The unique characteristics of low-income housing tax credit (LIHTC) properties make it difficult for assessors to agree on how to value them for property tax purposes. Vagueness in state statutes and conflicting court decisions across the country provide little guidance to either assessors or property owners.

It’s important for owners to find out if their state directs assessors in how to value LIHTC properties. If it does, what kind of direction are assessors given? Does the state want assessors to apply case law (court opinions) or statutory law (codes)?

Debates continue in the appraisal community about how assessors should value a tax credit project. First, assessors grapple with whether to use a LIHTC property’s restricted rents or to use conventional market rents when applying the income approach to value a project. Another matter is whether the tax credit benefits should be treated as tangible or intangible value in the valuation equation. Tangible versus intangible becomes a crucial factor because, in most jurisdictions, assessors cannot include intangible values in their property tax assessments.

Because most states still do not have court cases or statutes on the books that provide guidance about what rents to use and whether tax credits have a tangible or intangible value, the debate between assessors and LIHTC owners rages on. Even among the states that do address these issues via case law, no uniformity exists about how to value LIHTC properties for assessment purposes. An examination of varying state court decisions demonstrates this point and also will prove helpful to owners in determining whether to appeal their property tax assessments.

State court decisions

Twelve states have court decisions that address the property tax assessment of LIHTC properties and can be cited as precedent in other cases. The differences between the states’ decisions hinge on whether the courts feel that the tax credits provide intrinsic value to the property, and thus should be included in the valuation equation, or whether they treat them as nontaxable intangible property.

Recent court decisions like Huron Ridge LP v. Township of Ypsilanti are proving problematic for LIHTC property owners. In Huron Ridge, decided in 2005, the Michigan Tax Tribunal deliberated whether the influence of the tax credit, restricted rents and other requirements imposed under Sec. 42 must be accounted for when determining the market value of a 142-unit complex. The tribunal decided that the LIHTC value influence must be part of the valuation equation because the benefits associated with a tax credit property would be included in a potential buyer’s evaluation of the project. The tribunal stated:

“LIHTC properties can be sold, in which case the purchaser ‘steps into the shoes’ of the prior owner with respect to the remaining credit. ... The tax credits in this case provide a ‘considerable benefit to the owner.’ … The benefits are transferable with the real estate and clearly would be considered by a purchaser in a market transaction.”

Courts in New Hampshire and South Dakota have recently handed down decisions similar to the Huron Ridge case. In Epping Senior Housing Associates, LP v. Town of Epping, New Hampshire’s Board of Land and Tax Appeals held that the LIHTCs were one of the bundle of rights that the property owner enjoyed by the purchase and development of the project, so they should be included in the property’s valuation. Similarly, the Supreme Court of South Dakota found in Town Square Limited Partnership v. Clay County Board of Equalization that the “tax credits make ownership of the subject property more desirable … and enhance the value of the property in the marketplace.” Thus, LIHTCs must be taken into consideration in the property’s assessment. Courts in North Carolina, Connecticut, Kansas, Tennessee and Idaho have also ruled that assessors should consider LIHTCs in their property tax assessments.

In only five of the 12 states with court decisions on LIHTCs have those decisions sided with the taxpayer, holding that tax credits should not be considered when valuing LIHTC properties. For example, in Maryville Properties, L.P. v. Pat Nelson, Assessor, the Missouri Court of Appeals reversed a State Tax Commission decision allowing tax credits to be included in valuing a LIHTC project. The court held that tax credits are intangible personal property and thus not subject to real property taxation. In classifying the tax credits as intangible property, the Maryville Properties court stated:

“LIHTCs are not characteristics of the property. Rather they are assets having direct monetary value. Their restricted transferability does not destroy their essential status as intangible property having value primarily to their owner. Objective standards should be used for determining fair market value in the market place. The particular circumstances of the owner are not a proper consideration.”

The Washington Court of Appeals, in Cascade Court Limited Partnership v. Scott Noble, King County Assessor, similarly held that LIHTCs are intangible personal property that could not be considered by assessors when valuing real property. In a pending case in Oklahoma, a court will soon decide whether tax credits are intangible property not subject to taxation in that state.

An Arizona Tax Court focused on a LIHTC project’s restricted income potential when siding with the taxpayer in a tax assessment suit. In Cottonwood Affordable Housing v. Yavapai County, the Arizona court stated that a property’s value should be determined from its restricted income potential, without regard to tax credits. The court further ruled that while LIHTCs do provide an incentive for an investor or developer to invest in and construct these low-income housing projects, they also act as a disincentive for a current owner to sell, and provide little or no incentive for a new buyer to purchase the property. Thus, the court found that LIHTCs add little, if anything, to the long-term value of a property.

Finally, courts in Montana and Oregon have also come down on the side of the taxpayer in LIHTC assessment cases. Specifically, the Supreme Court of Oregon ruled in the Baybridge Associates Limited Partnership v. Department of Revenue that the LIHTC program was a “governmental restriction as to use” and thus could not be taken into account in determining the true cash value of property for ad valorem tax purposes.

It is hard to predict how a court will rule on an issue as complicated as the valuation of LIHTC properties. Conflicting court decisions prove problematic for both the owner of a tax credit property and for the assessor. Nonetheless, everyone’s best interests are served when statutes address valuation issues rather than providing courts the opportunity to make law.

State statutes

Fourteen states have passed legislation addressing the valuation of LIHTC properties. All of these state statutes provide valuation guidance beneficial to both affordable housing developers and assessors. A majority of the state statutes address the LIHTC valuation issue from an income perspective. Other statutes reference tax credit properties on a broader level.

Several states mandate that LIHTC properties be assessed under the income approach of appraisal and that assessors exclude from income the benefit associated with the tax credits. The most recently enacted legislation in this vein comes out of New York state. In October 2005, Gov. George Pataki signed the Affordable Housing Property Tax Assessment Bill. The legislation amends the state’s Real Property Tax Law by adding Sec. 581A, which requires local assessors to assess affordable housing projects under the income approach, excluding the tax credits from income. This statute grants a victory to LIHTC property owners. The income approach to property valuation, as opposed to the cost approach or market approach, often results in reduced assessments because of the restricted rents received by a tax credit property. This law was not intended to include New York City properties, but it does currently and will have to be amended in the next session of the state legislature.

3In California, Maryland, Nebraska, Illinois and Iowa, legislatures enacted statutes similar to New York’s. For example, Sec. 402.95 of California’s Revenue and Taxation Code states, “in valuing property under the income method of appraisal, the assessor shall exclude from income the benefit from federal and state low-income housing tax credits.” Similarly, Maryland’s statute gives assessors perhaps one of the most explicit mandates. Sec. 8-105 of Maryland’s Tax Code states:

“In determining the value of commercial real property developed under Sec. 42 … the supervisor:

(i) shall consider the impact of applicable rent restrictions… required by Sec. 42;

(ii) may not consider income tax credits under Sec. 42 … as income attributable to the real property; and

(iii) may consider the replacement cost approach only if the value produced by the replacement cost approach is less than the value produced by the income approach ….”

Other states like Georgia and Utah address the LIHTC valuation issue in broader terms. For instance, Georgia’s Revenue and Taxation Code states, “the tax assessor shall not consider any income tax credits with respect to real property” when determining the fair market value of property. Pennsylvania, Alaska, Wisconsin, Colorado, Florida and Indiana are the additional states that have enacted legislation specifically prohibiting the inclusion of LIHTCs in the valuation equation.

It appears that legislatures, more than most courts, clearly understand the inherent difficulties in assessing LIHTC properties. Thus, owners and developers of tax credit properties would be well advised to lobby their state legislators to enact statutes similar to the ones discussed here, especially in those states with negative court decisions (seven states) or no case law at all (23 states).

Gilbert Davila is a partner with the Austin, Texas, law firm of Popp, Gray & Hutcheson, LLP. Popp, Gray & Hutcheson devotes its practice exclusively to the representation of taxpayers in property tax appeals and lawsuits and is the Texas member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Davila can be reached at