Blog Post

Doug John achieves appellate victory for taxpayers in low-income housing valuation case

Frazer Ryan • Jun 14, 2021

In a big win for taxpayers, the Arizona Court of Appeals resolved a long-running dispute between taxpayers and county assessors over the correct valuation method to be used for low-income tax credit (LIHTC) housing projects encumbered by restrictions under Section 42 of the Internal Revenue Code.

The dispute in Maricopa County v. Viola centered on whether the legal restrictions that burden LIHTC properties should be considered in property tax valuations. Unlike market-rent apartments, federal and state law impose restrictions on an owner’s use and operation of a property for a period of not less than 30 years, in exchange for federal tax credits necessary to build a low-income housing project. The deed restrictions limit, among other things:

the rent an owner can charge,
who can occupy a unit based on a tenant’s income, and
the owner’s ability to sell the property.

LIHTC housing is also burdened by state regulatory authorities who impose operational and compliance costs, periodic monitoring, on-site inspections, and compliance reviews.

Maricopa County sought to require county assessors to use the Arizona Department of Revenue’s Subsidized Housing Valuation Guidelines issued in 1998. The Guidelines assume that a LIHTC property is not encumbered by deed restrictions and, instead, market rent and expenses are used to value LIHTC housing. In other words, LIHTC apartments should be valued as though they are market-rent apartments. This position is contrary to the law in almost all states.

In its written opinion, the Arizona Court of Appeals rejected Maricopa County’s argument and agreed with the taxpayers. The court noted that “a market value approach requires us to consider market value limitations.” The deed restrictions must be accounted for because they “have a direct and immediate effect upon marketability.” The failure to recognize that the current use of LIHTC housing as low-income apartments, the court pointed out, would require assessors to value them in excess of their actual fair market value in violation of Arizona law. Maricopa County appealed the decision to the Arizona Supreme Court, but the court denied review.

If Maricopa County had succeeded, it would have had a direct impact on the availability of low-income housing in Arizona. Property tax assessments would have increased, thereby burdening low-income housing operators, making it financially more difficult to underwrite and develop low-income housing projects.

It also would have exacerbated Arizona’s shortage of low-income housing. Since Congress created the Low-Income Housing Tax Credit (LIHTC) program in 1986, 16,000 housing LIHTC units have been placed into service in Arizona. Despite the increase in LIHTC housing, there are currently 183,343 extremely low-income renter households in Arizona, and only 48,585 affordable and available rental homes. Arizona is currently tied for the second-worst affordable housing shortage for low-income earners in the nation, and the Phoenix metro area is tied for the third worst among large U.S. metropolitan areas.

Read the Court’s full ruling in Maricopa County v. Viola.

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 email.

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