The Wisconsin Supreme Court overturned the city of Racine’s property tax assessments in Regency West Apartments LLC v. City of Racine, 2016 WI 99, clarifying in important respects the appropriate assessment methodology for I.R.C. § 42 low-income housing tax credit properties.  The court essentially rejected the trial court’s fact finding on the ground that the assessor’s opinions on which the lower court relied were based on legally faulty assessment methodologies. [Note: Foley & Lardner represented the property owner in this case.]

Regency West concerned the 2012 and 2013 assessments of a newly constructed 72-unit Section 42 housing development.  Established case law requires assessors to use the actual income and expenses of properties subject to federal programs like Section 42, not market rates.  See Metro. Holding Co. v. Bd. of Review, 173 Wis. 2d 626, 631-32, 495 N.W.2d 314 (1993).  Nevertheless, for 2012, the first tax year following completion of construction, the city assessed the property using the direct capitalization of income approach, which divides the property’s net operating income (NOI) by the applicable capitalization rate.  Because Regency West did not have actual income and expenses for the prior period, it provided the city with its projected income and expenses for the property. The assessor refused to use the projections, instead calculating the NOI using market-rate data.  And the assessor derived the capitalization rate from sales of market-rate properties, rather than from sales of other Section 42 properties.

For 2013, the city assessed the property based primarily upon the comparable sales approach.  The comparison properties used were either market-rate apartments with only a few Section 42 units or HUD § 8 rent-subsidized units.  Regency West argued that none of the assessor’s comparison sales met the threshold comparability test because none were subject to restrictions similar to the subject property.

The Supreme Court rejected the city’s assessments for both years.  With respect to the city’s income valuation for 2012, the court first reiterated that, when calculating the NOI for Section 42 properties, assessors must use income and expense data specific to the property.  In the absence of property-specific historical data, projected income and expenses for the subject property, rather than market-rate data, provide the best information available.  In addition, the capitalization rate had to be based on sales of Section 42 properties, rather than market-rate properties.

For 2013, the court held, as a matter of law, that market-rate properties may not be used as comparisons in assessing Section 42 properties.  Likewise, as a matter of law, HUD § 8 properties are not reasonably similar to Section 42 properties, since the two types of properties are not subject to the same types of restrictions.

Besides rejecting the city’s assessments, the court also approved the alternative valuations provided by Regency West’s expert, who relied solely upon the direct capitalization of income approach. The court rejected the city’s objection to the expert’s utilizing a single valuation method, holding that it is appropriate to do so when there is only one reliable method.