In re Appeal of Greens of Pine Glen Ltd.

• Decision Date: 28 February 2003
• Docket Number: No. 681PA01.,681PA01.
• Parties: In the Matter of APPEAL OF the GREENS OF PINE GLEN LTD. Partnership from the Decision of the Durham County Board of Equalization and Review Regarding the Valuation of Certain Real Property for Tax Year 1997.
• Court: North Carolina Supreme Court

576 S.E.2d 316

356 N.C. 642

In the Matter of APPEAL OF the GREENS OF PINE GLEN LTD. Partnership from the Decision of the Durham County Board of Equalization and Review Regarding the Valuation of Certain Real Property for Tax Year 1997.

No. 681PA01.

Supreme Court of North Carolina.

February 28, 2003.

S.C. Kitchen, Durham County Attorney, by Curtis Massey, Assistant County Attorney, for appellant Durham County.

Parker, Poe, Adams & Bernstein L.L.P., by Charles C. Meeker and William H. McCullough, Raleigh, for taxpayer-appellee The Greens of Pine Glen.

North Carolina Association of County Commissioners, by James B. Blackburn, III, General Counsel, amicus curiae.

Moore & Van Allen PLLC, by Susan Ellinger, Charles H. Mercer, Jr., and Marc C. Tucker, Raleigh, on behalf of the North Carolina Low Income Housing Coalition, amicus curiae.

EDMUNDS, Justice.

Respondent The Greens of Pine Glen, Limited Partnership (taxpayer), instituted this action against petitioner Durham County to review petitioner's ad valorem tax valuation of taxpayer's property, The Greens of Pine Glen, which is located in Durham, North Carolina. The North Carolina Property Tax Commission, sitting as the State Board of Equalization and Review, confirmed the valuation assigned by Durham County, but the Court of Appeals reversed and remanded the matter to the Commission for further proceedings. We hold that the Commission properly confirmed Durham County's appraisal of The Greens of Pine Glen. Accordingly, we reverse the Court of Appeals. In addition, we remand to the Court of Appeals for further remand to the North Carolina Property Tax Commission for the limited purpose of substituting in its final decision the correct square footage value for The Greens of Pine Glen.

The Greens of Pine Glen is a 168-unit apartment complex constructed in southwest Durham in 1996 pursuant to 26 U.S.C. § 42. This statute, which is part of the Internal Revenue Code and is commonly referred to as "section 42," provides substantial federal income tax credits as an incentive for developers to construct and operate housing for low-income families and individuals. 26 U.S.C. § 42 (2000). A potential tenant is eligible to rent a section 42 unit only if that tenant's income does not exceed sixty percent of the area's median income. Id. In exchange for the tax credits, developers agree to limit rents for a section 42 unit to no more than thirty percent of the sixty percent median income level. Id. In addition to the federal tax credit, North Carolina also provides state income tax credits to reward participation in the section 42 program (the program). N.C.G.S. § 105-129.16B (2001). Thus, section 42 tax credits fill the gap between the cost of developing the property and the reduced rents received from tenants, making section 42 construction projects attractive to developers.

Public agencies within each state administer the program and allocate the available federal and state tax credits. The North Carolina Housing Finance Agency, which is the responsible agency in this state, awards tax credits on the basis of several criteria, including the number of units built with rent restrictions and the overall cost of construction. Taxpayer presented evidence that, in practice, section 42 developments are sufficiently desirable that interested developers compete for them. In fact, taxpayer's witness testified before the Commission that the number of applicants typically equals five times the available resources. Moreover, the high demand for such housing often results in a low vacancy rate. As a result, developers desiring the credits frequently agree to terms that exceed the minimum requirements of the program. In the case at bar, in order to maximize the credits available to it, taxpayer chose to construct one hundred percent of The Greens of Pine Glen as a section 42 program. In addition, taxpayer offered to extend the period of the restrictions beyond the mandatory fifteen years up to a total of thirty years. The rents taxpayer charges for its apartments are twenty-five to thirty percent below market rents for apartments of similar size, construction, and location, but are the maximum allowed for continued participation in the program.

Taxpayer's witness testified that developers of section 42 properties who receive an allocation from the North Carolina Housing Finance Agency almost always form a limited partnership with one or more limited or investor partners. The developer/general partner allocates the tax credits to the limited partners, which are typically Fortune 500 companies. Taxpayer's witness explained that the limited partners' interests lie solely in the tax credits for subsequent resale. In other words, the limited partners purchase a financial product.

The Greens of Pine Glen was developed through the creation of such a limited partnership. W.O. Brisben Companies, a for-profit company in the affordable housing field, became a one percent general partner with a ninety-nine percent limited partner, SunAmerica Housing Fund 213, a subsidiary of AIG Insurance. The partnership agreement allocated the tax credits allowed under section 42 to each partner commensurate with its ownership interest. The federal income tax credits allocated to the project were $822,006 per year for ten years, and the limited partner paid approximately $4,700,000 for its share of these credits. These funds were used to develop The Greens of Pine Glen, whose construction cost $10,800,000.

After construction was completed, Durham County in April 1997 sent taxpayer a tax appraisal that valued the property at $5,941,692. Durham County arrived at this value by using the income approach method of appraisal, which took into account the market impact of section 42 use and rent restrictions on the property. However, at that time, Durham County used the cost approach method of appraisal to value restricted-rent properties and newly developed properties that did not have a rental history. The cost approach method of appraisal considers market rents and does not take into account rent restrictions. Consequently, owners of other restricted-rent properties suggested to Durham County tax officials that an error had been made when the income method was used to value The Greens of Pine Glen.

On 9 May 1997, Durham County delivered to taxpayer a revised appraisal of $7,488,350, based on the cost approach. Durham County later discovered that it had erred in calculating the property's square footage in its May 1997 appraisal and accordingly sent a corrected third appraisal to taxpayer in 1998, decreasing the appraised value to $7,250,050 for tax year 1998.

Taxpayer appealed Durham County's May 1997 appraisal to the Durham County Board of Equalization and Review, which affirmed the $7,488,350 value. Taxpayer then appealed to the Commission, which conducted a hearing on 13 and 14 April 2000. On 19 June 2000, in a split decision, the Commission confirmed Durham County's May 1997 appraisal.

Taxpayer appealed the Commission's decision to the North Carolina Court of Appeals. On 20 November 2001, the Court of Appeals issued a unanimous opinion reversing the Commission. After determining that Durham County overvalued The Greens of Pine Glen by using market rents to determine its value under the cost approach, In re Appeal of Greens of Pine Glen Ltd. Part., 147 N.C.App. 221, 555 S.E.2d 612 (2001), the Court of Appeals held that The Greens of Pine Glen must be valued "using the income method or a combination of methods which account for the market effect of the section 42 [rent] restrictions," id. at 229-30, 555 S.E.2d at 618. Accordingly, the Court of Appeals remanded the matter for receipt of additional evidence on the property's value. Id. at 230, 555 S.E.2d at 618. On 6 March 2002, this Court allowed Durham County's petition for discretionary review.

Petitioner Durham County contends that the Court of Appeals erred when it reversed and remanded the Commission's decision. Durham County argues that the Commission properly concluded that taxpayer failed to meet its burden to rebut the presumption that the county's appraisal was correct. We review decisions of the Commission pursuant to N.C.G.S. § 105-345.2. N.C.G.S. § 105-345.2 (2001). Questions of law receive de novo review, while issues such as sufficiency of the evidence to support the Commission's decision are reviewed under the whole-record test. N.C.G.S. § 105-345.2(b). Under a de novo review, the court considers the matter anew and freely substitutes its own judgment for that of the Commission. Mann Media, Inc. v. Randolph Cty. Planning Bd., 356 N.C. 1,13, 565 S.E.2d 9, 17 (2002). Under the whole-record test, however, the reviewing court merely determines "`whether an administrative decision has a rational basis in the evidence.'" In re Appeal of McElwee, 304 N.C. 68, 87, 283 S.E.2d 115, 127 (1981) (quoting In re Rogers, 297 N.C. 48, 65, 253 S.E.2d 912, 922 (1979)). Because the controlling issue in this case is whether the Commission properly accepted Durham County's method of valuing The Greens of Pine Glen rather than the method offered by taxpayer, we use the whole-record test to evaluate the conflicting evidence.

Ad valorem tax assessments are presumed to be correct. Id. at 75, 283 S.E.2d at 120. However, a taxpayer may rebut this presumption if it produces "competent, material and substantial" evidence establishing that: "(1) Either the county tax supervisor used an arbitrary method of valuation; or (2) the county tax supervisor used an illegal method of valuation; AND (3) the assessment substantially exceeded the true value in money of the property." In re Appeal of AMP, Inc., 287 N.C. 547, 563, 215 S.E.2d 752, 762 (1975). Thus, a taxpayer who is challenging an ad valorem tax assessment must satisfy a two-prong test by demonstrating that the means adopted by the tax supervisor was illegal or arbitrary and also that the valuation was...