By Lillian E. Eyrich
Williams v. Opportunity Homes, L.P.* is a recent decision by the Louisiana Supreme Court that will be of interest to people who own low-income housing developments, particularly properties with Low Income Housing Tax Credit (LIHTC) restrictions on rental rates. In brief, owners of this kind of real estate will want to be sure that the tax assessor properly appraises their property so that it is fairly taxed.
There are a variety of appraisal methods available to tax assessors in Louisiana to determine the fair market value of property. The key is to determine the appropriate method for a piece of property. Owners of property that have special circumstances affecting the property should be particularly interested in making sure that a fair appraisal method is applied to their property, because fair market value of such property can be different from property without the special circumstances. An example is an apartment complex that has a large percentage of its units set aside for low-income residents at lower than the average rental rate in the city where the property is located.
The Various Approaches to Property Appraisals in Louisiana
The Louisiana Constitution and Louisiana Revised Statutes have several provisions requiring tax assessors to follow uniform guidelines, procedures, rules, and regulations in determining fair market value of property. See La. R.S. 47:2323(B). The next section, La. R.S. 47:2323(C), provides that fair market value may be determined by one of three procedures: the market approach, the cost approach, or the income approach.
Using the market approach, the assessor is required to estimate market value based on prices paid in actual market transactions and current listings – i.e., comparable sales of similar property in the same taxing district.
The cost approach requires the assessor to determine value by estimating the replacement or reproduction costs of the improvements, deducting the estimated depreciation, and then adding in the market value of the land.
The final option for an assessor, the income approach, requires the assessor to “use an appraisal technique in which the anticipated net income is capitalized to indicate the capital amount of the investment which produces the net income.” See La. R.S. 47:2323(C)(3).
The Louisiana Tax Commission issues rules and regulations regarding appraisal methods, to promote the uniformity of tax appraisals around the state. La. R.S. 47:1837(D). In 2009, the Tax Commission recommended using the income approach in assessing affordable rental housing. See La. Admin. Code, Title 61, Part V, Section 303(C).
Williams v. Opportunity Homes, L.P. – The Ruling
The Orleans Parish assessor used the market approach in appraising property owned by Opportunity Homes, L.P., rather than the income approach as recommended by the Tax Commission. This resulted in a significantly higher tax liability, and Opportunity Homes appealed. The Tax Commission ruled in favor of the owner, which the district court upheld. The appellate court reversed that decision, and the owner sought review by the Louisiana Supreme Court, which granted writs and reversed the appellate court, reinstating the assessment values established by the Tax Commission using the income approach.
Williams v. Opportunity Homes, L.P. – The Reasoning of the Court
In its decision, the Louisiana Supreme Court discussed the differences between properties that are restricted to charging below-market-value rents and properties that can charge full market value rents, and gave great weight to the Tax Commission’s appraiser who used the income approach on the subject property for that reason. Additionally, the Court noted that there were no recent, comparable sales of similarly rent-restricted properties in the area where the Opportunity Homes property is located, as well as the fact that owners of LIHTC properties need federal approval to sell the restricted property and must comply with other regulatory requirements.
The Court stated that the Orleans Parish assessor did not submit any evidence that directly contradicted the Tax Commission’s appraiser, and that the assessor had made only a general statement that its market value appraisal was “supported by comparable sales data”, but without providing testimony or documentation of comparable sales. The Court also stated that the assessor did not say whether the low-income housing tax credits were incorporated into the assessor’s valuation. For these reasons, the Court concluded that the market approach was not the appropriate appraisal method for the subject property, and that the income approach used by the Tax Commission was the more accurate method in this case.
The Upshot for Owners of Low Income Properties
The Louisiana Supreme Court reinstated the Tax Commission’s valuation of the LIHTC property, which lowered the owner’s property taxes by a significant amount. This decision will be of great benefit to owners of property subject to LIHTC restrictions that affect the market value of the property.