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The Drama (or Comedy) of LIHTC Property Tax Assessment

In prominent historian Joseph J. Ellis’s latest work, The Quartet, he chronicles how George Washington, Alexander Hamilton, James Madison and John Jay persuaded—and with great difficulty—states in fear of another King George III that wanted to remain independent, instead, be united. What that Colonial Quartet feared was 13 different opinions on vital issues (at that point, primarily war with a foreign nation).

The foresight was formidable. Nearly two and a half centuries later, federal programs that yield implementation decisions to states inevitably result in a grab bag of opinions, which might be manageable to locals but perplex businesses working in a variety of regions. In the business of tax credit housing, we face a number of these pass-the-buck issues.

At a meeting of NH&RA’s Board of Directors at July’s Summer Institute in Newport, Larry Curtis of WinnDevelopment raised the recurring issue of the inclusion of the “value” of the tax credits in the property tax assessment. “At project initiation,” Curtis said, “every dollar budgeted for real estate taxes results in approximately $15 less of  supportable capital, and, therefore requires more public subsidy. The real losers in aggressive municipal tax assessment are state and federal allocators who need to provide more resources to enable project feasibility. After completion, over assessment and over taxation results in less dollars available for project operations, and ultimately results in the property’s decline–obviously all counter to the interests of the municipality creating the over assessment.”

Immediately, voices all around the table responded by reporting legal challenges on both sides of the issue—inclusion of LIHTC proceeds in Connecticut and Alaska, exclusion in Ohio and Maryland, reversed decisions and legislative efforts in one direction or the other in Tennessee and Georgia, and additional conflicting opinions in municipalities large and small.

If this did not have an effect on the effort to fulfill our country’s severe need for affordable housing, it would be comic. Abbott and Costello’s “Who’s on first?” routine comes to mind. Or an American President’s famous defense, “It depends on your definition of ‘is.’” Different people are hearing the same words but interpreting them contradictorily. The lack of a single national policy on the issue has led to an amoeba-like landscape constantly reforming its shape. And yet, since the bulk of the tax credit program is federal and property taxes are local, it is difficult to dictate uniformity. Rulings on property taxes are clearly embedded as the rights of states.

Simply the issue is this: the LIHTC federal program (as well as state tax credit programs), exists to encourage developers to build more affordable housing that would not otherwise be built. In exchange for the availability of tax credits to attract financing for projects, developers commit to maintaining below-market-rate units at restricted rents. While rents are restricted on these properties,  expenses are not. Any imposed expense burden on  projects (such as higher property taxes), makes the  acceptance of restricted rents less feasible and discourages building in that region. Property taxes, in fact, are usually the most expensive item in a projects’ operating budget. Research published in 2006 by Joseph Rosenblum of John Marshall Law School showed that valuations that included LIHTC tax credits were, on average, twice those that excluded the credits.

Those who support including the credits in valuations would argue that with the decreased value of houses in many areas as a result of the Great Depression continuing in many places, local governments are hungry for additional tax revenue. They might also point out that there is such wide demand for the tax credits that many requests remain unfulfilled and only 1% of tax credits go unused annually.

It’s another conundrum of the ongoing American dilemma—social need versus bottom line. The national landscape is kind of a mess and the difficulty of getting elected tax assessors as well as trade groups of appraisers to agree on the issue has exacerbated it.

The Uniform Standards of Professional Appraisal  Practice (USPAP) guidelines overseen by the Appraisal Foundation, a joint committee of U.S. and Canadian  appraisal organizations, states that “competency  required to appraise subsidized housing extends beyond typical residential appraisal competency.” This seems to recognize that the idiosyncrasies of tax credit supported housing requires a different skill set from market rate  multifamily appraisal. On the other hand, the Fall 2010 issue of The Appraisal Journal, an industry trade publication stated, “Tax credits are as much of a part of real property as the rent that is paid by tenants.”

A steady ongoing flow of legislative and court decisions throughout the country for over three decades have ruled differently on two main issues: (1) Is the rental income utilized to determine value for taxation based on market rent or restricted rent; and (2) Is the funding provided by sale of tax credits to be included in the assessed value?

The ongoing discrepancies amongst judges provides assessors and appraisers with the license to have their own contrary positions. The primary factor considered in most of these court decisions is, are the tax credits tangible and do they bring added intrinsic value to the property, or are they intangible since their benefits goes to the investors.

Here is the current hodgepodge landscape: Currently, there are 15 states in which neither the legislature nor the courts have provided any.

In 32 states, legislative or court decisions have directed the utilization of restricted rent.

The inclusion of tax credits is less clear. Legislatures in 24 states have excluded tax credits from valuation primarily arguing they undermine the goal of encouraging development. In six of those states, while a court originally ruled that the credits should be included, that decision was subsequently overturned by the legislature.

In Hawaii and Nebraska, LIHTC properties are exempt from property taxes.

Idaho is the only state in which both a court and the legislature have ruled to include tax credits in valuation. Kansas and Michigan include tax credits solely by court ruling.

Other states, such as Alaska and Tennessee, have their own different approaches, such as Payment in Lieu of Taxes programs (PILOT) in which other efforts of community support are substituted for property tax.

Given this mass confusion, it is imperative that developers and their attorneys check the specific property tax status of tax credit investment both in the state and in municipalities at an early stage of a project.