In re Greens of Pine Glen Ltd.

• Decision Date: 20 November 2001
• Docket Number: No. COA00-1218.,COA00-1218.
• Citation: 555 S.E.2d 612,147 NC App. 221
• Court: North Carolina Court of Appeals
• Parties: In the Matter of Appeal of The GREENS OF PINE GLEN LTD. of the Durham County Board of Equalization and Review Regarding the Valuation of Certain Real Property for Tax Year 1997.

555 S.E.2d 612

147 NC App. 221

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

No. COA00-1218.

Court of Appeals of North Carolina.

November 20, 2001.

Durham County Attorney S.C. Kitchen, by Assistant County Attorneys Kimberly M. Grantham and Curtis O. Massey, for appellee Durham County.

Parker, Poe, Adams & Bernstein, L.L.P., by Charles C. Meeker and Jason J. Kaus, Raleigh, for appellant The Greens of Pine Glen, Limited Partnership.

James B. Blackburn, III, Raleigh, amicus curiae for the North Carolina Association of County Commissioners.

Moore & Van Allen, PLLC, by Susan Ellinger, Charles H. Mercer, Jr. and Marc C. Tucker, amicus curiae for the North Carolina Low Income Housing Coalition; William D. Rowe, Raleigh, amicus curiae for the North Carolina Justice and Community Development Center.

HUNTER, Judge.

Taxpayer, The Greens of Pine Glen, Limited Partnership ("GPG"), appeals a final decision of the Property Tax Commission ("Commission") affirming appellee Durham County's ("the County") ad valorem tax valuation of GPG's property. We reverse the decision of the Commission and remand.

GPG is a 168-unit apartment complex constructed in Durham, North Carolina in 1996. The complex was built pursuant to a federal program which encourages the building of rent-restricted housing for low-income families. Pursuant to this program, set forth in the Internal Revenue Code at 26 U.S.C. § 42 ("section 42"), GPG's developer received ten years' worth of federal tax credits which assisted in financing the construction of the housing. In return, the developer agreed to restrict the pool of eligible tenants to low-income families for thirty years, and to limit rents to rates that are approximately twenty-five to thirty percent less than prevailing market rates for thirty years. The restrictions on the property are enforced by recorded restrictive covenants.

In April 1997, the County delivered to GPG a property tax appraisal which valued the property at $5,941,692.00. The County arrived at the value by using the income method of appraisal, which took into account the market impact of the section 42 use and rent restrictions on the property. On 9 May 1997, the County delivered to GPG a revised appraisal which increased the appraised value of the property to $7,488,350.00. The County arrived at the May 1997 appraisal using solely the replacement cost method of valuation, not the income method. The May 1997 appraisal did not take into account the section 42 restrictions on the property.

The County sent a third appraisal to GPG in 1998 when it determined that it had erred in calculating the square footage of the GPG apartments in its May 1997 appraisal. As a result, the County decreased the appraised value of the property to $7,250,050.00. Again, the County's third appraisal was based solely on the replacement cost of the GPG property and did not take into account the section 42 restrictions on the property.

GPG appealed the County's May 1997 assessment to the Durham County Board of Equalization and Review. The County Board refused to revise the assessment, and on 10 October 1997, GPG filed an appeal with the Commission. In a three to two decision, the Commission affirmed the County's May 1997 assessment on 19 June 2000. Two commissioners dissented, concluding that the section 42 restrictions must be taken into account in appraising the property's tax value. GPG appeals.

GPG argues on appeal that the Commission erred in affirming the County's valuation of the property as though not encumbered by section 42 restrictions; that the Commission's decision essentially authorizes the County to improperly tax GPG's section 42 federal tax credits which are intangible property; and that the Commission erred in affirming the County's May 1997 valuation, which the County concedes was based upon an incorrect measurement of the property. For reasons stated herein, we reverse the Commission's decision and remand for a redetermination of the value of GPG's property which takes into account the section 42 restrictions on the property.

The standard of appellate review for property valuations is set forth in N.C. Gen. Stat. § 105-345.2(b) (1999). This statute provides that we "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." N.C. Gen.Stat. § 105-345.2(b). This Court has the authority to reverse, remand, modify, or declare void any Commission decision which is:

(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, material and substantial evidence in view of the entire record as submitted; or

(6) Arbitrary or capricious.

Id. We must "review the decision of the Commission analyzing the `whole record' to determine whether the decision has a rational basis in evidence." In re Appeal of Owens, 144 N.C.App. 349, 351, 547 S.E.2d 827, 828 (2001).

"It is presumed that ad valorem tax assessments are correct and that the tax assessors acted in good faith in reaching a valid decision." Id. at 352, 547 S.E.2d at 829. However, the presumption is rebutted where a taxpayer can "show that an illegal or arbitrary method of valuation was used, and that the assessed value substantially exceeds the properties [sic] fair market value." Id. (citing In re Appeal of AMP, Inc., 287 N.C. 547, 563, 215 S.E.2d 752, 762 (1975)) (emphasis omitted).

According to this State's uniform assessment standards, "all property, real and personal, shall be assessed for taxation at its true value or use value as determined under [N.C. Gen.Stat. § 105-283 (1999) ]." N.C. Gen.Stat. § 105-284(a) (1999). The term "true value" is defined in N.C. Gen.Stat. § 105-283 (1999) as "market value":

[T]hat is, the price estimated in terms of money at which the property would change hands between a willing and financially able buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of all the uses to which the property is adapted and for which it is capable of being used.

N.C. Gen.Stat. § 105-283. Significantly, N.C. Gen.Stat. § 105-317 (1999) requires that in determining the true value of property or a building, the appraiser must take into account its "uses; past income; probable future income; and any other factors that may affect its value." N.C. Gen.Stat. § 105-317(a)(1).

It is generally accepted that there are three methods of appraisal for determining market value: (1) comparable sales; (2) cost; and (3) income. City of Statesville v. Cloaninger, 106 N.C.App. 10, 16, 415 S.E.2d 111, 115, appeal dismissed and disc. review denied, 331 N.C. 553, 418 S.E.2d 664 (1992)

. However, the courts of this State have routinely held that "`the income approach is the most reliable method in reaching the market value of investment property.'" In re Appeal of Owens, 132 N.C.App. 281, 287, 511 S.E.2d 319, 323 (1999) (quoting In re Appeal of Belk-Broome Co., 119 N.C.App. 470, 474, 458 S.E.2d 921, 924,

affirmed,

342 N.C. 890, 467 S.E.2d 242 (1996)). That approach is based upon the theory that something is worth what it will earn. Id.

On the other hand, "[t]he cost approach is better suited for valuing specialty property or newly developed property; when applied to other property, the cost approach receives more criticism than praise." Belk-Broome, 119 N.C.App. at 474, 458 S.E.2d at 924. The cost approach is most often used "when no other method will yield a realistic value. The modern appraisal practice is to use cost approach as a secondary approach `because cost may not effectively reflect market conditions.'" Id. (citation omitted).

The County argues, and the Commission agreed, that the cost approach was the appropriate method of valuation for GPG and that the section 42 restrictions must not be considered. In support of this argument, the County relies upon In re Pine Raleigh Corp., 258 N.C. 398, 128 S.E.2d 855 (1963), and In re Appeals of Greensboro Office Partnership, 72 N.C.App. 635, 325 S.E.2d 24, disc. review denied, 313 N.C. 601, 330 S.E.2d 610 (1985). In Pine Raleigh, the taxpayer appealed the county's appraisal, arguing that the appraisal did not take into account a lease which encumbered the subject property. Pine Raleigh, 258 N.C. at 399-400, 128 S.E.2d at 856. The lease, which was to last for a period of thirty years, fixed the rental income the taxpayer could receive. Id. at 399, 128 S.E.2d at 856. The court determined that in assessing the property's past income and probable future income under N.C. Gen.Stat. § 105-295 (now § 105-317), the assessor need not necessarily rely solely on actual income, but could also consider "income which could be obtained by the proper and efficient use of the property." Id. at 403, 128 S.E.2d at 859.

The court stated that "[t]o hold otherwise would be to penalize the competent and diligent and to reward the incompetent or indolent." Id. The court determined that net rental income is a factor that should be considered in determining value. Id. It is only where "the income actually received is less than the fair earning capacity of the property, [that] the earning capacity should be substituted as a factor rather than the actual earnings." Id. This Court in Greensboro simply relied on this holding of Pine Raleigh in affirming the Commission's determination that it would not consider the fact the subject property was encumbered by a lease for below-market rents. Greensboro, 72 N.C.App. at 640, 325 S.E.2d at 26-27.

These cases are distinguishable from the present case. GPG, which was constructed under section 42 for the express purpose of providing...