Judges: MIKE BEEBE, Attorney General
Filed Date: 10/25/2004
Status: Precedential
Modified Date: 7/5/2016
The Honorable Stephen D. Bright State Representative 127 Southshore Drive Maumelle, Arkansas 72113-5810
Dear Representative Bright:
I am writing in response to your request for an opinion on the proper valuation of certain low-income housing for property tax purposes. You have enclosed with your request several pages of unsigned correspondence setting out the issue for resolution. The problem is stated as follows:
Certain Multi-Family Residential Complexes in Pulaski County are being developed using IRS Tax Credits. These tax credits are typically awarded on the basis of a percentage of the construction costs of the project. In exchange for these tax credits, the property owners agree to accept a reduced rental rate for a specified number of the units for a period of time, usually fifteen (15) years, leasing those units to low-income families. These tax credits are negotiable in the market place and are often used as a method of offsetting the monthly rental reduction or the cash value is applied to the construction costs.
The Pulaski County Assessor, among other assessors in the state, has traditionally appraised properties which have these tax credits at market value, using market rental rates, expenses and capitalization rates. This is the appropriate method of estimating market value utilized by all member organizations of the Appraisal Foundation. The use of contract rental rates and actual expenses would result in an estimate of the "Leased Fee Value" of the property, rather than the "Market Value."
The owner of the Chapel Ridge Apartment Complexes across the county has recently challenged this method, stating in part, that the Assessor should be using contract rental rates rather than market rental rates, and should ignore the tax credits altogether. It is their opinion that the tax credits have no effect on market value.
The Assessor's Office and most of the reputable Arkansas Certified General Appraisers we have contacted, hold a different belief. The consensus seems to be that the tax credits are de facto compensation for the reduced rental rates and therefore should either be included as income, prorated for the term of the rent restrictions, or the properties should be appraised using market rental and expense rates with no regard to the reduced rates required to qualify for the tax credits. In all instances where the owners of these properties have had appraisals made for financing, the market rental rates and expenses are used, resulting in an estimate of "Market Value."
REQUEST FOR RESOLUTION
The Pulaski County Assessor's Office would like to have some resolution to this question. Should we use market abstracted rental rates, expenses and capitalization rates to estimate" Market Value" or should we use contract rental rates, actual expenses and built-up capitalization rates and estimate "Leased Fee Values?
RESPONSE
In my opinion the answer to this question is not clearly settled in Arkansas law. There is no applicable statute or regulation on the point and I have found no Arkansas case law addressing the issue. There are a number of decisions of other states on the question and they are split as to the outcome, some holding that the lower contract rents should be used without regard to the tax credits, some holding that the lower contract rates should be used along with consideration of the income tax credits and at least one holding that market rents should be used. I cannot predict with reasonable certainty the outcome of the issue if properly placed before the Arkansas Supreme Court. Recent litigation on the question in Pulaski County was settled before a judicial determination.1 In my opinion legislative or judicial clarification of the issue is necessary to determine the matter.
It has been stated that the last-cited case:
. . . reviewed the Arkansas case law and statutory authority which established the premise by which assessment statutes and methods must be measured. This premise is that property must be assessed according to its "real and true value"; the "true and full market or actual value". In calculating the market value, many factors must be considered, and the type of inquiry will depend on what type of property is involved, but "all of these questions are to be considered for the purpose at last of ascertaining the market value of the tract in question, and that is the value which must be adopted for the purposes of assessment when it has been ascertained." Id., at 76, quoting American Bauxite Co. v. Board of Equalization of Saline County,
119 Ark. 362 ,177 S.W. 1151 (1915).
Jim Paws, Inc. v. Equalization Board of Garland County,
Section
Assessors use different approaches (and often more than one approach), to arrive at the current market value of property. See Board of Equalizationv. Evelyn Hills Shopping Center,
As stated in Jim Paws Inc., supra "[i]n addition to the "new cost" approach used by the county appraiser, there are the market data approach and income approach. The market approach compares sales of similar properties in the community and looks at any arms-length transactions involving the subject property. The income approach estimates the fair market rental of the property, determines what the net income for the property would be, and then capitalizes the net income to obtain the dollar value of the property."3 Id. at 118.
It has been stated that "[i]n the use of any one of the three methods there are certain inherent weaknesses" (Evelyn Hills at 1057), and that: "[w]e have recognized in cases involving condemnation of property by the State Highway Commission that use of reproduction costs, less depreciation, as a means of determining the true market value of property is a method that is inherently unreliable, especially when dealing with income-producing property." Jim Paws, Inc., supra at 120.
The correspondence you have attached appears to focus on the income method for determining the value of low-income housing. This determination appears to be supported by the weight of authority for this type of property.4 See Jim Paws, Inc., supra; Spring Hill, L.P. etal. v. Tennessee State Board of Equalization,
Another provision of the Arkansas Constitution, however, may also be relevant for purposes of this opinion. Amendment 57 authorizes the General Assembly to classify "intangible personal property" for assessment at lower percentages of value than other property and to exempt one or more classes of intangible personal property from taxation or to provide for taxation of intangible personal property on a basis other than ad valorem. In response to this authority, the General Assembly has adopted A.C.A. §
Finally, the standard of review for property tax assessment issues has been described as follows:
The standard of review of a tax assessment is whether the assessment is "manifestly excessive or clearly erroneous or confiscatory." Summers Chevrolet, Inc. v. Yell County,
310 Ark. 1 ,832 S.W.2d 486 (1992); Jim Paws, Inc. v. Equalization Bd. of Garland County,289 Ark. 113 ,710 S.W.2d 197 (1986), citing St. Louis-San Francisco Ry. Co. v. Arkansas Pub. Serv. Comm'n,227 Ark. 1066 ,304 S.W.2d 297 (1957). The burden of proof is on the protestant assessed. Summers Chevrolet, Inc. v. Yell County, supra; Arkansas Elec. Coop. Corp. v. Arkansas Pub. Serv. Comm'n,307 Ark. 171 ,818 S.W.2d 935 (1991).It is only in the most exceptional cases that an appellate court will grant a reassessment. Jim Paws, Inc. v. Equalization Bd. of Garland County, supra.
IBM Credit Corporation v. Pulaski County,
The Low Income Housing Tax Credit was created by the Tax Reform Act of 1986. It was codified at 26 I.R.C. §
42 [26 U.S.C. § 42 ]. Congress created the LIHTC to encourage new construction and rehabilitation of existing rental housing for low-income households and to increase the amount of affordable housing for low-income households. The LIHTC program authorizes the states to issue federal tax credits for the acquisition, rehabilitation, or new construction of affordable rental housing. To qualify for the LIHTCs, a project must have a portion of its units set aside for low-income households. The project's use of the property is restricted by deed to low income housing for at least fifteen years. The rents on the units are limited to a percentage of qualifying income. After the state allocates tax credits to the developers of the low-income housing project the credits are usually sold to private investors in a limited partnership. The private investors use the tax credits to offset their tax liability. The money paid for the credits is used as equity financing to make up the difference between the development cost for a project and the non-tax credit financing that could be expected to be repaid from rental income. Investors can claim the credits for each year of a ten year credit period as long as a minimum percentage of the projects' units are rented to low-income tenants at restricted rents for the fifteen year compliance period.
Cottonwood Affordable Housing v. Yavapai County,
It has also been stated that such tax credits "run with the land, and extend to the owners' successors and assigns" and that the "Tax Credits may be sold together with the property to a purchaser who is willing to honor the restrictions on use." Spring Hill, L.P. et al v. TennesseeState Board of Equalization,
The question is whether the current market value of such low-income housing property under the income capitalization method must be determined by using market rents, without regard to the contractual restrictions placed on the rental rates, or whether the reduced contracted rental rates should be used. If the latter is required, a question also arises as to whether the value of the tax credits must be considered in arriving at the true market value.
When approaching the assessment of such property, local assessors must be guided by the Arkansas Constitution, state statutes, applicable Arkansas case law and any directives of the Assessment Coordination Division. As noted above, however, neither the Arkansas Constitution, state statutes, Arkansas case law nor any directive of the Assessment Coordination Department specifically addresses the assessment of low-income housing utilizing the federal tax credits under
A host of other jurisdictions have addressed the question you pose. The Arkansas Supreme Court has stated that it is appropriate to look to the decisions of sister states when presented with novel questions. Williamsv. State,
The decisions from sister states are not in agreement. At least one court has concluded that the use of market rents is proper, reasoning that the voluntary agreement by a developer to be bound by the restricted rents is not a "government restriction" so as to require consideration of the lower rents. See In the Matter of Appeal Of The Greens of Pine Glen Ltd.Partnership,
Most decisions appear to agree, however, that the use of the restricted rents is proper in determining value under the income method. SpringHill, L.P., et al v. Tennessee Board of Equalization, supra; CottonwoodAffordable Housing v. Yavapai County, supra; Maryville Properties, L.P.v. Nelson,
Although the majority of courts appear to base valuation of such low-income housing property on the reduced rentals, sharp disagreement exists as to whether to also include the value of the credits when determining the value. Cases from Arizona, Washington, Missouri and Oregon conclude that the credits should not be considered. See,Cottonwood Affordable Housing v. Yavapai County,
This Court in determining how property should be appraised, would give strong deference to the Appraisal Institutes Uniform Standards of Professional Appraisal Practice ("USPAP") and the Advisory Opinion that govern the conduct of certified appraisers through out the United States, particularly where neither the legislature nor courts have created such guidelines or precedent. The Arizona Administrative Code requires that our Arizona appraisers comply with USPAP when performing appraisals. [citation omitted.]5 In Advisory Opinion 14, the Appraisal Standards Board recognized that "LIHTCs are an example of an incentive that results in intangible property rights. . . ."6
Cottonwood Affordable Housing v. Yavapai County, supra at 359.
In the Bayridge case, the fourth case listed above, a majority of the Oregon Supreme Court concluded that the most probable price to be received for the properties at issue would not include the tax credits, because the record shows that the credits would be recaptured if the property were not maintained as low-income housing." Id. at 32.
Other courts, including those in Tennessee, Georgia, Illinois and Pennsylvania have concluded that the value of the income tax credits must be considered in determining the value of the property. See Spring HillL.P. v. Tennessee Board of Equalization,
Three of the last-mentioned cases (Spring Hill, Pine Pointe, and RainbowApartments), specifically disagreed that the tax credits constituted "intangible personal property." The court in Spring Hill stated that:
. . . the Tax Credits are not being taxed as intangible property. While the credits may be characterized as intangibles that affect the value of the property, they are not severable from it. Ownership of the property and agreement to restrict its use are the criteria for award of the credits. Tennessee law allows and has long allowed inclusion of value-affecting intangible factors in the valuation of property. Such inclusion does not constitute a tax on those intangibles.
Id. at 47.
The court also held that the credits were "irrevocably attached to the real property." Id. at 48. This conclusion is similar to the one reached in Rainbow Apartments, supra that: "[t]he benefit of a tax credit to a limited partner is entirely incidental to that investment." Id. at 1108.
As can be seen from the discussion above, courts are sharply divided on whether to include the value of the § 42 tax credits when determining the value of low-income housing. I have not found any controlling distinctions in Arkansas that would align our law more nearly with one group of cases or the other. As a consequence, it is impossible to predict with reasonable certainty what the Arkansas Supreme Court would hold if faced with the question. I will note that legislation has been passed in several states to specifically address the issue. See e.g., PinePoint Housing, supra (mentioning a Georgia statute, O.C.G.A. §
Deputy Attorney General Elana C. Wills prepared the foregoing opinion, which I hereby approve.
Sincerely,
MIKE BEEBE Attorney General
MB:ECW/cyh
In Re Appeal of the Greens of Pine Glen Ltd. Partnership , 356 N.C. 642 ( 2003 )
Cottonwood Affordable Housing v. Yavapai County , 205 Ariz. 427 ( 2003 )
Cascade Court Limited Partnership v. Noble , 20 P.3d 997 ( 2001 )
Rainbow Apartments v. Property Tax Appeal Board , 326 Ill. App. 3d 1105 ( 2001 )
In Re Equalization Appeal of Ottawa Housing Ass'n, Lp , 27 Kan. App. 2d 1008 ( 2000 )
Board of Equalization v. Evelyn Hills Shopping Center , 251 Ark. 1055 ( 1972 )
BAYRIDGE ASSO. LTD. PART. v. Dept. of Rev. , 321 Or. 21 ( 1995 )
Arkansas Public Service Commission v. Pulaski County Board ... , 266 Ark. 64 ( 1979 )
W. M. Bashlin Co. v. Smith , 277 Ark. 406 ( 1982 )
Summers Chevrolet, Inc. v. Yell County , 310 Ark. 1 ( 1992 )
Jim Paws v. EQUALIZATION BD. OF GARLAND , 289 Ark. 113 ( 1986 )
Stephens v. State , 320 Ark. 426 ( 1995 )
Pine Pointe Housing, L.P. v. Lowndes County Board of Tax ... , 254 Ga. App. 197 ( 2002 )
Williamson v. Williamson , 212 Ark. 12 ( 1947 )
Williams v. State , 338 Ark. 97 ( 1999 )
Maryville Properties, L.P. v. Nelson , 2002 Mo. App. LEXIS 1361 ( 2002 )
St. Louis-San Francisco Ry. Co. v. Ark. Publ. Service Comm. , 227 Ark. 1066 ( 1957 )
Parkside Townhomes Associates v. Board of Assessment ... , 1998 Pa. Commw. LEXIS 319 ( 1998 )