Cottonwood Affordable Housing v. Yavapai County, TX 2001-000616.

• Citation: 72 P.3d 357,205 Ariz. 427
• Decision Date: 09 May 2003
• Docket Number: No. TX 2001-000616.,TX 2001-000616.
• Parties: COTTONWOOD AFFORDABLE HOUSING v. YAVAPAI COUNTY, et al.
• Court: Tax Court of Arizona

72 P.3d 357

205 Ariz. 427

COTTONWOOD AFFORDABLE HOUSING v. YAVAPAI COUNTY, et al.

No. TX 2001-000616.

Tax Court of Arizona.

May 9, 2003.

Dawn R. Gabel of Steptoe & Johnson, Phoenix, for Plaintiff Cottonwood Affordable Housing.

Glenn M. Gustafson, Deputy County Attorney, for the Defendant Yavapai County.

OPINION

PAUL A. KATZ, J.

Nature of the Case

Plaintiff, Cottonwood Affordable Housing Ltd. Partnership ("Cottonwood") owns and operates a low-income housing project in Cottonwood, Arizona. This Arizona limited partnership was formed to construct and operate low income housing under the federal Low Income Housing Tax Credit ("LIHTC") program. Cottonwood's limited partners bought LIHTCs under that program. In assessing Cottonwood's property, the Yavapai County Assessor assigned a full cash value to the property of $2,121,859 for the 2002 and 2003 tax years. Cottonwood challenged this value claiming it was in excess of the true market value for the property. The parties agree the property should be valued via the income approach to value. However, the parties disagree as to what items of income should be used to arrive at the full cash value. Cottonwood contends the actual income and expenses of the project should form the basis for valuation. The County contends either, that market rents generated by regular commercial apartment complexes should be used to determine the value of the property via the income approach rather than actual rents collected by Cottonwood or the credits themselves should be added to the income stream.

This case presents several issues. The first issue is whether LIHTCs are intangible property. The second issue is whether LIHTCs should be included in the value of Cottonwood's property. And the third issue is whether the restrictions imposed by the LIHTC program should be considered in valuing Cottonwood's property.

The Low Income Housing Tax Credit Program

The Low Income Housing Tax Credit was created by the Tax Reform Act of 1986. It was codified at 26 I.R.C. § 42. Congress created the LIHTC to encourage new construction and rehabilitation of existing rental housing for low-income households and to increase the amount of affordable rental housing for low-income households. The LIHTC program authorizes the states to issue federal tax credits for the acquisition, rehabilitation, or new construction of affordable rental housing. To qualify for the LIHTCs, a project must have a portion of its units set aside for low-income households. The project's use of the property is restricted by deed to low income housing for at least fifteen years. The rents on the units are limited to a percentage of the qualifying income. After the state allocates tax credits to the developers of the low-income housing project the credits are usually sold to private investors in a limited partnership. The private investors use the tax credits to offset their tax liability. The money paid for the credits is used as equity financing to make up the difference between the development costs for a project and the non-tax credit financing that could be expected to be repaid from rental income. Investors can claim the credits for each year of a ten year credit period as long as a minimum percentage of the projects' units are rented to low-income tenants at restricted rents for the fifteen year compliance period.

Legal Discussion

The Court finds there is no Arizona caselaw or authority on point. In reviewing the caselaw of various jurisdictions of the United States, the Court finds two cases involving the LIHTC program that are informative as to the issues presented in this case. Maryville Properties, L.P. v. Nelson, 83 S.W.3d 608 (Mo.App.2002), is a Missouri court of appeals case that involved a low-income housing project developed by Maryville Properties. One of the issues in the case dealt with the question of whether LIHTCs are intangible property. The assessor included the LIHTCs received by the limited partners in the valuation of the low-income apartment complex. The court of appeals found that LIHTCs are intangible property and should not be included in the appraisal. Maryville Properties, 83 S.W.3d at 617. The Maryville Properties court found that "LIHTCs are not characteristics of the property. Rather they are assets having direct monetary value." Id. at 616. LIHTCs do not have a direct effect on the income of the property. Id. at 616. "The value of the tax credits is to the owner of the property and not to the property itself." Id. at 616. The credits comprise the limited partners' interest in the partnership. Arizona recognizes an interest in a partnership as intangible. Arizona Tractor Co. v. Arizona State Tax Commission, 115 Ariz. 602, 604, 566 P.2d 1348, 1350 (App.1977).

This Court in determining how property should be appraised, would give strong deference to the Appraisal Institutes Uniform Standards of Professional Appraisal Practice ("USPAP") and the Advisory Opinions that govern the conduct of certified appraisers through out the United States, particularly where neither legislature nor courts have created such guidelines or precedent. The Arizona Administrative Code requires that our Arizona appraisers comply with USPAP when performing appraisals. Ariz. Admin. Code R4-46-601 (1998). In Advisory Opinion 14, the Appraisal Standards Board recognized that "LIHTCs are an example of an incentive that results in intangible property rights..."

The Court finds the credits constitute intangible property and should not be added to the value of Cottonwood's property or considered as part of Cottonwood's income stream. LIHTCs are intangible because they are sums of money being paid by the federal government as an incentive to invest in the project and are not income flowing from the rental of the property. If a limited partner's interest is sold the buyer will only receive the remainder of the credit, if any, and the seller may be subject to having the remaining credits recaptured. The tax credits will not significantly affect the marketability of the project, particularly if the property were to be resold at or near its tenth year of operation, because at that time the credits will have been exhausted and will play no significant part in any negotiations between a buyer and seller. If the interest is sold after any amount of time it will have to be sold at a steep discount. These tax credits are not an integral part of the real estate. They do not add to the value of the property as their use is...