Hampton Associates v. BD of Assessors of Northampton

• Decision Date: 17 April 2001
• Docket Number: P-1711
• Parties: (Mass.App.Ct. 2001) HAMPTON ASSOCIATES vs. BOARD OF ASSESSORS OF NORTHAMPTON. 98-
• Court: Appeals Court of Massachusetts

751 N.E.2d 437 (Mass.App.Ct. 2001)

HAMPTON ASSOCIATES vs. BOARD OF ASSESSORS OF NORTHAMPTON.

98-P-1711

Massachusetts Court of Appeals

April 17, 2001.

July 18, 2001.

County: Suffolk.

Present: Greenberg, Duffly, & McHugh, JJ.

Taxation, Real estate tax: value. Value.

Appeal from a decision of the Appellate Tax Board.

Neva Kaufman Rohan for the plaintiff.

Richard P. Bowen for the defendant.

MCHUGH, J.

Hampton Associates (Hampton), a Massachusetts limited partnership, owned a low-income housing complex (complex) in Northampton in fiscal years 1992, 1993 and 1994. Claiming that the Northampton board of assessors overvalued the complex for those years, Hampton appealed the valuation to the Appellate Tax Board (board). After an evidentiary hearing, the board concluded that Hampton had failed to sustain its burden of proving overvaluation and consequently found in the assessors' favor. This appeal followed. Finding no error, we affirm.

Although the ultimate issue in the case centers on whether Hampton carried its burden of proof, resolution of that issue implicates the special problems assessors encounter when determining the value of residential real estate on which income and income distribution have been artificially capped. That problem, in turn, flows from the nature of the complex and the financing that produced it. Before examining the evidence the parties presented to the board, therefore, we look briefly at the complex and its genesis.

The complex consists of twenty-six two-story buildings on approximately eighteen acres of land. The buildings contain a total of 207 apartments ranging in size from one to four bedrooms. Among other things, the complex has access to highways and public transportation, has its own on-site pumping station for a sanitary sewer system and has five or six on-site managers.

In late 1972, Hampton obtained the construction funds to build the complex through participation in a program created by § 236 of the National Housing Act, 12 U.S.C. §§ 1701, 1715z-1 (1970), a Federal program designed to encourage construction of low-income housing nationwide. Under the program, Hampton invested approximately $530,000 of its own funds and obtained approximately $4.7 million in construction funds from a commercial lender under a forty-year loan carrying a 7 percent annual interest rate. The Department of Housing and Urban Development (HUD), which oversaw the program, agreed to pay all but one percent of the annual interest directly to the lender. In addition to the mortgage subsidy, participation in the program also meant that Hampton, its principals and investors would not be liable for payments due under the note and mortgage in the event of a default in those payments. Finally, the program provided the investors with a number of significant tax benefits including offsets, or "shelter," for income the investors obtained from other pursuits.¹

In return for the foregoing benefits, Hampton, like other program participants, agreed to a number of restrictions designed to achieve the program's over-all goals. For present purposes, the most important restrictions included a limit on the amount of rent Hampton could charge for each of the apartments in the complex.² In addition, Hampton was prohibited from prepaying the mortgage note, and thus from escaping the restrictions, for twenty years. Finally, the program limited to $31,979, or six percent of Hampton's $530,000 original equity investment, the amount of income from operation of the complex Hampton could distribute to its investors annually.³

The record of proceedings before the board reveals that, in the mid- and late 1980's, two changes in Federal law altered basic principles theretofore applicable to § 236 housing like the complex. First, in 1986, the Federal tax code was amended to restrict, among other things, the kinds of income that losses from operation of the complex could shelter.⁴ Indeed, insofar as the record before the board is concerned, none of the original tax benefits available to Hampton and its investors remained available by fiscal year 1992.⁵

Second, in 1987, Congress, concerned about the impact on availability of low-income housing potentially resulting from substantial note prepayments, enacted the Emergency Low Income Housing Preservation Act of 1987 (ELIHPA), Pub. L. 100-242, Title II, 101 Stat. 1877 (1987). See 12 U.S.C. § 1715l. That statute substantially but temporarily limited the right Hampton and other developers had to prepay their notes after twenty years and thereby shed the program's restrictions on use of their properties. In return for the limitations, however, ELIHPA provided the possibility of incentives, including withdrawal of some of the owner's equity, for continued program participation. See generally Alder Terrace, Inc. v. United States, 39 Fed. Cl. 114, 116-17 & n.2 (Ct. Cl. 1997). In 1990, Congress made the temporary limits and accompanying incentives permanent by replacing ELIHPA with the Low Income Housing Preservation and Resident Homeownership Act (LIHPRHA), 12 U.S.C. §§ 4101-4147. See generally Greenbrier v. United States, 193 F.3d 1348, 1351-53 (Fed. Cir. 1999), cert. denied, 530 U.S. 1274 (2000).

As of the first of the valuation dates here at issue, therefore, the legislation just described severely circumscribed Hampton's ability to remove the complex from the program before maturity of the forty-year note. At the same time, Hampton's continued participation in the program carried with it at least the prospect of certain financial incentives designed to make continued participation more attractive than it had been when the program began.⁶

Against that backdrop, the assessors valued the complex at $7,919,500 for fiscal year 1992 and $7,127,600 for fiscal years 1993 and 1994.⁷ Hampton timely filed applications for abatement with the assessors together with its petition to the board pursuant to G. L. c. 59, §§ 64, 65.

The board held an evidentiary hearing on Hampton's petition. At the hearing, the board heard from three witnesses: Andes, the vice president of Spear Management Company, a company Hampton had hired to manage the complex; King, the appraiser Hampton had hired; and Levitch, the appraiser the assessors had hired. Both appraisers agreed that the capitalization of income approach to valuation provided the appropriate method for determining the value of the complex on the relevant dates.⁸

Although both appraisers looked at similar elements of income and expense, their use of those elements differed dramatically. King determined that the net income from operation of the complex in each of the taxable years was greater than $31,979. Because the program limited the amount of Hampton's annual withdrawal to $31,979, however, King used that amount as the net income to be capitalized.⁹ Using a capitalization rate of ten percent he derived, with some modifications, from treasury bills and other "safe" investments, King capitalized the "income" from the complex at $319,790. To that amount, he added $4,124,969, the unpaid principal balance of the construction mortgage, to produce a total value of $4,444,759, which he rounded to $4,500,000, for fiscal year 1992.¹⁰ King added the unpaid principal balance of the mortgage to the capitalized value of the complex's "income" on the theory that, because a potential buyer "can't pay off the existing mortgage, [that buyer is] going to . . . pay whatever the principal balance is on the mortgage. I don't see any reason why they would pay anything more than that."

In its decision, the board rejected King's analysis concluding, among other things, that it made no sense simply to add the unpaid principal balance of the mortgage to the value derived by capitalizing the "income." In the board's view, the way King used the mortgage balance meant that the value of the complex actually decreased as the mortgage balance declined and Hampton's equity in the complex increased. To the board, such a result was at war both with common sense and with recognized appraisal standards.¹¹ Moreover, the board noted, King himself had appraised the complex at a total value of $8 million when Hampton submitted an application to HUD for withdrawal of its equity interests in the project under the LIHPRHA program.¹²

The board's rejection of King's testimony was well within its power. The board was required to accept neither the

opinions nor the calculations of any expert witness. See Assessors of Lynnfield v. New England Oyster House, Inc., 362 Mass. 696, 701-702 (1972). See also New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 473 (1981). Although Hampton bore the burden of proving overvaluation, Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974); Foxboro Associates v. Assessors of Foxboro, 385 Mass. 679, 691 (1982), the board could not disbelieve the evidence Hampton proffered "without an explicit and objectively adequate reason," New Boston Garden Corp. v. Assessors of Boston, 383 Mass. at 470-71, quoting from Jaffe, Judicial Control of Administrative Action 607 (1965). The board's articulated reasons for rejecting King's opinion in this case fully met both criteria.

Without King's opinion, nothing in Hampton's affirmative case carried its burden. In an effort to remedy that defect, Hampton focuses on the opinion delivered by Levitch, the assessors' appraiser.¹³ Hampton urges that, even if the board properly discounted the case it presented, the opinion Levitch rendered, and thus the assessors' case, was so deeply flawed that the board was left with no substantial evidence on which to rest its ultimate decision in the assessors' favor.

There can be little doubt about the flaws in the opinion Levitch presented. Unlike King, Levitch did not cap Hampton's net income at the amount of its permitted annual distributions. Indeed, apart from considering limitations on the rent the complex could develop, Levitch gave the...