Property Taxation of Affordable Housing Todd C. BrockmannLee J. Van De Carr Jr. The Brockmann Law Firm, PCThe Pendergraph Companies, LLC 8037 Corporate Center Drive3924 Browning Place Suite 100Suite 1 Charlotte, NC 28226Raleigh, NC (704) (919)

What is the Issue? Income Approach vs. Income Using Market Rents vs. Income + Tax Credit Value Approach vs. Replacement Cost Approach vs. Statutory Guidelines

State Analysis Results vary from : State to State County to County in some states Variances declining?

Example of Income Approach Example Property: 136 units, 8 story high-rise, Senior community NOI = $267,000, Effective Tax Rate = 1.43% Income Approach: NOI =$ 267,000 Cap Rate =9.00% Value =$ 2,966,667

Example of Income Approach using Market Rate Rents Example Property: 136 units, 8 story high-rise, Senior community NOI = $267,000, Effective Tax Rate = 1.43% Income Approach using Market Rate Rents: NOI =$360,000 * assuming market rents are 10% higher than TC rents Cap Rate =9.00% Value =$4,000,000

Example of Income Approach adding Tax Credit Value Example Property: 136 units, 8 story high-rise, Senior community NOI = $267,000, Effective Tax Rate = 1.43% Income Approach adding Tax Credit Value: NOI = $267,000 Cap Rate = 9.00% Sub-Total = $2,966,667 Tax Credits = $3,000,000 Value = $5,966,667

Example of Income Approach using Market Rate Rents and adding Tax Credit Value Example Property: 136 units, 8 story high-rise, Senior community NOI = $267,000, Effective Tax Rate = 1.43% Income Approach using Market Rate Rents and adding Tax Credit Value: NOI = $360,000 Cap Rate = 9.00% Sub-Total = $4,000,000 Tax Credits = $3,000,000 Value = $7,000,000

Example of Replacement Cost Approach Example Property: 136 units, 8 story high-rise, Senior community NOI = $267,000, Effective Tax Rate = 1.43% Replacement Cost Approach: Insured Value =$6,075,000 * Typically a per sq ft value is used to get this calculation (135,000 sq ft at $45.00 per sq ft) Dev Budget =$5,300,000 Dev budget minus financing costs, land, soft costs, dev fee Average =$5,687,500

Taxes at Different Values using Effective Tax Rate APPROACHVALUEPROPERTY TAXES Restricted Income$2,966,667$42,423 Market Income$4,000,000$57,200 Restricted Income + Tax Credits $5,966,667$85,323 Market Income + Tax Credits $7,000,000$100,100 Replacement Cost$5,687,500$81,331

North Carolina Case Law The Greens of Pine Glen Ltd. v. Durham County Board of Equalization (2003) Supreme Court “Taxpayer voluntarily entered into such an agreement because of the substantial tax credits it received in return. Taxpayer could have built these apartments for rental on the open market, but it chose to be in the business of affordable housing in order to take advantage of the various federal and state incentives. Its participation in the section 42 program created another way to finance taxpayer’s building project because the sale of the tax credits generated funds that taxpayer used to construct The Greens of Pine Glen. Therefore, taxpayer’s participation in section 42 housing represented a business and economic decision…..”

Recent Bankruptcy Case In re: Creekside Senior Apartments, LP, et al Five related Kentucky LIHTC projects fell into bankruptcy. Bankruptcy Court was tasked with determining the value of each property and added the net present value of the remaining tax credits to the property value at the rent-restricted appraised value.

Recent Bankruptcy Case In re: Creekside Senior Apartments, LP, et al “The issue was whether the fair market value of the various apartment complexes secured by the Bank's mortgages should reflect the value of the remaining tax credits. The Bank did not argue, nor did the bankruptcy court determine, that the Bank was entitled to claim the tax credits on its tax returns. Nor did the Bank argue that it owned or had a separate security interest in the tax credits or in the money paid by the investors in exchange for allocation of the tax credits. The only aspect of the tax credits at issue in this case is whether the value of the remaining credits affects the value of the Bank's collateral and, thus, the amount of the Bank's secured claim.” “Because the restrictions limit the amount of income an owner can realize from low- income housing properties, the restrictions affect the price a willing seller would agree to pay for such properties….If the burden impacts the value, the benefits must as well…[T]he value of the remaining tax credits is properly included in determining the amount of the Bank's secured claim.”

North Carolina Statute N.C.G.S. Section A North Carolina low-income housing development to which the North Carolina Housing Finance Agency allocated a federal tax credit under section 42 of the Code is designated a special class of property under Article V, Section 2(2) of the North Carolina Constitution and must be appraised, assessed, and taxed in accordance with this section. The assessor must use the income approach as the method of valuation for property classified under this section and must take rent restrictions that apply to the property into consideration in determining the income attributable to the property. The assessor may not consider income tax credits received under this section 42 of the Code or under G.S in determining the income attributable to the property. Became effective for fiscal tax year

Sample under N.C.G.S. Section

How Do you Calculate Costs? Actual costs are most accurate for the project, but county wants uniformity. County will apply a percentage of income (e.g. 40%) as a flat cost amount. Normal multifamily percentage underestimates costs because of lower affordable rents. Are reserves considered expenses?

Other Issues Under Statute Value is based upon revaluation year 1602/Exchange projects Which rent restrictions – actual or maximum Capitalization rate used Weighing the cost of the appeal – attorney, appraiser, time

North Carolina Exemptions Property Tax Exemption in certain circumstances N.C.G.S. § (a)(8): Exempt if wholly-owned by nonprofit organizations providing housing for individuals or families with low or moderate incomes. What about for-profit affordable housing without tax credits?

South Carolina Statutes Anecdotal evidence indicates that it was negotiable in various counties prior to 2006 SC Code of Laws § : Income approach required “ (A)Federal or state income tax credits for low income housing may not be taken into consideration with respect to the valuation of real property or in determining the fair market value of real property for property tax purposes. For properties that have deed restrictions in effect that promote or provide for low income housing, the income approach must be the method of valuation to be used. (B)For purposes of this section, ‘low income housing’ means housing intended for occupancy by households with incomes not exceeding eighty percent of area median income, adjusted for household size, as determined by the United States Department of Housing and Urban Development.” SC Code of Laws § : Nonprofit exemption from property taxes

North Carolina Property Tax Appeal Process STEP ONE: INFORMAL APPEAL File appeal form Tax department appraiser will review The result is mailed to owner The owner has thirty (30) days to file a formal appeal

North Carolina Property Tax Appeal Process STEP TWO: FORMAL APPEAL File formal appeal form Tax department appraiser meets with owner to discuss findings and give opinion. If still disputed, a formal appeal case will be scheduled and presented to the Board of Equalization and Review. At hearing, owner and tax department present information to Board. Board makes decision which is mailed to owner within thirty (30) days of hearing.

North Carolina Property Tax Appeal Process STEP THREE: PROPERTY TAX COMMISSION  The owner has thirty (30) days from the date on the formal appeal decision to file an appeal with the North Carolina Property Tax Commission.  Appeal cases are adjudicated in Raleigh.

North Carolina Property Tax Appeal Process STEP FOUR: COURTS  The owner may make an appeal to the North Carolina Court of Appeals and North Carolina Supreme Court.  See Greens of Pine Glen case.

Important Dates for Real Estate Tax Appeals in North Carolina APPEALS AT COUNTY LEVEL (Board of Commissioners or Board of Equalization and Review) NCGS (g)(2): On request, the board of equalization and review shall hear any taxpayer who owns or controls property taxable in the county with respect to the listing or appraisal of the taxpayer’s property or the property of others. a.A request for a hearing under this subdivision (g)(2) shall be made in writing to or by personal appearance before the board prior to its adjournment. NCGS (e): Time of Meeting. – Each year the board of equalization and review shall hold its first meeting not earlier than the first Monday in April and not later than the first Monday in May. NCGS (g)(2)(d):...The board shall notify the appellant by mail as to the action taken on the taxpayer’s appeal not later than 30 days after the board’s adjournment.

Important Dates for Real Estate Tax Appeals in North Carolina APPEALS AT STATE LEVEL (Property Tax Commission and ultimately the North Carolina Court of Appeals) NCGS (e): Time Limits for appeals. – A notice of appeal from an order of a board of county commissioners, other than an order adopting a uniform schedule of values, or from a board of equalization and review shall be filed with the Property Tax Commission within 30 days after the date the board mailed a notice of its decision to the property owner. NCGS (a): No party to a proceeding before the Property Tax Commission may appeal from any final order or decision of the Commission unless within 30 days after the entry of such final order or decision the party aggrieved by such decision or order shall file with the Commission notice of appeal and exceptions which shall set forth specifically the ground or grounds on which the aggrieved party considers said decision or order to be unlawful, unjust, unreasonable or unwarranted, and including errors alleged to have been committed by the Commission.

Property Taxation of Affordable Housing Todd C. BrockmannLee J. Van De Carr Jr. The Brockmann Law Firm, PCThe Pendergraph Companies, LLC 8037 Corporate Center Drive3924 Browning Place Suite 100Suite 1 Charlotte, NC 28226Raleigh, NC (704) (919)