Tibbs v. Poplar Bluff Assocs. I, L.P., SD 31385.
| Decision Date | 30 April 2013 |
| Docket Number | No. SD 31385.,SD 31385. |
| Parties | Marion TIBBS, Assessor Butler County, Missouri, Plaintiff–Respondent, v. POPLAR BLUFF ASSOCIATES I, L.P., Defendant–Appellant. |
| Court | Missouri Court of Appeals |
411 S.W.3d 814
Marion TIBBS, Assessor Butler County, Missouri, Plaintiff–Respondent,
v.
POPLAR BLUFF ASSOCIATES I, L.P., Defendant–Appellant.
No. SD 31385.
Missouri Court of Appeals,
Southern District,
Division Two.
Jan. 9, 2013.
Application for Rehearing and/or Transfer Denied Jan. 31, 2013.
Application for Transfer to Supreme Court Denied April 30, 2013.
[411 S.W.3d 815]
Richard D. Dvorak, of Overland Park, KS, for Appellant.
Patricia L. Hughes, of Liberty, MO, for Respondent.
GARY W. LYNCH, J.
In 2005 and 2006, Poplar Bluff Associates I, L.P. (“PB Associates”), built a forty-unit housing complex, which included: twenty two-bedroom, two-bath units; twenty one-bedroom, one-bath units; eighty-five parking spaces and forty-four covered parking spaces; a community room; and an office. The complex was built at a total cost of $4,324,356. The Butler County Assessor (“the Assessor”) determined the fair market value of the property to be $2,668,060; however, the State Tax Commission (“the Commission”) determined the fair market value to be $888,300 for the tax years 2007 and 2008. The Assessor asserts two points in this appeal: first, the Commission erred in “ruling that low income housing must be valued using the ‘Maryville Formula’ ” and, second, the Commission erred because its use of the “Maryville Formula” to value subsidized housing rather than the methods “used for other apartments and rental housing” results in a separate subclassification of residential real property contrary to article III and article IV(b) of the Missouri Constitution. Because neither issue was raised before the Commission and thereby properly preserved for appellate review, Commission error cannot be premised upon either ground.
The duplexes at issue are subsidized housing under the Internal Revenue Code and are required by the terms of a land-use restriction agreement to be rented at below-market rent to low-income seniors. The United States and Missouri provide federal and state income tax credits to encourage the construction or rehabilitation of affordable housing for low-income individuals and families. These tax credits may be sold or held by the initial owner and can be taken each year for ten years. For housing in Missouri, the federal and state income tax credits are administered by the Missouri Housing Development Commission (“MHDC”).1
[411 S.W.3d 816]
PB Associates applied to the MHDC for an allocation of federal and state income tax credits in connection with the construction of the duplexes at issue in this case and was allocated federal and state income tax credits in the approximate total annual amount of $626,000 for ten years in exchange for PB Associates' agreement to rent the duplexes at below-market rents to low-income seniors for thirty years. PB Associates sold limited partnership interests in itself for an aggregate of $3,546,546 in cash. The limited partnership interests entitled the purchasers to receive the income tax credits and offset the credits against their federal and state income tax liabilities. 2 PB Associates borrowed $800,000 and used those loan proceeds and the proceeds from the sale of the limited partnership interests to construct the duplexes at a cost of $4,324,356. Included in this cost was a $475,000 fee that PB Associates paid its general partner for the general partner's services in developing the duplexes. The duplexes were completed in 2006.
The Assessor determined the fair market value of the duplexes on January 1, 2007, was $2,668,060. PB Associates disagreed and appealed to the Butler County Board of Equalization (“Board of Equalization”). The Board of Equalization “affirmed” the Assessor's valuation. Based on the Assessor's notice of change in assessed value, dated June 25, 2007, the Assessor's valuation would produce approximately $18,150 in real property taxes. PB Associates requested review by the Commission of the Board of Equalization's valuation, see section 138.430.1, and proposed a fair market value for the duplexes equal to $690,000.3 PB Associates' proposed valuation would produce approximately $4,695 in real property taxes.4
An evidentiary hearing was held by the Commission's Hearing Officer on October 29, 2008. The only issue before the Hearing Officer was the “fair market value” of the duplexes on January 1, 2007. In addition to the facts already set out, the evidence presented at the hearing included the following.
The duplexes are “subsidized housing” under Section 42 of the Internal Revenue Code,5 and are known as the Idlewild Apartments or Idlewild Estates. The duplexes are located on 7.33 acres with an office, community room, and covered and surface parking. The general partner of PB Associates has little or no cash capital invested in the duplexes. At the time of the hearing, the duplexes rented for $415 a month for the one-bedroom units and $468 a month for the two-bedroom units.
A limited partner receives the tax credits over ten years, but PB Associates must maintain the duplexes in compliance with MHDC rules for thirty years. PB Associates' failure to do so could result in the loss of future tax credits and the recapture of tax credits taken in the past.
In April 2006, PB Associates entered into a Low–Income Housing Tax Credit Land Use Restriction Agreement (“LUR Agreement”) with the MHDC for the duplexes “as a condition precedent” and “in consideration of receiving an allocation of” federal and state income tax credits. The LUR Agreement requires the duplexes to
[411 S.W.3d 817]
be rented for below-market rents to residents fifty-five years and older who earn sixty percent or less of the median income for the area (approximately $20,000 or less annually). The LUR Agreement also provides that it “shall be placed of record in the real property records of the county,” and “the covenants contained herein shall run with the land.” The LUR Agreement further provides that the MHDC “may void” any transfer of the duplexes if the transferee “fails to assume in writing the requirements of [the LUR Agreement],” and “no ... transfer ... shall occur without the prior written consent of MHDC.” In addition, the LUR Agreement provides the MHDC may apply for specific performance of the LUR Agreement. The Rental Housing Programs Application attached to the LUR Agreement shows estimated real estate taxes for the duplexes in the amount of $14,000. The LUR Agreement permits PB Associates to request a rent increase annually and provides that the MHDC “shall approve rental increases sufficient for the Owner to compensate for any net increases in taxes (other than income taxes) over which the Owner has no effective control,” however, it will not consider any request for an increase greater than seven percent of the existing rent, and rents shall not exceed the maximum allowed under the federal and state laws related to subsidized housing.
The Assessor and PB Associates “stipulated to a net operating income of $78,970, a blended loan constant of 7.47, and a tax rate of .81 percent” for the duplexes. The parties also agreed that PB Associates borrowed $800,000 to construct the duplexes.
In its Order Affirming Hearing Officer Decision Upon Application for Review, the Commission stated:
It is within the State Tax Commission's discretion to determine what method or approach it shall use to determine the true value in money of property. The correct methodology for valuing subsidized housing projects is the methodology set out in Maryville Properties and followed by [PB Associates]. That methodology is accurate because (1) rent restrictions are considered through the use of actual income rather than market income; (2) additional management requirements and expenses are accounted for through use of actual expenses which are in excess of market expenses; and (3) the actual loan-to-value ratio and the subsidized interest rate demonstrates and accounts for any and all risks involved in the property as well as the benefits flowing to the property.
(Internal footnotes omitted).
PB Associates called state-certified appraiser John T. Robertson and also submitted the written testimony of state-certified appraiser Robert E. Marx. Robertson and Marx determined an “equity dividend rate” equal to nine percent for the duplexes was appropriate based on sales of non-subsidized or “conventional” apartments with upward adjustments for “marketability,” “illiquidity,” and a debt-to-equity ratio of twenty-to-eighty percent. The equity dividend rate is the return an equity investor would require on its investment to convince the investor to invest in the property. Tax credit equity is a subsidy and is not equity from which an investor would want a return. Based on Robertson and Marx's opinion that an appropriate equity dividend rate for the duplexes was nine percent, PB Associates took the position before the Hearing Officer that the duplexes had a value under the “Maryville Formula” of $721,303 on January 1, 2007. Kenneth N. Vitor, an officer of PB Associates' general partner, testified that there is no active market for the sale of subsidized housing. Robertson also testified that
[411 S.W.3d 818]
there is a “lack of sales” of subsidized housing “in the market.”
The Assessor called certified general real estate appraiser Charles E. Trail. Trail testified: He prepared an appraisal of the duplexes that is “restricted ... for use in valuing subsidized housing,” that “is not a market value,” and that is “based on application of the Maryville Properties formula.” He did not prepare a cost- or sales-comparison-approach appraisal of the duplexes and noted that “there is not an active market of subsidized housing properties.” Based on the Maryville and Lake Ozark Village decisions,6 he calculated an equity dividend rate of .3952 percent based on “information and factors from” the specific duplexes at issue. In Trail's view, these decisions indicate you should not “use market rates, such as...
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