Pinelake Housing Co-op. v. City of Ann Arbor

• Decision Date: 05 June 1987
• Docket Number: Docket No. 85376
• Citation: 159 Mich.App. 208,406 N.W.2d 832
• Parties: PINELAKE HOUSING COOPERATIVE and Forest Hills Housing Cooperative, Petitioners-Appellants, v. CITY OF ANN ARBOR, Defendant-Appellee. 159 Mich.App. 208, 406 N.W.2d 832
• Court: Court of Appeal of Michigan — District of US

Page 832

406 N.W.2d 832

PINELAKE HOUSING COOPERATIVE and Forest Hills Housing Cooperative, Petitioners-Appellants, v. CITY OF ANN ARBOR, Defendant-Appellee.

Docket No. 85376.

159 Mich.App. 208, 406 N.W.2d 832

Court of Appeals of Michigan.

Submitted Aug. 11, 1986.

Decided March 23, 1987.

Released for Publication June 5, 1987.

[159 MICHAPP 210] Michaelene K. Young, Ypsilanti, for petitioners-appellants.

John K. Van Loon, Ann Arbor, for defendant-appellee.

Before DANHOF, C.J., and SHEPHERD and HOBSON, ^* JJ.

PER CURIAM.

This appeal involves consideration of the method adopted by the Tax Tribunal to assess the value of two low-income, government-subsidized housing projects for property tax purposes.

Petitioners, Pinelake Housing Cooperative (Pinelake) and Forest Hills Housing Cooperative (Forest Hills), are both located in the City of Ann Arbor, which is the respondent in this matter. Pinelake contests its tax assessments for 1981, 1982, and 1983. Forest Hills disputes its assessments for 1981, 1982, 1983, and 1984. Respondent contends that the true cash value of the projects is roughly three times the amount which the petitioners assert is the proper valuation for each of the tax years in question.

Pinelake and Forest Hills received separate hearings before a Tax Tribunal hearing officer. With the exceptions of the values derived, the hearings were virtually identical. The attorneys, the experts, and their propounded theories were [159 MICHAPP 211] the same. By agreement of all of the parties, the hearing officer authored a single proposed judgment. From that point, the cases have been consolidated.

I

Pinelake is a federally-regulated low-income housing cooperative, consisting of 129 units. When built in 1975, the original mortgage balance was $2,871,900, payable at seven percent interest over forty years, and represented one hundred percent of the property's cost. The mortgage was guaranteed by the federal government through the Department of Housing and Urban Development (HUD) pursuant to Sec. 236 of the National Housing Act of 1959, as amended, 12 U.S.C. Sec. 1715z-1. The most significant aspect of HUD's participation in the project is an "interest-reduction" subsidy, which pays all except one percent of the interest due on the mortgage note.

The cooperative association contracted for the construction of the complex and owns the buildings and the land. Residents gained the right to possess units by purchasing membership certificates. To qualify as a member, an individual's income must be below limits set by HUD.

A membership certificate conveys some indicia of ownership to the occupants. The conveyed interest is analogous to owning a share in a corporation; a member does not own the specific unit in which he lives, but rather an intangible portion of the whole.

When a member leaves the co-op, he may transfer his interest to another person who meets the income requirement and other requirements of the co-op. However, members are not free to set their own price. Rather, the bylaws of the cooperative [159 MICHAPP 212] establish the "transfer value." Originally, the transfer value was to have increased annually at a fixed rate after the fourth year of the project. However, sometime between 1979 and 1981, HUD granted Pinelake's request to freeze the transfer value at a range between $688 and $820, depending on apartment size.

Another indicium of ownership is that the members gain some measure of control in the management of the cooperative. They can vote for directors and can run for such offices. The board of directors makes management and administrative decisions within the limits of the regulatory agreement with HUD. However, control ultimately lies in the hands of HUD, which reviews the co-op's budget line by line and has power to reject any portion of it, to increase the percentage of income which a member must pay as monthly "carrying charges" (what the members pay instead of rent), to freeze the transfer value of a membership, and to require the co-op to make increased payments to reserves and so forth.

The carrying charges are applied to the co-op's operating expenses and the mortgage. The carrying charges are adjusted annually and are set at a level sufficient to cover the operating expenses and the co-op's obligation on the one percent mortgage. The charges are not designed to generate any "profit." If expenses increase or decrease, the carrying charges are adjusted in the following year's budget.

Despite the substantial federal subsidy, Pinelake is not without problems. As previously mentioned, the transfer value of its memberships was frozen sometime between 1979 and 1981 at the request of the cooperative at a range of between $688 and $820. The freeze was necessitated by the fact that Pinelake was having trouble finding low-income [159 MICHAPP 213] individuals to fill vacancies who had sufficient cash on hand to pay both the membership fee (transfer value) and the first month's carrying charge. Together these amounts were over $1,000 in all cases. In 1980, Pinelake lost between two percent and three percent of its potential income due to vacancies. In 1981, vacancy loss rose to 9.5 percent. In 1982, vacancy loss represented 11.8 percent. Pinelake also experienced collection problems during those years. However, collection losses were smaller than vacancy losses.

Verna Spath, the co-op's president, testified that "very, very frequently" the residents do not give the required sixty-days notice of their intention to leave but instead simply stop paying the monthly carrying charge. By the time the residents move, the past due carrying charges plus the amount charged for damage to the unit "almost always" exceeds the transfer value of the membership.

Brady Caputo, the co-op's manager, testified that it costs an average of $1,500 to rehabilitate a unit after a member moves out. He also testified that, since the project was nine years old, it was beginning to require large maintenance expenditures. The tile floor and carpeting in the units needed to be replaced. The porches and sidewalks were in need of repair. The exterior needed repainting. Refrigerators were beginning to wear out.

Laurence Allen, petitioners' appraiser, testified that Pinelake was "generally in poor condition."

Steven Breshgold, the co-op's accountant, testified that the co-op was one month behind in paying bills.

II

Forest Hills is a similar but larger (306 units) cooperative housing project, subject to the same [159 MICHAPP 214] regulations. It was developed in five phases. The first occupants moved in in 1971. The original amount of the five mortgages totaled $6,477,800.

The makeup of Forest Hills' member population is somewhat different than that of Pinelake's. While eighty percent of the units at Pinelake were occupied by single-parent families, Forest Hills has a "high rate of couple occupants." Laurence Allen, petitioners' appraiser, testified that he considered Forest Hills to be superior to Pinelake in both location and "property."

Unlike Pinelake, at the time of the hearing, Forest Hills had not frozen the transfer value of its membership. However, Forest Hills permits new members to initially pay only fifty percent of the membership fee, with the balance being paid off in installments. Even so, Forest Hills found that the high initial cash payment was burdensome and was in the process of seeking approval from HUD to freeze the transfer value. Forest Hills' vacancy losses for both 1980 and 1981 were less than one percent. Vacancy losses were 5.9 percent for 1982 and 4.5 percent for 1983.

Terry Lewis, Forest Hills' president, testified that the co-op repurchases the membership when a resident leaves. She testified that repurchases were necessary because the co-op had a one-third annual turnover rate. She did not believe memberships would be marketable if new members were not guaranteed a buyer at resale.

Like Pinelake, Forest Hills is undergoing a period where extensive repairs are becoming necessary due to the increased age of the project. There was no testimony that Forest Hills was behind in paying its creditors. However, there was testimony that, because of the increased vacancy loss problem, the co-op did have to hold off on a preventative[159 MICHAPP 215] maintenance program and the replacement of appliances.

III

At the hearings before the Tax Tribunal hearing officer, both petitioners' appraiser and respondent's appraiser testified that valuation of the subject properties was made more difficult because, except for foreclosures, they were unaware of any such property which had ever been sold.

Laurence Allen, petitioners' appraiser, presented two approaches. In the first, which he called the "cooperative approach," Allen theorized that the value of a Sec. 236 cooperative is equal to the value of the outstanding mortgage plus the total value of the membership fees. ¹ Adding these two amounts together, Allen concluded that the properties' true cash values for the years in dispute were:

The second approach Allen employed was the [159 MICHAPP 216] "Congresshills " ² approach. Using the actual income and actual expense experience of the projects, Allen calculated net income ³ for each property, which he multiplied by overall capitalization rates of 13.38 percent, 14.46 percent, 11.66 percent, and 11.66 percent for 1981 to 1984 respectively. To the overall capitalization rate, Allen added a tax capitalization rate to arrive at total capitalization rates of 16.63 percent, 17.56 percent, 14.65 percent, and 14.81 percent, for 1981 to 1984, respectively. Allen testified that the Congresshills approach indicated the following values:

Allen's final conclusion was that the cooperative approach more accurately represented the true cash values of the subject properties than did the Congresshills approach.

Respondent's appraiser, David Geragosian, presented a cost approach and three variations of the...