Dealing with Property Taxes: Proactive Approach Can Pay Rewards

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Developers and owners should take a proactive approach when it comes to property tax assessments for low-income housing tax credit (LIHTC) projects. Aggressive early and ongoing actions can prevent or minimize excessive assessments that can jeopardize the financial viability of a property, said panelists at the recent 2013 Annual Meeting of the National Council of Housing Market Analysts in Columbus, Ohio.

“I would say on average that real estate taxes are 12 to 15 percent of operating costs for a particular project for our company,” said David Cooper of The Woda Group, a Westerville, Ohio-based developer/owner/manager of LIHTC and other multifamily rental housing properties.

“From 2007 through 2012,” he said, “we achieved across our portfolio greater income increases than we had expenses increase. And one of the ways we controlled expenses…was to aggressively appeal real estate taxes, and also, even before starting construction, to work with assessors. It’s definitely an education process.”

 

Problem with Faulty Assessments

Panelists reported that the key problems occur when local assessors set the value of LIHTC properties – determining the property tax bill – by using the cost approach or sales approach rather than the correct income approach, and/or by including the value of the housing tax credits in their determination.

The cost approach values an apartment property based on its actual development cost; the sales approach by looking at recent sales prices for comparable area properties; and the income approach based on the annual rental income generated by the project. LIHTC properties have less rental income than comparable conventional apartment properties because they have restricted rents that must be maintained for an extended period of time.

Conditions are better in some states than others when it comes to LIHTC assessment practices. Some have passed laws requiring assessors to value LIHTC properties using the income approach and bar them from including the value of the tax credits. Many others, though, do not, and local tax assessors have much more latitude.

Richard Poulton, an appraiser, market analyst, and principal with Value Research Group, LLC, Livingston, N.J., outlined some of the arguments that developers and owners should use to educate assessors about the LIHTC program and tax credit properties in order to enhance their prospects for receiving a fair assessed value or appealing an unreasonably high assessment.

“One of the things that has to be established is that affordable housing is based on the notion that the developer and the owner are providing a public good to serve the community,” said Poulton. Part of the message, he said, is that housing credits or other subsidies are needed to help cover construction costs and fill the gap to facilitate below-market, restricted rents that are affordable to low-income households for at least 15 years and most likely 30 years. This can help to explain to assessors why the value of a LIHTC project should be less than its actual development cost. Poulton said assessors should also be made aware that there is significant risk involved in developing LIHTC projects and that they don’t always work.

 

Appeals, Educational Efforts

The Woda Group appealed a case involving assessments of some of its Ohio properties to the Ohio Supreme Court, and won. The court ruled that the income approach is the appropriate valuation method for affordable housing properties. Cooper said his company has also taken two cases to the West Virginia Supreme Court.

Cooper said it makes sense for developers to meet with assessors before starting construction of a LIHTC property to educate them and try to ward off any problems regarding its assessed value down the road.

“We’ve learned,” said Cooper, “that it’s a good idea to go in upfront and work with assessors before we even start construction and say, ‘Here’s what we’re going to build. Here’s what the rents are going to be. Here’s who’s going to live here.’”

“I’m not going to say we’re always successful educating assessors. But I would say where we go in upfront and work with the assessor, probably 50% of the time we’ll reach an agreement essentially on how the property’s going to be valued even before we start construction.”

Cooper said developers and owners also need to be continually vigilant, monitoring the annual property tax bill for each property and appealing when warranted. Just because an assessor adjusts the assessed value downward after an appeal one year doesn’t mean he or she won’t raise it the next, Cooper warned.