Ruling reaffirms the commonly used valuation method for LIHTC properties.
In a big win for taxpayers – one that holds serious policy implications – the Arizona Tax Court recently denied Maricopa County’s motion for declaratory relief in a dispute over the correct valuation method for low-income housing projects encumbered by restrictions under Section 42 of Title 26 of the Internal Revenue Code.
If Maricopa County had succeeded, it likely would have caused property tax assessments to increase, thereby burdening low-income housing operators and making it financially more difficult to underwrite and develop low-income housing projects in Arizona.
- See the Tax Court’s decision in El Rancho Affordable Housing L.P. v. Maricopa County.
The Low-Income Housing Tax Credit (LIHTC) program is the most important resource for creating affordable housing in the United States. Congress instituted the LIHTC program in 1986. Between 1987 and 2017, approximately 3.13 million housing units have been placed in service nationwide, including 16,000 housing units in Arizona. Arizona currently has the nation’s third-worst affordable housing shortage for low-income earners, and the Phoenix metro area is tied for the eighth-worst among large U.S. metropolitan areas.
Until Maricopa County filed its motion, the issue of what valuation method to use when valuing LIHTC housing for property tax purposes was largely a closed question. Arizona county assessors generally followed the valuation approach outlined in Cottonwood Affordable Housing v. Yavapai County, 205 Ariz. 427, 72 P.3d 357 (Ariz. Tax 2003), which recognizes the uniqueness of low-income tax credit apartments due to the regulations and deed restrictions that govern their operation, particularly the restrictions on the rents that can be charged. Cottonwood Affordable Housing established that these restrictions must be considered when determining value, and that a LIHTC apartment’s “value should be determined from its restricted income potential” and not based on market rents and expenses.
Maricopa County sought to overturn the valuation method used in Cottonwood Affordable Housing and replace it with the Arizona Department of Revenue’s Subsidized Housing Valuation Guideline issued in 1998. The Guideline assumes that a LIHTC property is not encumbered by deed restrictions and, instead, market rents and expenses should be used as the basis for valuing LIHTC housing. In other words, LIHTC apartments should be valued as though they are market rent apartments.
The Tax Court denied Maricopa County’s motion and reaffirmed the valuation method used in Cottonwood Affordable Housing. The Tax Court found that Cottonwood Affordable Housing is consistent with Arizona legal precedent that requires a county assessor to take into account the land use restrictions that affect the current usage and the value of a property.
The Tax Court also noted that most jurisdictions consider the deed restrictions, particularly rent restrictions, when valuing LIHTC housing. To ignore the deed restrictions would not result in a determination of fair market value.
Finally, the Tax Court noted that the ruling effectively rendered the Guideline moot as to the valuation of LIHTC properties. Thus, for now, the valuation of LIHTC apartments in Arizona remains consistent with the nation’s 41 other jurisdictions that have addressed the issue.
Douglas S. John represented El Rancho Affordable Housing L.P. in the matter discussed above. If you have questions concerning this issue, please contact Mr. John by phone (602-277-2010) or email.
