February 19, 2020
A close call for Affordable Housing and the Federal LIHTC program in AL:
Typically, the Weekly Wednesday Insights (WIN) consists of my perspective on the relevant economic and commercial real estate news of the past week. As our ACRE community should all be tuned up on the 2020 Outlook from our recent annual ACREcom program February 7th in Birmingham, and all is good from recent economic news on GDP (the Advance Estimate for Q4 2019 registered +2.1%), jobs (+225,000 in January according to the BLS and +291,000 in January according to ADP) – and corporate earnings from banks - such as Synovus and Regions in AL - and even retailers (like WalMart on Tuesday Jan 18th with +35% e-commerce sales growth and +1.9% same-store physical store sales growth) whom continue to meet or beat expectations - and we wait-and-see on the impact from Coronavirus, I am using this week’s commentary to focus on a recent property tax ruling (January 29, 2020) in Alabama involving a case that I and ACRE became involved with late in 2019. It holds lessons for our entire commercial real estate community on three levels: i) property tax; ii) affordable housing; and iii) understanding of basic real estate appraisal concepts such as property rights and treatment of intangibles.
In Q4 2019, I was asked through ACRE to consider providing expert witness testimony in an affordable housing property tax case in Alabama. As I became familiar with the litigation action and issues at dispute, I knew that I and the Alabama Center for Real Estate (ACRE) could not turn away from the case. Why?
First: ACRE has at its core a mission of service to our state-wide commercial real estate community.
Second: ACRE is committed to the need for affordable housing as this need is arguably the most important economic issue confronting every state - and virtually every MSA, even in Alabama.
Third: The central issue involved property valuation matters - one of my central skills being a designated MAI for the past 30 years.
The parties involved in this litigation matter (CV-2017-900036) were the Alabama Affordable Housing Association (Plaintiff) versus the Alabama Department of Revenue and Jefferson County (Birmingham) Board of Equalization. At issue was the methodology for property tax assessment of multifamily properties that had utilized the federal Low-Income-Housing-Tax-Credit program enacted by Congress in 1986 (aka LIHTC). LIHTC is the largest federal program intended to assist in the provision of affordable housing. In Alabama, as in all states, credits are awarded annually to each state at a federal level, and then a state authorized entity allocates the awarded credits in a competitive bid process to meet the needs across its many communities. In Alabama, that entity is the Alabama Housing Finance Authority (AHFA). AHFA has been a most effective steward of this program. In 2019, it had 58 new construction projects and 14 “acquisition/rehabilitation” projects across the state of Alabama from Mobile to Dotham to Montgomery to Tuscaloosa to Birmingham and to northern AL encompassing Huntsville. The respective AHFA multifamily communities all operate at a high occupancy rate in the mid-90% range (further testament to the demand and need for affordable housing in AL), and are the lifeline to what is termed as the “cost-burdened” households in AL. Cost-Burdened is a term used to describe those households where more than 50% of their income goes to housing costs (primarily rent). The most severely impacted households are those labeled “Extremely Low-Income (ELI) where their household incomes are 30% or less of the area-mean-income (AMI). In other words, these are our working poor where they are spending more than half their income on housing. Although many assume it is the California, New York, and high-cost-of-living states with the majority of “Cost-Burdened” households, that is just not the case. In fact, in states like AL, MS, AR, and TN with more affordable cost of living standards, an estimated 40% of the rental housing is beyond the reach of ELI households. In AL, that ratio translates to a shortage of more than 69,000 rental homes affordable and available for extremely low-income renters, according to the National Low- Income Housing Coalition 2019 Alabama Housing Profile. In other words, AL and virtually every state has an extreme affordable housing shortage. The last thing that should be under assault by our state revenue departments, tax assessors, and state government leaders is affordable housing finance programs. Below is a snapshot of Alabama’s Housing Profile by the NLIHC. Such a profile exists for every state and highlights the national need.
The Property Tax Issue:
In this case, the Alabama Department of Revenue and Jefferson County (Birmingham) Board of Equalization had taken the position going back to 2017 that the tax credits from the LIHTC program should be ignored and LIHTC multifamily properties have their fair market value for property tax assessment purposes be no different than a property that is able to collect market rents. And that is exactly how they proceeded to reassess LIHTC multifamily properties commencing in Jefferson County (Birmingham) AL in 2017. Before you form an opinion on this methodology, it is important to understand that LIHTC multifamily properties have a “Land Use Restriction Agreement” (LURA) that is a recorded document in the probate of land records that restricts the rents that can be charged for 15-30 years - and well beyond the typical 10-year tax credit period. This LURA has a material impact on the value of multifamily properties and cannot just be ignored in determining fair market value. But that is exactly what the AL Department of Revenue and Jefferson County Board of Equalization wanted to do in order to raise a few pennies of additional revenue at the detriment of affordable housing in Alabama.
This position went contrary to all the fundamental principles of valuation that I learned decades ago from my training to become a designated MAI appraiser. And one would think that a recorded deed restricting rents for essentially the economic life of a multifamily property would be something that all property tax assessing authorities would recognize as an element to be adjusted for in the fair market valuation of a property. It is for lending purposes. It is for price determination in the sale of multifamily properties. So why not at the AL Department of Revenue of Jefferson County Board of Equalization? In their defense, confusion of core valuation principles - such as property rights and the treatment of intangibles like tax credits – has become prevalent by tax assessing authority organizations like the IAAO (Association of Assessing Officials) as they attempt to put a finger in the dike of revenue loss from essentially the retail industry resulting from tens of thousands of store closings and the plethora of retail bankruptcies in an era of Amazon and e-commerce. Entities like the IAAO (Association of Assessing Officials) have invented new appraisal theory such as “Dark Store Valuation” that aim to blur concepts like property rights in order to assess say a vacant department or “Big-Box” retail store (Sears, K-Mart or Toys R Us examples) as though they were occupied and still economically viable. And these misguided valuation theories that lack any industry or academic validation by leading real estate centers such as University of Alabama (ACRE), Texas A&M, or University of Florida, etc., are morphing into new areas like multifamily and the LIHTC affordable housing program.
This case is a wake-up call for our entire commercial real estate industry that basic appraisal principles and property tax assessments matter and need redefending. Leading appraisal organizations, like the Appraisal Institute and Counselors of Real Estate (both of which I am a member) should be providing renewed clarification versus avoiding conflict with the IAAO or tax assessors. Property Tax should be a “Top-10 CRE Issue!”. The body of knowledge for appraisal theory and concepts like property rights and the inclusion/exclusion of intangibles were created by the Appraisal Institute almost three-quarters of a century ago - and vetted in case law, accounting standards, bank regulatory appraisal guidelines, and leading universities with recognized real estate centers. This property tax confusion and blurring of established appraisal concepts is not just a California, New York or high-cost state concern. It extends to all states - and currently the primary lines of defense are two-fold:
- i. Expensive litigation to appeal these flawed tax assessment theories and practices; and
- ii. Organizations like the American Property Tax Counsel (APTC) that are the only professional organization bringing representation to the one entity in America where there is no representation in taxation. That entity is the corporate property owner. Corporate entities do not vote and have no representation in property tax other than an expensive appeal process.
In this case, the Alabama Affordable Housing Association had to take up the cause to preserve a most important affordable housing program at a time where AL has tens of thousands of new factory and logistics workers being recruited into AL to work at say Airbus in Mobile, Toyota in Huntsville, Mercedes in Vance near Tuscaloosa, Hyundai near Montgomery, Amazon in Bessemer, and WalMart in Mobile. AL Department of Labor Secretary Fitzgerald Washington can train and recruit workforce for our growing manufacturing and logistics industries, but if AL can’t provide affordable housing, then that economic growth will stall and wither away. Don’t let flawed property tax assessment practices undermine the economic growth being generated once again by our political and economic development leaders!
The Final Ruling – a WIN for Affordable Housing, but …
I testified against a formidable expert witness – a former president of the Appraisal Institute. He is a good person and appraiser that I have known and have respected in my career. However, he and a number of leaders within the Appraisal Institute, have become confused by some of the IAAO new theories (such as Dark Store theory) and tactics like this one on affordable housing. I encourage my peers in the appraisal industry to look at this case and how close a call it was for affordable housing in AL as a reason to recommit a focus on core valuation appraisal principles regarding property rights, the treatment of intangibles, and reflection on property tax case law.
The APTC and a number of my fellow appraisal colleagues have prevailed in the last couple of years in aiding the courts in understanding the most basic appraisal principles around property rights and treatment of intangibles - and dispelling these unvetted new appraisal theories by tax assessing authorities. Watershed cases like this one in Alabama, and others in Florida (2019 Disney Versus Orange County Tax Assessor on proper identification and treatment of intangibles in hotel properties by Todd Jones, MAI, CRE of RealAdvice), Iowa (Home Depot on the blurring of Fee Simple and Leased Fee property interests), Kansas (WalMart vs. Johnson County), and California are re-establishing the original valuation appraisal principles regarding property rights, intangibles and the concept of uniformity (all property owners should have a uniform process for fair market value assessment).
The appraisal industry and our CRE community need to be aware of the tactics being tried by assessing authorities to put a finger in the dike of lost revenue from the changing highest and best use of property types such as retail due to so many retail bankruptcies and store closings. I understand the need for revenue to fund schools, local services like police and fire, etc., but at the core of all property valuation is a principle known as uniformity. The best way to uniformity is understanding property rights and the difference between fee simple and leased fee property rights - and then recognizing the intangibles in valuation assignments and how to segregate them. We may know how to do it for say hotel properties, but this case is a wakeup call that intangibles exist in other property types like MF and the LIHTC program to facilitate more affordable housing. Below are some excerpts from the final court ruling in this case that are worth noting.
The significance of this ruling - and the gratitude that should be extended to the Alabama Affordable Housing Authority (AAHA), Alabama Housing Finance Authority (AHFA), ACRE, and the lead attorney for AAHA in this case (Ken Perry – Ken Perry Law Firm, LLC of Birmingham AL) - can not be understated.
In essence, the future of affordable housing and the LIHTC federal affordable housing tax credit program were at risk in AL - and potentially other states where tax assessing authorities would have taken a contrarian ruling in this case as a green light to emulate the tactic of treating LIHTC tax credits as real estate. A contrarian ruling would have set back affordable housing and future economic development for years if not decades. As stated in the opening of this WIN, this case was a close call for affordable housing. Don’t just breathe a sigh of relief from the ruling in this case, get engaged again in property tax assessment and understanding basic appraisal principles regarding property rights and intangibles. Property Taxes are likely the most or second highest operating expense in the real estate you own, invest in, or lend upon.
Please feel free to reach out to ACRE or me as a resource with any property tax, valuation principles or methodology questions. My email is KCConway@Culverhouse.ua.edu
Click here to review the court case.
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