Hill v. Tennessee State Board of Equalization, No. M2001-02683-COA-R3-CV (Tenn. App. 12/31/2003)
| Decision Date | 31 December 2003 |
| Docket Number | No. M2001-02683-COA-R3-CV.,M2001-02683-COA-R3-CV. |
| Parties | SPRING HILL, L.P., et al. v. TENNESSEE STATE BOARD OF EQUALIZATION, et al. |
| Court | Tennessee Court of Appeals |
Appeal from the Chancery Court for Davidson County; No. 00-152-II Carol McCoy, Chancellor.
Affirmed and Remanded
Grant C. Glassford, Bryan E. Pieper, Paul D. Krivacka, Nashville, Tennessee, for the appellants, Spring Hill, L.P., Greentree Pointe, L.P., and Acorn Hills, L.P.
Paul G. Summers, Attorney General and Reporter; Michael E. Moore, Solicitor General; Margaret M. Huff, Assistant Attorney General, for the appellees, Tennessee State Board of Equalization.
Robert O. Binkley, Lewisburg, Tennessee for the appellees Linda Haislip, Marshall County Property Assessor, and Margaret Tyree, Marshall County Trustee.
Michael R. Jennings, Lebanon, Tennessee for the appellees Jennifer Bell, Wilson County Property Assessor, and Ernest Lasater, Wilson County Trustee.
Stephen H. Price, Dwayne W. Barrett, Michael D. Orr, Nashville, Tennessee, for the Amici Curiae, Greater Nashville Apartment Association, Tennessee Network for Community Economic Development, and Tennessee Apartment Association.
Patricia J. Cottrell, J., delivered the opinion of the court, in which Ben H. Cantrell, P.J., M.S., and Allen W. Wallace, SP. J., joined.
Taxpayers appeal their property tax assessments for the 1998 tax year. All of the properties in dispute receive federal income tax credits authorized by § 42 of the Internal Revenue Code of 1986, under the Federal Low Income Housing Tax Credit Program. Taxpayers complain that the county assessors improperly included the present value of the federal tax credits in the valuations of their low-income housing properties, thereby making the assessments too high. The trial court affirmed the decisions of the State Board of Equalization, finding that the tax credits were properly included in the valuations. In addition, Taxpayer Acorn challenges its reclassification from residential to commercial for property tax purposes. The trial court affirmed Acorn's reclassification. We affirm the judgment of the trial court.
In this consolidated appeal, Taxpayers are three limited partnerships, Spring Hill, L.P., Greentree Pointe, L.P., and Acorn Hills, L.P., that seek judicial review of two Wilson County assessments of their properties, Spring Hill1 and Greentree Pointe,2 and one Marshall County assessment regarding Acorn Hills.3 All of the properties at issue have qualified for, and use, certain federal income tax credits ("Tax Credits" or "LIHTC") authorized by § 42 of the Internal Revenue Code of 1986 under the Federal Low Income Housing Tax Credit Program. Taxpayers complain that the appraisals improperly considered the present value of the Tax Credits in the valuations of their low-income housing properties, thereby making the valuations and resulting assessments too high.4 In addition, Taxpayer Acorn challenges its reclassification from residential to commercial for property tax purposes
The LIHTC program was created as part of the Tax Reform Act of 1986, and utilizes the Internal Revenue Code to provide an incentive for the construction and rehabilitation of low-income rental housing.5 Specifically, the LIHTC program provides the owners of qualified low-income rental housing an annual credit against federal income tax liability for a ten-year period. The amount of the Tax Credits is based on the costs of the project development and the number of qualified low-income housing units included in the project. In exchange for the Tax Credits, the developers/owners enter into a binding contractual agreement to restrict the use of the property for the benefit of low-income households.6 The agreements are binding for a minimum of fifteen years, run with the land, and extend to the owners' successors and assigns. I.R.C. § 42(f),(g). Here, Taxpayers agreed to restricted covenants for a period of thirty years in order to enhance the probability that their applications for the Tax Credits would be accepted. The restrictive covenants are publicly recorded as part of the deed to the property.
The subsidy provided by the Tax Credits is designed to bridge the gap between the value of the property in a restricted use and the cost of development of the project. The market value of the property in a restricted use, as defined by the present value of rental income, will typically represent 30% of the total development cost of the project. Little or no cash will typically be invested as equity in these properties. Instead, the developer will obtain conventional mortgage financing for the 30% portion of the total funds required to develop the project. Tax Credits will then be awarded to provide the remaining 70% portion of the total funds required to develop the project. Once Tax Credits are allocated to a property, the owner can assign the Tax Credits in order to finance the costs of development or rehabilitation of the qualified properties.
This assigning of the Tax Credits is usually accomplished by creating limited partnerships in the development. In exchange for investing in the project, the limited partners are allocated the Tax Credits on an yearly basis and can apply those credits to their tax liability unrelated to the projects for which the credits are awarded. Large companies comprise the majority of the investors in LIHTC projects and use the credits to offset federal income tax liability.7 In addition to internal allocations of the Tax Credits through a limited partnership arrangement, the Tax Credits may be sold together with the property to a purchaser who is willing to honor the restrictions on use.8
In Tennessee, the Tennessee Housing Development Authority ("THDA") administers the program and monitors compliance with the restrictive covenants agreed to by the participating developers/owners.9 In the event the owner fails to honor the restricted rent rates, THDA issues notices of non-compliance to the IRS that can result in the disallowance of the Tax Credits to defaulting owners. The application process for the right to participate in the LIHTC Program is governed by policies and procedures established by THDA. The application process is very competitive. Each calendar year, only approximately 33% — 40% of the total applications are approved by THDA and awarded Tax Credits. THDA allocated $6.8 million in Tax Credits during 1999.
The Taxpayers herein are the limited partnerships that own the properties. The LIHTCs awarded to each project were allocated by Taxpayers to various limited partner investors for $.60 on the dollar, and Taxpayers used 100% of the money obtained to finance the construction of the properties. Greentree assigned the right to receive ten annual tax credits of $666,331 for a lump sum of $4,033,439. Spring Hill assigned the right to receive ten annual tax credits of $702,869 for a total of $ 4,202,317. Acorn assigned the right to receive ten annual tax credits of $393,689 for a lump sum of $2,362,134.
The Wilson County and Marshall County assessors included the present value of the Tax Credits in their appraisals of Spring Hill, Greentree, and Acorn. It was the appraisers' opinions that the LIHTCs awarded to the three low-income housing developments have a value enhancing effect. In addition to including the positive effect of the LIHTCs, the appraisers also factored in the value-reducing effect of the restricted rents received by Taxpayers.
The first table below sets forth the impact of the Tax Credits on total value assessed for each of the disputed properties:
PROPERTY TOTAL VALUE WITHOUT TOTAL VALUE WITH ASSESSMENT
TAX CREDITS CONSIDERED TAX CREDITS CONSIDERED IN DISPUTE
Spring Hill $2,551,987 $4,440,300 $1,775,120
Greentree $3,512,078 $7,242,400 $2,896,960
Acorn $1,407,244 $3,821,000 $1,528,450
The second table below sets forth the impact of the Tax Credits on the real property tax due and payable for the 1998 tax year for each of the disputed properties:
PROPERTY PROPERTY TAX DUE PROPERTY TAX DUE DIFFERENCE10
WITH TAX CREDITS WITHOUT TAX CREDITS
Spring Hill $ 79,156.88 $52,040.32 $22,131.03
Greentree $104,134.80 $48,466.68 $51,478.44
Acorn $ 23,697.99 $64,345.64 $40,647.65
Taxpayers first appealed the assessments to their respective county boards of equalization, arguing that the valuations established by the county appraisals were too high based on the erroneous inclusion of the present value of the Tax Credits. Both the Wilson and Marshall county boards affirmed the assessments. Taxpayers next appealed to the State Board of Equalization where a contested case hearing was conducted.
At the administrative hearing, Mr. A. Dean Lewis, the State Valuation Coordinator, Division of Property Assessments of the Office of the Comptroller of the Treasury, introduced his appraisals. Mr. Lewis gave considerable weight to the income capitalization approach in appraising the properties. This approach determines market value by converting the future benefits of the property into an expression of present worth. In his calculations, Mr. Lewis used both a value-decreasing factor, the lower restricted rents (rather than market rents the properties would command if they were not LIHTC properties), and also a value-enhancing factor, the present worth of the Tax Credits.11 Mr. Lewis explained:
The owner contracted with the Tennessee Housing Development Agency to receive tax credits for a ten-year period for the subject propert[ies]. By contract he gave up some of his property rights in order to receive this benefit. These were:
— the right to...
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