WINFREE, Justice.
A property owner and a borough property tax assessor each contend, for different reasons, that the superior court erred in affirming the borough board of equalization's final valuation for a low-income housing tax credit property. We affirm a portion of the superior court's legal rulings upholding the board's interpretation of the relevant appraisal statute and we affirm the superior court's legal ruling affirming the board's choice of appraisal methodology. But because we cannot discern (1) how the board treated relevant federal tax credits in its valuation of the property, (2) the comparable properties for the board's finding that the assessor's valuation was "grossly disproportionate as compared to similar properties," or (3) the basis for the 40% economic obsolescence factor by which the board reduced that valuation, we remand for clarification by the board.
Congress created the low-income housing tax credit (LIHTC) program as part of the Tax Reform Act of 1986.
Typically a developer finances a LIHTC project by attracting limited liability partners to invest in return for use of the stream of tax credits.
Rental restrictions and federal tax credits pose difficult questions in property tax assessments of LIHTC properties, and courts are not in agreement in resolving these questions.
Courts differ on whether and why rental restrictions must be considered. Arizona, Kansas, South Dakota, and Washington all assess property value based on standards similar to Alaska's statutory "full and true value" standard,
Courts also differ on whether LIHTC tax credits should be considered. The Arizona Tax Court, Washington and Missouri intermediate courts of appeal, and Ohio and Oregon Supreme Courts have determined that regardless of whether rental restrictions are taken into account in property tax assessments, the tax credits should not be considered.
Reaching the opposite conclusion, courts in Georgia, Idaho, Illinois, Indiana, Michigan, Pennsylvania, South Dakota, and Tennessee have held that LIHTC tax credits cannot be ignored when rental restrictions are taken into account in the absence of contrary statutory authority.
Alaska Statute 29.45.110(a) requires that property be assessed at its "full and true value," defined there as "the estimated price that the property would bring in an open market and under the then prevailing market conditions in a sale between a willing seller and a willing buyer both conversant with the property and with prevailing general price levels."
In Dash v. State
In 2000 the Alaska legislature added a new subsection to AS 29.45.110.
The final version of the bill created AS 29.45.110(d).
The Kenai Peninsula Borough Assembly (Assembly) passed an ordinance exempting post-2000 LIHTC properties from AS 29.45.110(d)(1)'s mandatory valuation based on actual income without consideration of tax credits.
Pacific Park Limited Partnership (Pacific Park) owns a 30-unit apartment complex (Apartments) in Seward, within the Kenai Peninsula Borough (Borough). In 2003 Alaska
In 2005 Pacific Park applied to the Assembly for a resolution directing the Assessor to value the Apartments based on actual income derived from the property. The resolution failed.
In 2005, 2006, and 2007 the Assessor valued the Apartments at $2,930,700 using the cost approach, which is based on the rationale that a willing buyer will not pay more for a building than it would cost to build one just like it.
In 2007 Pacific Park had the Apartments independently appraised using the income approach and the restricted rents. As explained by the Assessor, the income approach measures property value by capitalizing income streams and potential future resale into a present, lump sum value.
Pacific Park appealed the Assessor's 2007 valuation of $2,930,700 to the Borough's Board of Equalization (Board). Upon reinspection and reevaluation, the Assessor calculated a total value of $3,067,800.
The Board heard Pacific Park's appeal on June 11, 2007. Pacific Park argued that: (1) the Assessor had used "a fundamentally wrong principle of valuation in that the Assessor did not consider [the] 30-year rent restriction"; and (2) even under the cost approach, rental restrictions needed to be considered in the form of economic obsolescence.
The Assessor argued that: (1) Pacific Park would have to show fraud or the clear adoption of a fundamentally wrong valuation
The Board found that although using the cost approach was within the Assessor's discretion, application of that approach to the Apartments without consideration of rental restrictions or economic obsolescence resulted in a valuation that was "overvalued [and] grossly disproportionate as compared to similar properties." The Board decided that the Apartments' improvement value should be reduced by a 40% economic obsolescence factor.
The Assessor appealed the Board's decision to the superior court, and Pacific Park cross-appealed. The superior court addressed four issues encompassing all points on appeal. First, the superior court held the Board did not err by not adopting the income approach to value the Apartments. Second, it held the Board did not violate state law, borough code, or legislative intent by adjusting the Assessor's valuation. Third, it held the Board did not err by finding the Assessor's application of the cost approach resulted in an overvalued and grossly disproportionate valuation. Finally, it held the facts and law supported the Board's valuation of Pacific Park's property, including the 40% economic obsolescence factor.
The Assessor appeals and Pacific Park cross-appeals.
"When the superior court acts as an intermediate court of appeal in an administrative matter, we independently review and directly scrutinize the merits of the board's decision."
Whether the Board's factual findings, particularly the findings that the Assessor's valuation was grossly disproportionate and excessive by 40%, are "sufficient to permit appellate review is a legal question that we decide by exercising our independent judgment."
Whether the Board's assessment violated relevant law is a question of law not involving agency expertise, and we therefore review this question under the substitution of judgment standard.
Pacific Park appeals on the ground that the Board "erred when it failed to adopt [Pacific Park's] appraiser's valuation using the `income' approach" because that approach is the preferred method for valuing LIHTC projects.
The Apartments are properly valued under AS 29.45.110 subsection (a)'s general full and true value provision rather than subsection (d)(1)'s mandatory income approach without adjustment for tax credits because they did not qualify for the LIHTC program prior to January 1, 2001, they are located in a municipality where post-2000 LIHTC projects are exempt from mandatory use of the statutory income approach,
A taxing authority is allowed to choose a reasonable method for determining the full and true value of a property "so long as there was no fraud or clear adoption of a fundamentally wrong principle of valuation."
The Assessor appeals on the ground that the Board "impermissibly focused on the restricted rental income of the property." The Assessor argues that (1) after AS 29.45.110(d) became effective, rental restrictions could not be considered in calculating full and true value under AS 29.45.110(a), and (2) the failure of Pacific Park's Assembly resolution precludes consideration of the rental restrictions. We disagree. Just because a taxing authority is not required under state or local law to use the statutory income approach does not necessarily mean that it is prohibited from considering restricted rental rates in another valuation method, if reasonable to do so. The Board could reasonably conclude that it was appropriate to consider the rental restrictions when valuing the Apartments under the cost approach, and we affirm the superior court's decision upholding the Board on this issue.
The Assessor also appeals on the ground that the Board's valuation "failed to account for the federal tax credits provided to the Property." The Assessor argues there is a requirement that the taxing authority consider federal income tax credits if it considers rental restrictions in assessing the full and true value of a LIHTC property. As noted above, courts from other jurisdictions differ on whether federal income tax credits must be considered when rental restrictions are considered in valuing a LIHTC property. Some conclude that tax credits should be ignored because they are intangible property
Here the Board did not expressly address the tax credits associated with the Apartments, and we cannot discern whether or why the Board took the tax credits into account or ignored them in its adjustment of the Assessor's valuation. The superior court noted that the Board's decision did not address these questions, but nonetheless held that the Board "acted within its expertise to decide that tax credits are largely intangible and not appropriate for tax assessment." We are unable to affirm the superior court's decision on this record. As discussed below, we are remanding to the Board for clarification of its use of the rental restrictions to adjust the Assessor's valuation, and the Board should clarify its treatment of the tax credits in its subsequent decision as well.
The Assessor and Pacific Park both contend the Board's valuation of the Apartments must be set aside. The Assessor argues the Board did not accord his valuation proper deference and lacked sufficient grounds to find his valuation "excessive or grossly disproportionate compared to other similar projects." Pacific Park argues the Board should have recognized "complete" economic obsolescence due to the rental restrictions and, even under the cost approach, should have reached the same valuation as Pacific Park's appraiser under the income approach.
"The only grounds for adjustment of assessment are proof of unequal, excessive, improper, or under valuation based on facts that are stated in a valid written appeal or proven at the appeal hearing."
The Board found the failure to factor in rental restrictions and economic obsolescence made the Assessor's valuation excessive. The Assessor argues that his failure to incorporate rental restrictions in the form of economic obsolescence did not render the valuation excessive because economic obsolescence cannot measure internal conditions such as rental rates. But although the deed restriction limiting a LIHTC property's rental rates is part of the property itself, the marketplace's reaction to the deed restriction is external.
Pacific Park argues the Board should have recognized "complete" economic obsolescence instead of a 40% factor. In applying the 40% factor, the Board acknowledged it heard testimony that "up to a 50% reduction" would be reasonable as an economic obsolescence factor. Pacific Park accurately clarifies that Bethard's testimony suggested a 50% factor at the hearing to account for the depressed nature of the general housing market in Seward, and implies that its 30-year rental restrictions would
The Board's oral findings do not specify whether its 40% economic obsolescence factor accounts for the general housing market in Seward, the rental restrictions, or both, stating simply "the cost approach should include a factor for economic obsolescence." The Board's written findings state the Apartments were overvalued because "[t]he assessment did not include a factor for economic obsolescence, even though the property is burdened by rent restrictions that run with the land," indicating the 40% factor relates at least in part to the rental restrictions.
At oral argument before us, counsel for Pacific Park stated that the 40% factor chosen by the Board lacked an evidentiary basis. The Assessor stated at oral argument that he understood the restricted rental income was the sole reason for the Board's 40% obsolescence factor and the general Seward market was not taken into account by the Board. It is not clear to us why the Board applied a 40% economic obsolescence factor when the only quantified factor presented to the Board was the 50% obsolescence factor accounting for the depressed Seward rental market in general. We therefore remand to the Board for clarification and explanation of its decision on this issue and for further factual findings as it deems necessary.
The Board's oral and written findings do not state the comparison from which it determined the Assessor's valuation to be unequal.
Pacific Park argued to the Board that the Assessor's valuation was unequal to valuations of other LIHTC properties in Alaska. But as the Assessor pointed out to the Board, the other LIHTC properties in Alaska are valued under AS 29.45.110(d) — which mandates they be assessed under the income approach based on actual income without adjustment for federal tax credits — because they either qualified as LIHTC properties before January 1, 2001, or are located in municipalities without an ordinance allowing for a different valuation method.
The Assessor made particular mention of another post-2000 LIHTC property in the Borough valued under the cost approach without adjustments for rental restrictions or federal tax credits. But Pacific Park pointed out that the property was not appropriate for comparison because its owners participated in the Section 515 Program,
The Assessor asserted the valuation was not unequal given the appropriate comparison to the nearly 90 apartment complexes in the Borough appraised under the cost approach. The Board's finding that the Assessor's valuation was grossly disproportionate "because" of the failure to factor in recorded restrictions suggests that the Board compared the Apartments to the non-LIHTC apartment complexes, which are unencumbered by rental restrictions. This would be consistent with the Board's finding that the
Despite reviewing the parties' briefing and the record for clarification,
We AFFIRM the superior court's decision upholding the Board of Equalization's state law and borough code interpretation allowing the cost approach and the consideration of LIHTC rental restrictions in connection with that appraisal methodology. We VACATE the superior court's decision upholding the Board's final valuation and REMAND to the Board for findings that enable review of the basis for its decision.