Opinion ID: 901329
Heading Depth: 1
Heading Rank: 3

Heading: Assessment of Property in the Federal LIHTC Program

Text: [¶12.] Town Square argues that the actual restricted rents, rather than hypothetical market rents, should be the measure used in the income capitalization approach. The larger question, however, is whether either or both the reduced rents and the tax credits should be used in the assessment of LIHTC properties. Neither side cites a South Dakota statute or regulation dealing with this specific question. Several other states have addressed the issue either through court decisions or legislation. Before we examine out-of-state decisions, we must take caution to note that these cases might have limited value as precedent because they have often been decided on constitutional and statutory provisions incompatible with our own state's provisions. [2] [¶13.] Generally, our sister states are divided. But a clear majority of courts have ruled that the restricted rents must be taken into account when assessing LIHTC property. Only a few courts have ruled, like the circuit court here, that the use of the reduced rents is improper because a voluntary agreement by a developer to be bound by the restricted rents is not a government restriction requiring consideration of the lower rents. In the Matter of Appeal of The Greens of Pine Glen Ltd. Partnership, the court reasoned that [u]nlike a governmental restriction such as zoning, [LIHTC] restrictions do not diminish the property's value, but instead balance tax credits allowed to the developer against rent restrictions imposed on the developer, and [b]ecause [LIHTC] restrictions are freely entered contractual covenants, not governmental regulations, the taxpayer may not artificially alter the value of [the] property below fair market value. 576 SE2d 316, 322 (NC 2003). See also Alliance Towers Ltd. v. Bd. of Revision, 523 NE2d 826 (Ohio 1988) (market rental rates should be used; artificial effects of government housing assistance programs are not indicative of real estate valuation). [¶14.] Several courts hold, in line with what Town Square contends, that the restricted rental rates should be used without consideration of the tax credits or other subsidies. Cottonwood Affordable Housing v. Yavapai, 72 P3d 357 (Ariz TC 2003) (tax credits are nontaxable intangibles); Greenfield Village Apartments, L.P. v. Ada County, 938 P2d 1245 (Idaho 1997) (property valuation should consider restrictions on rent; concurring opinion argues that valuation should also include benefits of the tax credits); Maryville Properties, L.P. v Nelson, 83 SW3d 608 (MoCtApp 2002) (restricted rents must be taken into account, but tax credits cannot be considered); Cascade Court, L.P. v. Noble, 20 P3d 997 (WashCtApp 2001) (same); Metro. Holding v. Milwaukee Review Bd., 495 NW2d 314 (Wis 1993) (property assessment for low-income housing should be based on actual rents and expenses  not addressing tax credits). Town Square insists that tax credits are not taxable under South Dakota law because they are intangibles. [¶15.] Indeed, some of these out-of-state decisions hinge solely on the question whether tax credits are intangibles. In Cottonwood Affordable Housing, for example, the owner of a LIHTC project in Arizona challenged the county assessor's valuation of $2,121,859. Both sides agreed that the property should be assessed under the income approach, but disagreed on what types of income should be considered. The property owner thought the valuation should be based on the actual project income and expenses, while the county believed that either regular market rent rates should be used or the tax credits should be also considered. Cottonwood Affordable Housing, 72 P3d at 359. The court rejected use of the tax credits because they were intangibles, not an integral part of the real estate, and added no value [to] the property as their use is limited to ten years . . . . Id. On the restricted rents issue, the Cottonwood Affordable Housing court again agreed with the property owner: 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. Id. at 360. [¶16.] On the other hand, by way of diverse rationales, a number of courts have concluded that the restricted rents and the tax credits should both be factored in the assessment either because (1) the state has a broad definition of real property, (2) when only the reduced rents are considered, the value is artificially depressed, or (3) the value of the tax credits are part of the economic reality of the property. For instance, in Rainbow Apartments v. Illinois Property Tax Appeal Bd., 762 NE2d 534, 536-37 (IllAppCt 2001), the court held that along with considering the restricted rents, [i]gnoring the effect of the tax credits would distort the earning capacity, and thus the fair cash value, of the property as low-income housing. A willing buyer, the court reasoned, would surely consider the availability of the credits when determining the fair cash value of the property. Id. at 537. Indeed, although valuation of tax credits can be complex, they are nonetheless transferable under the rules governing LIHTCs: a purchaser of creditworthy property steps into the seller's shoes with respect to unused credits. [3] J. William Callison, The Effect of Tax Credit Restrictions on Valuation for Real Property Tax Purpose s, 5 J Affordable Housing & Cmty Dev L 32 (1995) (citing 26 USC § 42(d)(7)). [¶17.] Similar decisions can be found in several other states. In Pine Pointe Housing, L.P. v. Lowndes County Bd. of Tax Assessors, 561 SE2d 860, 863 (GaCtApp 2002), the court examined a tax statute that required zoning, use restrictions, and [a]ny other factors deemed pertinent, to be used to consider fair market value. LIHTC credits were deemed pertinent because [t]he credits have value to a taxpayer with federal income tax liability and can be passed through a partnership structure to those taxpayers . . . . [A] third party would pay for the value as part of that property's sale price in a bona fide, arm's length transaction. Furthermore, the tax credits go hand in hand with the restrictive covenants that require the property to charge below-market rent. Id. at 863. Furthermore, included with the tax credits, the restricted rents should be considered because [i]f viewed in isolation, the rental restrictions would artificially depress the value of the property for tax valuation purposes. Id. [¶18.] Likewise, the court in Parkside Townhomes Assoc. v. Bd. of Assessment Appeals of York County, decided that LIHTC credits are properly included in a fair market value because the tax credits were part of the economic reality. 711 A2d 607, 611 (PaCommwCt 1998). Tax related benefits associated with investment property ownership inherently affect value and the court is not constrained to determine [fair market value] as though the property lacked tax shelter features. Id. (citation omitted). See also In re Ottawa Housing Assoc., L.P., 10 P3d 777 (KanCtApp 2000) (both benefits and burdens of LIHTC housing should be considered). Furthermore, in Spring Hill, Pine Pointe, and Rainbow Apartments, supra, the courts specifically concluded that the tax credits are not intangible property. [¶19.] For several reasons, we think South Dakota law allows for consideration of both the restricted rental rates and the tax credits for LIHTC properties. First, we need not grapple, as other courts have, with the troublesome question whether these tax credits are intangible property. Out-of-state cases holding that intangible property cannot be taxed are of no value here because, for taxation purposes, South Dakota makes no distinction between tangible and intangible property. [4] Ewert v. Taylor, 160 NW 797, 801 (SD 1916). Second, South Dakota has a broad definition of real property that would encompass the tax credits: the definition includes the [l]and and all rights and privileges thereto belonging[.] SDCL 10-4-2. Third, the LIHTC program is a method for developers and owners to optimize their real estate investment. [5] See Parkside Townhomes, 711 A2d at 611. To ignore these credits, which enhance value, would be to ignore the realities of the marketplace. Buyers and sellers most certainly consider the benefits and restrictions that come with LIHTCs in determining the market value of real estate. See Pedcor Investments v. State Bd of Tax Comm'rs, 715 NE2d 432, 437 (IndTC 1999) (tax incentives provide financial benefits counteracting the decreased rental income). Surely Town Square would never have agreed to a covenant requiring forty years of restricted rents without the accompanying benefit of the tax credits. Accord Kankakee County v. Property Tax Appeal Bd., 544 NE2d 762, 767, 769 (Ill 1989); Glenridge Dev. Co. v. City of Augusta, 662 A2d 928, 931 (Me 1995); Meadowlanes Ltd. Dividend Housing Ass'n v. City of Holland, 473 NW2d 636, 649 (Mich 1991). As we indicated, to the extent that they have not been used, these tax credits are transferable to new buyers. [¶20.] Despite compelling reasons for valuing both the tax credits as well as the reduced rent restrictions, we must still address this Court's ruling in Yadco. That decision rejected a taxpayer's argument that his property should be appraised using the income approach because he had granted an uneconomical long-term lease on the property. The Court declined this position because the taxpayer's income approach distorted the result by employing actual income from the lease . . . . Yadco, 237 NW2d at 670 (citations omitted). [T]he county and the state should not be forced to bear the burden of increased taxation merely because a taxpayer, intentionally or through poor business judgment, has consummated a long-term, uneconomical lease. Id. at 658. Thus, the case instructs us that a property owner can reduce a property's value by imprudently agreeing to rental restrictions with consequent economic loss, but the owner should not be allowed to reduce the tax valuation in such a manner. [¶21.] We find Yadco to be distinguishable. Considered in isolation, reduced rental restrictions would negatively affect the income-producing capacity of the apartment complex and thus its value. But here the agreement to maintain the reduced rents under a restrictive covenant allows Town Square to take advantage of substantial federal tax incentives. These incentives provide financial benefits to Town Square's partners, thus offsetting the decreased rental income. [6] With tax credits allocated to the property, its marketable value increases. Unlike in Yadco, Town Square's investors have not intentionally or imprudently diminished the value of the property. They have financed and developed a low income apartment complex that may have otherwise not been economically feasible.