standard appraisal methods and techniques” for ADOR and
    county assessors to determine the valuation of property. A.R.S. § 42-
    11054(A)(1). ADOR’s guidelines require assessors to value LIHTC
    apartment complexes as if they are conventional apartment complexes that
    charge market rents because they are not subject to LIHTC restrictions.1 For
    nearly twenty years, however, the tax court has maintained that the ADOR
    valuation method, which disregards the deed restrictions that limit rents
    that may be charged by an LIHTC property, “will not result in a
    determination of fair market value for” such a property. Cottonwood, 
    205 Ariz. at 430
    .
    1      The Guidelines in effect when the tax court ruled in this case were
    issued in 1998; ADOR issued revised Guidelines in November 2020. See
    https://azdor.gov/sites/default/files/media/PROPERTY_SubsidizedHo
    usingValuation.pdf. As relevant here, the 2020 revision made no
    substantive change to the 1998 Guidelines.
    4
    MARICOPA v. HON. VIOLA/EL RANCHO, et al.
    Opinion of the Court
    ¶11             Maricopa County contends we must defer to the Guidelines
    because an administrative agency’s interpretation of a statute is presumed
    correct and lawful. Maricopa County further argues that the legislature’s
    failure to amend the valuation statutes to override the Guidelines since the
    tax court issued the Cottonwood decision in 2003 shows it approves of the
    Guidelines. The Guidelines, however, are just that, guidelines, not formal
    regulations, and were created for use by assessors. For that reason, the
    legislature’s silence about the validity of the Guidelines post-Cottonwood
    lends little support to the inference that it approves them without
    reservation. Further, while courts may consider an agency’s interpretation
    of a statute it is authorized to implement, the agency’s interpretation is not
    binding legal authority and cannot be inconsistent with statutory
    provisions. See Cent. Citrus Co. v. Ariz. Dep’t of Revenue, 
    157 Ariz. 562
    , 565-
    66 (App. 1988); Stewart Title & Tr. of Tucson v. Pima County, 
    156 Ariz. 236
    ,
    243 (App. 1987); Thomas & King, Inc. v. City of Phoenix, 
    208 Ariz. 203
    , 206, ¶ 8
    (App. 2004); cf. A.R.S. § 12-910(E) (court reviewing final administrative
    decision owes no deference to agency’s interpretation of statute).
    ¶12           As noted above, § 42-11054 requires that a property’s “current
    usage” be “included in the formula for reaching a determination of full cash
    value” of the property. A.R.S. § 42-11054(C)(1). They are low-income
    complexes with restrictions on the rent that may be charged and the
    incomes and tenants who may occupy them. Most significantly, LIHTC
    property rental prices are set below the market rates of conventional
    housing. Failing to recognize the “current use” of LIHTC projects as low-
    income complexes would require assessors to value them at an amount far
    greater than their actual market value in violation of the relevant statutes.
    See supra, ¶ 9 (fair market value is “that amount at which property would
    change hands between a willing buyer and a willing seller, neither being
    under any compulsion to buy or sell and both having reasonable
    knowledge of the relevant facts”). Arizona law requires that low-income
    properties be valued as low-income properties, not as ordinary properties.
    ¶13           As the tax court in Cottonwood stated, the long-term rent
    “restrictions imposed under the LIHTC program have a direct and
    immediate [e]ffect upon marketability.” 
    205 Ariz. at 430
    . The court further
    noted:
    A willing buyer, knowing that there is a restriction as to the
    amount of rent that can be charged, would pay less for a low
    income housing project than for a regular commercial
    apartment complex. This property should not be valued as
    though a buyer would not consider the restrictions. A
    5
    MARICOPA v. HON. VIOLA/EL RANCHO, et al.
    Opinion of the Court
    valuation for an LIHTC project, determined under any of the
    standard appraisal methods, that does not take the deed
    restrictions into account will not result in a determination of
    fair market value for that property.
    
    Id.
     We agree.
    ¶14            Maricopa County cites Recreation Centers of Sun City, Inc. v.
    Maricopa County, 
    162 Ariz. 281
     (1989), but that case does not require a
    different outcome. Recreation Centers involved the valuation of a non-profit
    recreation center owned and operated by a homeowner’s association for the
    benefit of its members. Recreation Centers, 
    162 Ariz. at 283
    . The supreme
    court noted there were two deed restrictions at issue: “one that requires the
    owner to operate the facility on a nonprofit basis for the benefit of [the]
    homeowners, and one that limits the use of the property to recreational
    purposes.” 
    Id. at 287
    . The property owner argued that the non-profit
    restriction must be considered in valuing the property because it rendered
    the property valueless for tax purposes. 
    Id. at 284, 288
    . The supreme court,
    however, disagreed, reasoning that the restriction did “not impact the type
    of use to which the property may be put” and did not destroy the property’s
    value, but instead effectively divided the value of the property between the
    owner and those who had the right to use it. 
    Id. at 288-90
    .
    ¶15           The court came to a different conclusion as to the restriction
    requiring the property be used for recreation purposes. It held that
    restriction must be considered in the valuation process because it did affect
    the value of the property:
    Just as with zoning and subdivision restrictions that limit the
    use of land, the recreational use restriction has an undoubted
    effect on value, whether the value be measured by any
    appraisal method. The property cannot be valued as if it were
    property to be used for residences, apartments, retail stores,
    or industry; the land is not and cannot be so used even though
    it may be now properly located and zoned. The limitation on
    use does not divide value between those who have the right
    to use; it limits the value in use of all users.
    
    Id. at 290
     (citation omitted). Here, the LIHTC restrictions do not just restrict
    rental income, they restrict an owner’s use of the property. An LIHTC
    property cannot be valued as if it were a conventional apartment complex
    because it is not and cannot be used as such. The “use” of an LIHTC
    property is not simply that of a conventional apartment complex. The
    6
    MARICOPA v. HON. VIOLA/EL RANCHO, et al.
    Opinion of the Court
    restrictions subject LIHTC properties to continuing government mandates
    that impose operational and compliance costs, periodic monitoring, on-site
    inspections, and compliance reviews. See Arizona Department of Housing
    Compliance Manual for Low Income Housing Tax Credit Program (2019).2
    The restrictions also limit who can live in LIHTC properties to those with a
    certain income or who meet other classifications (i.e., homeless, mentally
    ill, domestic violence victims, physically disabled). See id.; 
    26 U.S.C. § 42
    .
    Just as in Recreation Centers, the deed restrictions requiring the properties
    be used as LIHTC projects must be taken into account to fairly determine
    the full cash value of the property. A market value approach requires us to
    consider market value limitations.
    ¶16            It is an over-simplification to say, as Maricopa County argues,
    that LIHTC deed restrictions should not ease an owner’s property tax
    burden because the owner has voluntarily agreed to abide by those
    restrictions. LIHTC properties are subject to government restrictions
    designed to make low-income housing available to the public. Maricopa
    County argues that if LIHTC rent restrictions were allowed to drive the
    value of an apartment complex, without also taking into account the
    associated tax credits, the result would be the same as if a “savvy apartment
    owner” set an “artificially-low” rent, but at the same time required tenants
    to spend a minimum amount at an on-site commissary, so that the shopping
    requirement effectively supplemented the rent. But the County confuses
    “artificial” rates with “actual” rates. LIHTC property owners cannot
    manipulate rental rates; the rates are set by the ADOH, and if the property
    owner is not in compliance, the complex loses its LIHTC status, and the
    owner must reimburse the government for any tax credits it has taken.
    ¶17            Further, contrary to Maricopa County’s contention, it would
    not be more cumbersome or overly difficult for the assessor to consider the
    restrictions on the LIHTC properties when valuing those properties. At
    least in the case of El Rancho, the assessor valued the property using both
    the market rent charged by conventional complexes and the actual income
    generated by El Rancho. Valuing an LIHTC property based on actual
    income generated by the restricted rents is potentially simpler than valuing
    a property based upon a theoretical market rental rate. And in situations
    where a newly built complex has not yet produced rents, a different and
    more appropriate valuation approach can be used, so long as the LIHTC
    restrictions are taken into account (e.g., valuation derived from sales of or
    income generated by other comparable LIHTC properties). See Bus. Realty
    2 See https://housing.az.gov/sites/default/files/documents/files/2019-
    Compliance-Manual.pdf.
    7
    MARICOPA v. HON. VIOLA/EL RANCHO, et al.
    Opinion of the Court
    of Ariz., 
    181 Ariz. at 553-54
     (recognizing “three common appraisal
    approaches” to determining market value, “capitalizing the income stream,
    estimating replacement cost less depreciation, and estimating market value
    by comparable sales”). Simply put, assessors should treat LIHTC
    properties differently from conventional complexes because they are
    different.
    ¶18           Our opinion is in line with a majority of jurisdictions that have
    decided this issue and similarly allowed or required the consideration of
    rental restrictions on low-income housing projects in property tax
    valuations.3
    3       See Horan v. Kenai Peninsula Borough Bd. of Equalization, 
    247 P.3d 990
    ,
    998-99 (Ala. 2011); Nutmeg Hous. Dev. Corp. v. Town of Colchester, 
    151 A.3d 358
    , 361-62, 366 (Conn. 2016); Holly Ridge Ltd. P’ship v. Pritchett, 
    936 So.2d 694
    , 697-98 (Fla. Dist. Ct. App. 2006); Heron Lake II Apartments, LP v. Lowndes
    Cnty. Bd. of Tax Assessors, 
    833 S.E.2d 528
    , 534-37 (Ga. 2019); Greenfield Vill.
    Apartments, L.P. v. Ada County, 
    938 P.2d 1245
    , 1248 (Idaho 1997); Kankakee
    Cnty. Bd. of Rev. v. Prop. Tax Appeal Bd., 
    544 N.E.2d 762
    , 768-69 (Ill. 1989); In
    re Ottawa Hous. Ass’n, L.P., 
    10 P.3d 777
    , 778-80 (Kan. Ct. App. 2000); Williams
    v. The Muses, Ltd. 1, 
    203 So.3d 558
    , 568, 575-577 (La. Ct. App. 2016);
    Supervisor of Assessments of Baltimore City v. Har Sinai W. Corp., 
    622 A.2d 786
    ,
    795-97 (Md. Ct. Spec. App. 1993); Glenridge Dev. Co. v. City of Augusta, 
    662 A.2d 928
    , 931-32 (Me. 1995); Cmty. Dev. Co. of Gardner v. Bd. of Assessors of
    Gardner, 
    385 N.E.2d 1376
    , 1378-79 (Mass. 1979); Meadowlanes Ltd. Dividend
    Hous, Ass’n v. City of Holland, 
    473 N.W.2d 636
    , 648-49 (Mich. 1991); Willow
    Bend Ests., LLC v. Humphreys Cnty. Bd. of Supervisors, 
    166 So.3d 494
    , 496-97
    (Miss. 2013); Tibbs v. Poplar Bluff Assocs. I, L.P., 
    599 S.W.3d 1
    , 12 (Mo. Ct.
    App. 2020); Schuyler Apartment Partners, LLC v. Colfax Cnty. Bd. of
    Equalization, 
    783 N.W.2d 587
    , 590-92 (Neb. 2010); Steele v. Town of
    Allenstown, 
    471 A.2d 1179
    , 1181-82 (N.H. 1984); Penns Grove Gardens Ltd. v.
    Penns Grove Borough, 
    18 N.J. Tax 253
    , 263-65 (N.J. Tax Ct. 1999); Woda Ivy
    Glen Ltd. P’ship v. Fayette Cnty. Bd. of Revision, 
    902 N.E.2d 984
    , 989-93, ¶¶ 19-
    30 (Ohio 2009); Bayridge Assocs. Ltd. P’ship v. Dep’t of Revenue, 
    892 P.2d 1002
    ,
    1005 (Or. 1995); Church St. Assocs. v. County of Clinton, 
    959 A.2d 490
    , 494 (Pa.
    Commw. Ct. 2008); Town Square Ltd. P’ship v. Clay Cnty. Bd. of Equalization,
    
    704 N.W.2d 896
    , 902-03, ¶¶ 17-19 (S.D. 2005); Spring Hill, L.P. v. Tenn. State
    Bd. of Equalization, M2001-02683-COA-R3-CV, 
    2003 WL 23099679
    , at *13-14
    (Tenn. Ct. App. Dec. 31, 2003); Alta Pac. Assocs. v. Utah State Tax Comm’n,
    
    931 P.2d 103
    , 115-16 (Utah 1997); Cascade Ct. Ltd. P’ship v. Noble, 
    20 P.3d 997
    ,
    1001-02 (Wash. Ct. App. 2001); Stone Brooke Ltd. P’ship v. Sisinni, 
    688 S.E.2d 8
    MARICOPA v. HON. VIOLA/EL RANCHO, et al.
    Opinion of the Court
    ¶19           We approve of the tax court’s holding in Cottonwood that,
    regardless of the valuation method used, an assessor must take the rent
    restrictions of an LIHTC property into account in determining the fair
    market value for that property. See Cottonwood, 
    205 Ariz. at 430
    .
    CONCLUSION
    ¶20           For the foregoing reasons we accept jurisdiction but deny
    relief.
    AMY M. WOOD • Clerk of the Court
    FILED: AA
    300, 314 (W. Va. 2009); Regency W. Apartments LLC v. City of Racine, 
    888 N.W.2d 611
    , 620, ¶¶ 36-39 (Wis. 2016); see also 
    Cal. Rev. & Tax. Code § 402.1
    (a)(10)(B) and (11)(A)(ii), (iii); 
    44 R.I. Gen. Laws Ann. § 44-5-13.11
    ;
    Vt. Stat. Ann. tit. 32 § 3481(1)(A)-(B).
    9