Regency W. Apartments LLC v. City of Racine

• Decision Date: 22 December 2016
• Docket Number: No. 2014AP2947,2014AP2947
• Citation: 888 N.W.2d 611,372 Wis.2d 282
• Parties: Regency West Apartments LLC, Plaintiff-Appellant-Petitioner, v. CITY OF RACINE, Defendant-Respondent.
• Court: Wisconsin Supreme Court

372 Wis.2d 282

888 N.W.2d 611

Regency West Apartments LLC, Plaintiff-Appellant-Petitioner,^†

v.CITY OF RACINE, Defendant-Respondent.

No. 2014AP2947

Supreme Court of Wisconsin.

Oral Argument: September 9, 2016

Opinion Filed: December 22, 2016

For the plaintiff-appellant-petitioner, there was a brief by Maureen A. McGinnity and Foley and Lardner LLP, Milwaukee, and oral argument by Maureen A. McGinnity.

For the defendant-respondent, there was a brief by Robert E. Hankel, and Robert E. Hankel, S.C., Mount Pleasant., John M. Bjelajac, and Bjelajac and Kallenbach, LLC, Racine and oral argument by Robert E. Hankel.

PATIENCE DRAKE ROGGENSACK, C.J.

¶ 1 Regency West Apartments, LLC brought actions against the City of Racine in circuit court pursuant to Wis. Stat. § 74.37(3)(d) (2011-12)¹ to recover refunds from claimed excessive taxation for 2012 and 2013. We review a per curiam, unpublished decision of the court of appeals,² affirming an order of the Racine County Circuit Court³ that dismissed Regency West's claims of excessive taxation.⁴

¶ 2 The City of Racine's appraisers valued Regency West's property at $4,425,000 as of January 1, 2012 and at $4,169,000 as of January 1, 2013 for purposes of tax assessment. Regency West claims both appraisals fail to comply with appraisal principles required by Wisconsin law, and that those appraisals resulted in excessive taxation.

¶ 3 Our discussion centers on whether Racine's appraisals of Regency West's property comply with Wisconsin law. Specifically, we review whether Racine employed the methodology required by Wis. Stat. § 70.32(1) for valuing federally subsidized property that is subject to I.R.C. § 42 restrictions;⁵ whether Regency West has overcome the presumption of correctness set out in Wis. Stat. § 70.49 ; and whether Regency West proved the tax assessments for 2012 and 2013 were excessive.

¶ 4 We conclude that the valuation methodologies Racine used for the 2012 and 2013 assessments did not comply with Wisconsin law. Accordingly, we also conclude that Regency West has overcome the presumption of correctness for the 2012 and 2013 tax assessments, and that the circuit court and the court of appeals erred in concluding otherwise. And, finally, we conclude that Regency West has proved that Racine's tax assessments for 2012 and 2013 were excessive. Accordingly, we reverse and remand to the circuit court to calculate the amount of Regency West's refund.

I. BACKGROUND

¶ 5 Regency West is the owner and developer of a property located in Racine, Wisconsin. Regency West constructed the property in 2010-11, with the first units placed in service September of 2011, and the project being fully leased in February of 2012.

¶ 6 The property has 9 two-story buildings consisting of 72 residential units, all of which are family units. All units are federally regulated housing pursuant to I.R.C. § 42. These federal regulations include income and rent restrictions. As part of the restrictions, the property is subject to a Land Use Restriction Agreement (LURA) that provides that for 30 years, 51 of the 72 units are restricted to tenants earning up to 50 percent of the median income in Racine County and 21 are restricted to tenants earning up to 60 percent of the median income in Racine County. The maximum rents that Regency West may charge are set by Wisconsin Housing and Economic Development Authority (WHEDA).

¶ 7 For purposes of assessing real estate taxes, Racine's appraisers valued Regency West's property at $4,425,000 as of January 1, 2012 and at $4,169,000 as of January 1, 2013. Regency West contested both tax assessments, claiming that the appraisals that underlie the tax assessments did not comply with Wisconsin law. Regency West did not challenge the 2012 assessment before the board of review because Racine did not timely deliver the assessment to Regency West. However, Regency West did challenge the 2013 assessment before the board of review. The board upheld that tax assessment.

¶ 8 The matter now before us is Regency West's refund action brought in circuit court pursuant to Wis. Stat. § 74.37(3)(d). Therefore, we review the record made in the circuit court and the circuit court's determination, not the determination of the assessor or the board of review. See Nankin v. Vill. of Shorewood, 2001 WI 92, ¶¶ 24–25, 245 Wis.2d 86, 630 N.W.2d 141.

¶ 9 Trial testimony turned on various methods of real estate appraisal by which the value of Regency West could be determined. The City presented testimony from its assessor, Janet Scites, as well as the Chief Assessor for the City of Racine, Ray Anderson. Scites testified that for 2012 she applied a direct capitalization of income approach, using "mass appraisal techniques."⁶ With a direct capitalization of income approach to valuation, an appraiser computes the property's net operating income (income less expenses or NOI) and divides it by the applicable capitalization rate (ratio between NOI of comparable properties and their sale prices).⁷

¶ 10 One of Regency West's construction lenders provided estimates of potential gross income and expenses to Racine for use in the 2012 valuation. However, Racine's assessor said that the expense projections in that report were too high. Accordingly, Scites applied a 40 percent estimated expense ratio that she believed was reflective of other Section 42 properties. She testified that she did so "to stabilize expenses."

¶ 11 Racine's assessor used a 6 percent capitalization rate derived from market-rate properties, not from the market for Section 42 properties.⁸ To this, Scites added the 2.5 percent property tax rate, for a loaded capitalization rate of 8.5 percent.⁹

Racine's appraisers divided the NOI they calculated based on "stabilized expenses" by an 8.5 percent capitalization rate thereby yielding a value of $4,425,000 for 2012.

¶ 12 With respect to the 2013 assessment, Racine valued Regency West's property at $4,169,000 as of January 1, 2013. The City's assessors used the comparable sales approach, rather than the income approach, to appraise the property. They relied on the sales of three properties, which they claimed were reasonably comparable properties.

¶ 13 One of the properties, Lake Oakes, had few Section 42 housing units; most were market-rate units. The other two properties the City's assessors relied on, Woodside Village/Albert House and McMynn Tower, had no Section 42 units. Each of those developments was either entirely HUD § 8 housing or HUD § 8 housing with a small number of commercial units.¹⁰ The assessor did not adjust for differences in government restrictions on the different types of federally regulated housing when appraising Regency West's property. Instead, Scites testified that she considered the restrictions for Section 8 and Section 42 properties to be sufficiently similar.

¶ 14 Racine also presented the testimony of two outside appraisers, Peter Weissenfluh and Dan Furdek. The outside appraisers used four appraisal methods for both their 2012 and 2013 assessments. First, Weissenfluh and Furdek used the comparable sales approach. The appraisers relied on a combination of Section 42 and Section 8 properties, and Furdek testified that he believed the restrictions on the properties were irrelevant as long as the rental income from the properties was the same. Next, they used two variations of the income approach: the direct capitalization method and the discounted cash flow method. Finally, they used the cost approach. Each of Furdek and Weissenfluh's valuations resulted in higher valuations than Racine's.

¶ 15 In contrast, Regency West argued that it had overcome the presumption of correctness afforded the City's tax assessment for two reasons. First, the City had failed to comply with the Wisconsin Property Assessment Manual (WPAM)¹¹ in its appraisals of Regency West's property as Wis. Stat. § 70.32(1) requires. Second, Regency West presented sufficient contrary evidence that Racine's appraisals were excessive. In that regard, Regency West presented testimony from Michael Lerner and, its appraiser, Scott McLaughlin. Michael Lerner has vast experience working with Section 42 housing whereas Scott McLaughlin specializes in appraising subsidized housing. Relying solely on the income approach, which he explained was consistent with WPAM, McLaughlin appraised the property at $2,700,000 for 2012 and $2,730,000 for 2013.

¶ 16 At the conclusion of the trial, the circuit court dismissed Regency West's excessive tax claims for both years. The circuit court concluded that Regency West had failed to overcome Wis. Stat. § 70.49's presumption of correctness given to the 2012 and 2013 tax assessments.

¶ 17 The circuit court found that Racine did not do an individual valuation of Regency West's property for 2012, but instead, it "applied mass appraisal techniques." The court found that Scites "estimated expenses based upon her experience and used a capitalization rate of 8.5%." The court then concluded that "[d]ue to the number of assessments needed to be done (7,500), the City used mass appraisal techniques, [which was] an appraisal method approved by the Property Assessment Manual for commercial property" in arriving at $4,425,000 as the property's value in 2012.

¶ 18 The court of appeals affirmed the circuit court's dismissal of Regency West's complaint. With respect to the 2013 assessment, the court rejected Regency West's argument that Section 42 and Section 8 properties are not reasonably comparable for purposes of the comparative sales approach. The court reasoned that both types of subsidized housing are found within the same section of the WPAM, and Racine's assessors had opined that the rents from all the properties were essentially the same. With respect to the 2013 assessment, the court concluded that reliance on market-rate properties for the NOI was immaterial because Racine used the comparative sales approach for that valuation; and for 2012, reliance on a market-rate NOI was reasonable...