1198 Butler St. Assoc. v. Bd. of Assessment
| Decision Date | 17 April 2008 |
| Docket Number | No. 1374 C.D. 2007.,1374 C.D. 2007. |
| Citation | 946 A.2d 1131 |
| Parties | 1198 BUTLER STREET ASSOCIATES, 815 Ferry Street Associates, 600 Ferry Street Associates, Canal Park Associates, 100 South Third Street Associates, Grandview Apartments Associates, Knox Avenue Senior Associates v. BOARD OF ASSESSMENT APPEALS, COUNTY OF NORTHAMPTON Appeal of Easton Area School District. |
| Court | Pennsylvania Commonwealth Court |
Sharon W. Montanye, New Britain, for appellant.
Reneé L. Ferretti, Allentown, for appellees.
BEFORE: PELLEGRINI, Judge, and SIMPSON, Judge, and FLAHERTY, Senior Judge.
OPINION BY Judge SIMPSON.
In this tax assessment appeal, we consider for the first time application of Section 402(c)(1) of The General County Assessment Law (Assessment Law)1 to property valuation for real estate tax purposes. Added to the Assessment Law in 2003, Section 402(c)(1) provides that "[i]n arriving at the actual value of real property, the impact of applicable rent restrictions, affordability requirements or any other related restrictions prescribed by any Federal or State programs shall be considered." 72 P.S. § 5020-402(c)(1).
The Easton Area School District (Taxing Authority)2 appeals an order of the Northampton County Common Pleas Court (trial court) sustaining the assessment appeals of 1198 Butler Street Associates, 815 Ferry Street Associates, 600 Ferry Street Associates, Canal Park Associates, 100 South Third Street Associates, Grandview Apartment Associates, and Knox Avenue Senior Associates (collectively, Taxpayers). As more fully described below, the trial court established new assessment values for the seven properties at issue. In this appeal, Taxing Authority assigns error in the trial court's reliance on the properties' "use value" in determining fair market value, and it asserts an abuse of discretion by concluding Taxing Authority's expert witness's approach to valuation was invalid and by adopting Taxpayer's proposed findings of fact. Discerning no reversible error, we affirm.
Taxpayers are seven limited partnerships. Valley Housing Development Corporation (Valley Housing) is the sole general partner of each limited partnership. In the 1990s, Valley Housing put into service the subject properties, all of which are located in the Easton Area School District, Northampton County. Five of the properties are located in the City of Easton, one property is located in Palmer Township, and one property is located in Forks Township.
In August 2005, Taxpayers filed a tax assessment appeal for each property with the Northampton County Board of Assessment Appeals (Assessment Board). The Assessment Board denied Taxpayers' appeals and, consequently, Taxpayers appealed to the trial court. The trial court consolidated the appeals and granted Taxing Authority's motion to intervene.
Examining the matter anew, the respected trial court heard three days of testimony. At the outset, Taxing Authority introduced into evidence the Assessment Board's tax assessment records.3 To rebut the presumed validity of the tax assessment records, Taxpayers then called three witnesses.
Taxpayers first presented the testimony of their general counsel (Taxpayers' Counsel). He explained each Taxpayer is a Pennsylvania limited partnership and Valley Housing is a non-profit charitable organization.
Providing background information for income and rent restrictions affecting the properties, Taxpayers' Counsel explained that in 1986 Congress enacted Section 42 of the Internal Revenue Code, 26 U.S.C. § 42. This section provides income tax credits for non-public entities that develop affordable rental housing. Section 42 further establishes income and rent restrictions on developed properties in exchange for income tax credits for a period of 10 years. Each state is allocated a certain number of income tax credits. For the Commonwealth, the Pennsylvania Housing Finance Agency (PHFA) is charged with allocating the income tax credits and enforcing any age and income restrictions. The PHFA also establishes maximum rent rates for properties receiving the income tax credits.
Taxpayers' Counsel testified Valley Housing placed the subject properties into service in the 1990s. All properties were developed with the same non-revocable restrictive covenant in order to benefit from the income tax credits. In particular, the subject properties are all rent and income restricted for a period of 30 years. The non-revocable covenants restrict the renter's income level to either 50% or 60% of area median income. So long as Taxpayers operate the subject properties in compliance the restrictive covenants and 26 U.S.C. § 42, Taxpayers receive an income tax credit for a period of 10 years. In years 11 through 15, if Taxpayers sell or dispose of the subject properties, or are not in compliance with 26 U.S.C. § 42, the Internal Revenue Service recaptures the income tax credits previously taken. In years 16 through 30, the rent and income restrictions remain in place; however, the income tax recapture provisions are no longer in effect.
Taxpayers also presented the testimony of Valley Housing's executive director (Executive Director). He testified that the PHFA annually publishes a list of rent restrictions and maximum rent rates for 26 U.S.C. § 42 purposes. The allowable maximum rent rates are based on 50% and 60% of the area's median income level. Taxpayers, according to Executive Director, do not charge the maximum rent allowed under the PHFA rates because their tenants cannot afford it. He explained Taxpayers would experience increased vacancy and collection rates if they charged the maximum allowable rent. Executive Director then reviewed each property, detailing the rent actually charged, the PHFA maximum rent rates, and the number of units Taxpayers rent at the 50% and at the 60% median income levels. Director testified Taxpayers need property tax relief because the income generated from the subject properties does not support the current real estate taxes. At the time of Executive Director's testimony, only two properties received the income tax credits. However, all properties remain subject to the income and rent restrictions.
Taxpayers also presented the testimony of its real estate expert (Taxpayers' expert). Expert identified the properties' highest and best uses as subsidized income tax credit housing facilities. Addressing the three methods of valuation for real estate tax purposes,4 Taxpayers' expert discounted the cost approach because the properties' rental incomes would not support construction of new facilities. Likewise, Taxpayers' expert discounted the comparable sales approach on the basis there were no other comparable units with similar rent restrictions.
Utilizing the income approach to valuation, Taxpayers' expert first noted the subject properties operate under age and income restrictions imposed by 26 U.S.C. § 42 and the non-revocable restrictive covenants. This is in accord with Section 402(c)(1) of the Assessment Law, Taxpayers' expert then calculated each property's gross income less a 5% vacancy and collection loss rate. The expert also determined Taxpayers' property expenses, which included fixed and operating expenses. For each property, Taxpayers' expert subtracted expenses from gross income to arrive at net income. The expert multiplied each property's net income by a capitalization rate to arrive at the property's fair market value.5
For its part, Taxing Authority offered its own expert (Taxing Authority's expert) who reviewed Taxpayers' expert's report. She did not appraise the properties. Relevant here, Taxing Authority's expert disagreed with Taxpayers' expert's income and expense calculations, vacancy/collection rates, and capitalization rates. Taxing Authority's expert believed the vacancy/collection rates and capitalization rates were too high, and she would have used the PHFA's maximum rent to determine Taxpayers' gross incomes. Notably, Taxing Authority's expert only reviewed one property in-depth, that is, the Knox Avenue Senior Associates property. For all properties, she offered only a range of fair market values for each property based on various adjustments. When questioned about Section 402(c)(1) of the Assessment Law, Taxing Authority's expert's answer was unclear, merely stating her review did not interpret the Assessment Law.
By order of June 21, 2007, the trial court granted Taxpayers' appeals. In doing so, the trial court adopted as its own Taxpayers' 21 proposed findings of fact. These findings applied the common level ratio to the fair market values described below. The trial court also made four additional findings. In its first two additional findings, the trial court recognized the Assessment Board's current assessments fail to reflect the properties rent and income restrictions. In its final two findings, the trial court credited Taxpayers' expert's testimony over that of Taxing Authority's expert.
Relying on Taxpayers' calculations of fair market value, the trial court arrived at the properties' assessed value by multiplying the fair market value by the common level ratio of 36.4%. Accordingly, the trial court established each property's assessed value as follows:
Property Assessed Value
Butler Street $ 83,636
815 Ferry Street $ 80,000
600 Ferry Street $ 72,727
Iron Street (Canal Park Associates) $ 150,909
South Third Street $ 222,273
Grandview Apartments $1,218,182
Sullivan Trail (Knox Avenue Sr. Associates) $ 436,364
Taxing Authority appeals.
Taxing Authority raises three issues on appeal. First, Taxing Authority asserts the trial court committed legal error by relying on "use value" in determining the subject properties' fair market values. Second, Taxing Authority...
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