Alabama Court Decision Requires that Restrictions on LIHTC Properties Must be Considered in Property Tax Assessments

On December 13, 2019, an Alabama Circuit Court ruled that use restrictions for Low-Income Housing Tax Credit (and other types of affordable housing) must be considered when assessing the value of properties for real estate tax purposes.

The case is Glenbrook at Oxford I, LLC, Alabama Affordable Housing Association v. Magee, Commissioner of the Alabama Department of Revenue, J Jefferson County Board of Equalization, et. al.

In this case, the chief plaintiff, the Alabama Affordable Housing Association (“AAHA”), challenged the method specified for use in Alabama for determining the assessed values for real estate tax purposes of affordable housing properties.

The Alabama Department of Revenue property tax guidelines required that “the estimate of market value for subsidized multifamily housing properties will be accomplished using the same procedures provided by the Alabama Appraisal Manual for other multifamily housing real property.” This required local tax appraisers to ignore the legal restrictions on the use of an affordable housing property in assessing value for tax purposes. In essence, the guidelines directed that assessors not determine the actual market value of affordable housing properties. It stated directly that those properties should be valued for tax purposes as if they were “unrestricted” multifamily housing properties.

Unlike conventional multifamily apartment properties, LIHTC properties are substantially restricted by federally-mandated land use restrictions and covenants that are recorded in the probate land records and run with and encumber the land for at least 30 years (the “extended use period”). The restrictions include limits on the rents that may be charged and the income and student status of tenants at the property. As the court stated, “These restrictions negatively impact the cash flow, marketability, and, thus, the fair and reasonable market value of the property.” The court also noted that these restrictions stay in place even after all the tax credits have been claimed.

As noted by the court, Alabama law mandates that taxable property is to be valued at “it’s fair and reasonable market value…taking into consideration all elements or factors bearing on such value as heretofore or hereafter authorized…”

The court concluded that the taxation rules that “restricted affordable housing properties for which rents and eligible tenants are controlled and limited are to be valued for ad valorem tax purposes as if they are unrestricted multi-family housing property – violates Alabama law.”

Reasoning of the Court

  1. The Alabama Supreme Court has expressly held that tax assessors must consider encumbrances when assessing the fair market value of real estate.
  2. The taxation guidelines violate Alabama law because it ignores the restrictions and encumbrances (and thus the actual fair market values) of LIHTC properties and other affordable housing properties in Alabama.
  3. Alabama law requires state taxing authorities to take into consideration the negative impact of the rental rate, tenant eligibility, and other restrictions applicable to the affordable housing property when valuing it for property tax purposes. This is the only way the valuation process can determine a real-world “fair and reasonable market value.”
  4. By ignoring these restrictions and encumbrances and requiring the valuation of affordable housing properties as though they were unrestricted conventional multifamily housing, the valuation methodology unlawfully inflates the tax assessments made against LIHTC and other affordable housing properties.

For all these reasons, the court declared the assessment methodology in use by state and local taxing authorities to be null and void.

The court further stated that low-income housing tax credits are non-taxable intangible personal property under State law and their value can have no bearing on the real property valuation determination for property tax purposes.

With regard to the appraisal method used, the court found that the capitalization of income approach is “the controlling approach in the evaluation of income properties,” including the valuation of affordable properties, and that the restricted rents must be considered in this approach.

The cost approach, as set forth in the States Appraisal Manual, often does not relate to the productivity or market value of the property, especially in cases of the LIHTC program.

While this case only affects property tax assessments in Alabama, it presents a reasoned approach to the valuation of LIHTC properties and owners may consider referring to it when challenging local tax assessments that do not take use restrictions into account.