In re Blue Ridge Hous. of Bakersville LLC

• Decision Date: 19 March 2013
• Docket Number: No. COA12–941.,COA12–941.
• Citation: 738 S.E.2d 802
• Parties: In the Matter of the Appeal of BLUE RIDGE HOUSING OF BAKERSVILLE LLC from the decision of the Mitchell County Board of Equalization and Review denying property tax exemption for certain property effective for tax year 2011.
• Court: North Carolina Court of Appeals

738 S.E.2d 802

In the Matter of the Appeal of BLUE RIDGE HOUSING OF BAKERSVILLE LLC from the decision of the Mitchell County Board of Equalization and Review denying property tax exemption for certain property effective for tax year 2011.

No. COA12–941.

Court of Appeals of North Carolina.

March 19, 2013.

Appeal by Mitchell County from final decision entered 28 February 2012 by the North Carolina Property Tax Commission. Heard in the Court of Appeals 10 January 2013.

David A. Gitlin, for taxpayer-appellee.

Hal G. Harrison, Spruce pine, for Mitchell County-appellant.

HUNTER, JR., ROBERT N., Judge.

Mitchell County (the “County”) appeals from a final decision of the North Carolina Property Tax Commission (the “Commission”) reversing the decision of the Mitchell County Board of Equalization and Review (the “County Board”). Upon review, we affirm the Commission's decision.

I. Facts & Procedural History

Blue Ridge Housing of Bakersville, LLC (“Blue Ridge Housing”) owns Cane Creek Village, the property at issue. Cane Creek Village is a 24–unit apartment project in Bakersville that provides rental housing to families whose annual income is less than 50% of the median family income for the region.

Preliminarily, we discuss the administrative framework behind the development of Cane Creek Village. The Northwestern Regional Housing Authority (“NRHA”) is a public housing agency organized under N.C. Gen.Stat. Ch. 157. It is headquartered in Boone. The NRHA provides low-income housing for families living in North Carolina's mountainous counties. It also distributes federal rental assistance, funded by the Department of Housing and Urban Development (“HUD”), to the residents of these housing projects.

The Low–Income Housing Tax Credit Program, established by the Internal Revenue Service, provides a federal income tax credit for organizations like the NRHA that develop low-income housing. See26 U.S.C. § 42 (2012). Although this program benefits the NRHA, it would also jeopardize the NRHA's ability to administer rent subsidies from HUD.¹ To avoid this problem, the NRHA oversaw the creation of Northwestern Housing Enterprises, Inc. (“NHE”) as a separate entity to collect tax credits for the NRHA's new housing developments.

NHE is a 501(c)(3) non-profit corporation. Edward G. Fowler (“Fowler”) is the Executive Director of the NRHA, the Vice President and CEO of NHE, and its sole employee. According to NHE's Articles of Incorporation, its purpose is “to assist the Northwestern Regional Housing Authority within its jurisdictions with its stated goals and purposes” and to “provide for the relief of the poor and distressed ... through the development, creation, ownership, sponsorship, financing, building and maintenance of low and moderate income housing.” NHE has developed seven low-income housing projects in seven North Carolina counties. Despite their shared goals and resources, the NRHA does not own any portion of NHE.

NHE qualifies to receive a federal income tax credit under the Low–Income Housing Tax Credit Program. However, since it is a non-profit organization, it is exempt from federal income tax.² Therefore, by itself, NHE does not benefit from the Low–Income Housing Tax Credit Program. To leverage the benefits of this program, NHE partners with investors who have a federal income tax burden. The investors finance NHE's housing developments in exchange for tax credit equity. The investors can then use the federal income tax credits for their own federal tax burden.³

In August 1998, NHE established Blue Ridge Housing as the record owner of Cane Creek Village, one such low-income housing project. Blue Ridge Housing does not have non-profit status. The sole purpose of Blue Ridge Housing is to hold legal title of Cane Creek Village for induction of tax credit equity; it does not have any employees or own any other properties.

Blue Ridge Housing, a limited liability company (“LLC”), has two members. Its managing member, NHE, owns 0.1% of Blue Ridge Housing. Its investor member, the North Carolina Equity Fund III Limited Partnership (“NCEFIII”) owns 99.9%. The NCEFIII invested $1,164,439 in exchange for its ownership interest. ⁴ The general partner of the NCEFIII is Carolina Affordable Housing Equity Corporation (“CAHEC”). CAHEC is “a consortium of ... banks from eight southeastern states, and some insurancefunds and other investors.” Although the NCEFIII is a for-profit partnership, its general partner CAHEC is a nonprofit.

On 17 November 1998, NHE and the NCEFIII entered into an operating agreement (the “Operating Agreement”). The Operating Agreement requires the NCEFIII to maintain its ownership interest in Blue Ridge Housing for 15 years. It also provides NHE with a right of first refusal to purchase the NCEFIII's 99.9% ownership interest at the end of the 15–year term. At the onset of the instant case, four years remained of the 15–year term. NHE has stated it intends to buy the NCEFIII's ownership interest at the end of the 15–year term. NHE is currently in the process of exercising its right of first refusal for another similar low-income housing project in Yancey County.

Blue Ridge Housing employed the NRHA to develop the apartment complex at Cane Creek Village. The project was financed by investors from the NCEFIII. Construction began on 1 November 1998 and finished in December 2000.

Although exempt from federal income taxation, Cane Creek Village is subject to North Carolina ad valorem property tax. On 23 August 2000, NHE, as managing member of Blue Ridge Housing, submitted an Application for Property Tax Exemption to the Mitchell County Tax Assessor. It based its application on N.C. Gen.Stat. § 105–278.6(a)(8), which provides that:

(a) Real or personal property owned by:

...

(8) A nonprofit organization providing housing for individuals or families with low or moderate incomes shall be exempted from taxation if: (i) As to real property, it is actually and exclusively occupied and used, and as to personal property, it is entirely and completely used, by the owner for charitable purposes; and (ii) the owner is not organized or operated for profit.

N.C. Gen.Stat. § 105–278.6(a)(8) (2011). On 4 October 2000, the Mitchell County Board of Commissioners unanimously voted to grant an ad valorem tax exemption to Cane Creek Village. Since October 2000, there has been no change in the use of the property or in Blue Ridge Housing's equity structure.

NHE also applied for ad valorem tax exemptions for its six other low-income housing projects in six other North Carolina counties. It received exemptions for four of its other projects, but did not receive exemptions for its projects in Ashe County or Wilkes County. Nothing in the record indicates NHE has contested its two denied applications.

Pursuant to N.C. Gen.Stat. § 105–282.1, each county tax assessor must annually review at least one-eighth of tax-exempt property in the county. Accordingly, around January 2011, Mitchell County Tax Assessor Blair Hyder (“Hyder”) reviewed Cane Creek Village's tax-exempt status. On 6 January 2011, Hyder notified NHE that because he believed Cane Creek Village was not tax-exempt, he intended to undertake discovery proceedings pursuant to N.C. Gen.Stat. § 105–312. Hyder cited N.C. Gen.Stat. § 105–277.16 as the controlling statute. The statute, which took effect on 1 July 2009, states:

A North Carolina low-income housing development to which the North Carolina Housing Finance Agency allocated a federal tax credit under section 42 of the Code is designated a special class of property under Article V, Section 2(2) of the North Carolina Constitution and must be appraised, assessed, and taxed in accordance with this section.

N.C. Gen.Stat. § 105–277.16 (2011). After Hyder initiated discovery proceedings, NHE subsequently provided Hyder with all requested financial information.

Hyder concluded Cane Creek Village should never have received tax-exempt status because NHE did not have a sufficient ownership interest in Blue Ridge Housing to qualify Cane Creek Village for exemption under N.C. Gen.Stat. § 105–278.6(a)(8). On 17 March 2011, Hyder presented NHE with a tax bill for $64,837.72 ⁵ for the preceding five years, composed as follows: $24,066.48 for Mitchell County taxes; $9,922.87 for Mitchell County penalties; $21,749.28 for Town of Bakersville taxes; $9,099.09 for Town of Bakersville penalties.⁶

NHE promptly appealed this decision to the Mitchell County Board. The County Board held a hearing on 11 April 2011. On 10 May 2011, it decided to waive the Mitchell County penalties and only enforce the Mitchell County taxes of $24,066.48.⁷ On 6 June 2011, Blue Ridge Housing appealed the County Board's decision and applied for a hearing with the Commission.

The Commission held a hearing on 14 December 2011. On 28 February 2012, it decided Cane Creek Village qualifies for ad valorem tax exemption under N.C. Gen.Stat. § 105–278.6(a)(8). Mitchell County filed timely notice of appeal on 19 March 2012.

II. Jurisdiction & Standard of Review

This Court has jurisdiction to hear the instant appeal pursuant to N.C. Gen.Stat. § 7A–29 (2011). When reviewing a decision of the North Carolina Property Tax Commission:

the court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning and applicability of the terms of any Commission action. The court may affirm or reverse the decision of the Commission, declare the same null and void, or remand the case for further proceedings; or it may reverse or modify the decision if the substantial rights of the appellants have been prejudiced because the Commission's findings, inferences, conclusions or decisions are:

(1) In violation of constitutional provisions; or

(2) In excess of statutory authority or jurisdiction of the Commission; or

(3) Made upon unlawful proceedings; or

(4) Affected by other errors of law; or

(5) Unsupported by competent,...