Opinion
2016 CA 1253
08-29-2017
LOUIS FITZMORRIS, ASSESSOR, PARISH OF ST. TAMMANY v. NEW COVINGTON APARTMENTS, LP AND LOUISIANA TAX COMMISSION
John J. Weiler Christian N. Weiler New Orleans, Louisiana Counsel for Plaintiff-Appellee Louis Fitzmorris, Assessor, Parish of St. Tammany Thomas M. Beh New Orleans, Louisiana Counsel for Defendant-Appellant New Covington Apartments, LP Robert D. Hoffman, Jr. Covington, Louisiana Counsel for Defendant-Appellant Louisiana Tax Commission Brian A. Eddington Baton Rouge, Louisiana Counsel for Amicus Curiae The Louisiana Assessors Association Stephen H. Kupperman Stephen R. Klaffky Counsel for Amicus Curiae Louisiana Association of Affordable Housing Providers, Inc.
NOT DESIGNATED FOR PUBLICATION ON APPEAL FROM THE TWENTY SECOND JUDICIAL DISTRICT COURT
NUMBER 2015-14995, DIVISION F, PARISH OF ST. TAMMANY
STATE OF LOUISIANA HONORABLE MARTIN E. COADY, JUDGE John J. Weiler
Christian N. Weiler
New Orleans, Louisiana Counsel for Plaintiff-Appellee
Louis Fitzmorris, Assessor, Parish
of St. Tammany Thomas M. Beh
New Orleans, Louisiana Counsel for Defendant-Appellant
New Covington Apartments, LP Robert D. Hoffman, Jr.
Covington, Louisiana Counsel for Defendant-Appellant
Louisiana Tax Commission Brian A. Eddington
Baton Rouge, Louisiana Counsel for Amicus Curiae
The Louisiana Assessors Association Stephen H. Kupperman
Stephen R. Klaffky Counsel for Amicus Curiae
Louisiana Association of Affordable
Housing Providers, Inc. BEFORE: WHIPPLE, C.J., McDONALD, HIGGINBOTHAM, THERIOT, AND CHUTZ, JJ.
Disposition: REVERSED.
CHUTZ, J.
In this judicial review proceeding, the taxpayer, New Covington Apartments, LP (New Covington), and the Louisiana Tax Commission (LTC) appeal the district court's judgment in favor of the St. Tammany Parish Assessor, Louis Fitzmorris (the Assessor or STP Assessor), reversing the LTC's decision and reinstating the Assessor's determination of the fair market value of New Covington's property. For the reasons that follow, we reverse the district court's judgment and reinstate the decision of the LTC.
PROCEDURAL AND FACTUAL BACKGROUND
New Covington, a limited partnership, is the owner of the Groves at Mile Branch Apartments (the Groves), a multi-family residential complex located at 424 Purslane Drive in Covington, Louisiana. For the tax year 2014, the Assessor determined the fair market value for New Covington's 9.1 acre tract of land was $870,000 and $4,254,900 for the improvements for a total fair market valuation of $5,124,900. New Covington disputed the valuation and appealed the assessment to the St. Tammany Parish Board of Review (the Board). Before the Board, New Covington agreed with the Assessor that the fair market value of its land was $870,000 but proposed that the improvements were more properly valued at $2,160,110. The Board concurred with the Assessor's determination, concluding that the fair market value of New Covington's improvements was $4,254,900 for a total valuation of $5,124,900. New Covington timely appealed to the LTC. After a hearing at which testimonial and documentary evidence was adduced, the LTC concurred in the valuation of the land at $870,000 but found the fair market value of the improvements was $2,313,700.
Thereafter the Assessor filed a petition for judicial review in the district court. After a hearing, the district court reversed the LTC's decision and reinstated the Assessor's fair market valuation of New Covington's property, ordering disbursement of escrowed funds paid by New Covington under protest. New Covington and the LTC lodged this appeal. On appeal, New Covington and the LTC contend that because the LTC's fair market valuation of New Covington's property was supported by the evidence and not contrary to Louisiana's constitutional and statutory law, the district court erred in reinstating the Assessor's determination.
Because the parties agree that New Covington's land was correctly valued, we focus solely on the assessment of the improvements. The Groves apartment complex consists of 23 buildings with 94 rental units. As part of the Low-Income Housing Tax Credit (LIHTC) program, see 26 U.S.C. § 42, New Covington entered into a land use regulatory agreement (LURA) in May 2010 with the predecessor to the Louisiana Housing Corporation (LHC), which is the agency that administers the LIHTC program for the state.
The LURA that New Covington entered into was with the Louisiana Housing Finance Agency. By 2011 La. Acts No. 408, § 4, at midnight on December 31, 2011, the activities, authority, power, duties, functions, programs, obligations, operations and responsibilities and any pending or unfinished business of the Louisiana Housing Finance Agency, see La. R.S. 40:600.1 to 600.25.1 (prior to repeal), were assumed and completed by the governing authority of the Louisiana Housing Corporation.
The LIHTC Program:
In Williams v. The Muses , Ltd. 1 , 2016-0250 (La. App. 4th Cir. 10/19/16), 203 So.3d 558, 566-67, writ denied, 2016-2034 (La. 1/13/17), 215 So.3d 254, the fourth circuit set forth a comprehensive overview of the LIHTC program drawn from out-of-state case law and other scholarly sources, stating:
As part of the Tax Reform Act of 1986, Congress created the federal LIHTC program. 26 U.S.C. § 42. The purpose of the LIHTC program is "to encourage the private sector to develop affordable rental housing." Holly Ridge Ltd. P'ship v. Pritchett , 936 So.2d 694, 695 (Fla. Dist. Ct. App. 2006). The LIHTC program "provides federal tax credits tied to amounts invested in qualifying low-income housing projects. The credit is typically enjoyed by one or more entities that become passive investors in a low-income housing development after the developer has formed a limited partnership or limited-liability company." Woda Ivy Glen Ltd. P'ship v. Fayette
Cty. Bd. of Revision , 121 Ohio St.3d 175, 179, 902 N.E.2d 984, 988 (2009) (citing Joseph Rosenblum, Assessing the Value of Affordability: Ad Valorem Taxation of Properties Participating in the Low Income Housing Tax Credit Program , 2 J. Marshall Law School Fair & Affordable Housing Commentary 32, 33 (2006) (developers "syndicate" the right to the tax credit to passive investors through limited-liability entities)). "Tax credits equate to a dollar-for-dollar reduction of the holder's federal tax liability, which can be taken for up to ten years if the project satisfies governmental requirements each year." Holly Ridge Ltd. P'ship , 936 So.2d at 695. The tax credits are awarded over a ten-year period, such that one-tenth of the total amount of the LIHTC is allotted each year until the credit is fully exhausted. Id. at 696. Each state receives an annual allotment of LIHTCs based on its population, and, in each state, a particular agency administers the grant of entitlement to the credit. Id. at 695. In Louisiana, the LHC administers the LIHTC program.
Simply stated, the LIHTC program is essentially "a partnership among the federal government, state governments, and the private sector." Adam McNeely, Improving Low Income Housing: Eliminating the Conflict Between Property Taxes and the LIHTC Program , 15-SUM J. Affordable Housing & Community Dev. L., 324, 325 (2006). The mechanics of this partnership are best explained by outlining the steps of how the LIHTC program operates, which are as follows:
• [Step one:] the Internal Revenue Service ... issues tax credits to state housing agencies....
• [Step two:] the state housing agencies award the tax credits to developers of low income housing projects based on proposals submitted by the developers seeking tax credits....
• [Step three: the developer, after receiving an allocation of tax credits,] sells the tax credits to investors in return for capital to fund the project.... [Footnote deleted.]
• [Step four: the developer, after completing the project, operates] the project in compliance with requirements imposed by Congress in return for an award of tax credits.
Id. at 325.
The compliance requirements for the LIHTC program include that a developer "restrict a certain percentage of its developed units to affordable-housing rates set by HUD through recorded land-use restrictions." Scott B. Cohen, Patrick A. Clisham, A Primer on the Valuation of Affordable Housing in Chapter 11 , 32-MAY Am. Bankr. Inst. J. 52, 52 (2013). "LIHTCs typically accrue and may be claimed on an annual basis for a period of 10 years following the completion of the development. The applicable affordable-housing restrictions typically remain in place for 30 years." Id. The affordable-housing restrictions are set forth in a LURA. "The LURA is recorded
in the public records to insure compliance. The developer must submit annual compliance reports and projects are audited every year to enforce compliance. Tax credits may be disallowed or recaptured if a project is out of compliance." Holly Ridge , 936 So.2d at 696.
The New Covington LURA:
According to the terms of the duly-recorded LURA that New Covington entered into, it agreed that it would own, construct, renovate, manage, and operate the multifamily apartment complex as a qualified low-income housing project and residential rental project. In exchange for the LIHTCs, New Covington agreed to set aside a percentage of its rental units for families and individuals with low incomes during a compliance period of 15 years from January 1, 2011 through December 31, 2025; and an additional extended use compliance period of another 15 years through December 31, 2045. Thus, for 30 years, a percentage of the units at the Groves are required to be leased to lower income households at below market rent. As part of its participation in the LIHTC program, New Covington received $7,910,000 in tax credits to be used at a rate of $791,000 per year for ten years under the LURA. Evidence establishes that 65 of 94, or approximately 70%, of the Groves units are leased to qualified low-income housing applicants. New Covington expressly declared its intent that "the covenants, reservations and restrictions" set forth in the LURA "shall be deemed covenants running with the land ... and shall pass to and be binding upon [its] successors in title."
See 26 U.S.C. § 142(d) and 26 C.F.R. § 1.103-8.
The Valuations:
In Williams , 203 So.3d at 560, the LIHTC issue before the fourth circuit was whether, in the assessment of the fair market value of a housing complex utilizing the income capitalization approach, the Orleans Parish Assessor could include the value of the taxpayer's LIHTC credits. The Williams court concluded that he could not. Id., 203 So.3d at 577.
Here, the STP Assessor based his valuation of the LIHTC program property also utilizing the income capitalization approach but, unlike the assessor in Williams , chose to use market rate rents. The Assessor's commercial appraiser, J.B. Powell, classified the Groves as Class A, luxury apartments. He used the rental rates of the 29 units not subject to the LURA rental restrictions in the Grove to calculate the rental rate that the 65 LURA-restricted units could have charged in 2015 but for the LURA agreement. Powell determined an annual gross income of $984,120. The Assessor maintains this amount represents market rate rents for the Groves and, thus, its potential income. Powell adjusted this projected gross income by 10% to account for vacancies. Using eight "good" comparable expense ratios from other Class A apartments statewide, he determined the expense range was between 30% to 40%, but indicated that the Assessor's office utilized an expense ratio of 45%. Powell then calculated an annual net operating expense of $487,139, which he capitalized at 9.5% to arrive at a fair market value for the improvements of $4,257,783.
The Groves amenities include a community center that houses conference rooms, a fitness studio, a clubhouse with a kitchen, and a computer lab. A performance stage, a recreation field, a t-ball field, a playground, a paw park, and bar-b-que grill stations are other available amenities.
According to a notation in Powell's appraisal, when the data calculating the fair market value was transferred from the Excel to Computer Assisted Mass Appraisal (CAMA) operating system, "[t]he CAMA value is rounded down slightly.... In this case, the value rounded down to $5,124,900," which is the amount of the 2014 assessment valuation of both the land and the improvements. Subtracting the land assessment valuation of $870,000 from the total assessment yields $4,254,900 as the fair market valuation of the improvements, which is the amount that the Assessor valued.
The LTC's appraiser, Patrick Matheu, also valued the Groves property utilizing the income capitalization approach, but his methodology relied on the actual amounts contained in audited financial information for New Covington for 2013. Matheu used the actual rental income received by New Covington and found an annual effective gross income was $812,850. He then used the actual expenses, which were 65.7% of the gross effective income, to determine an annual net income of $279,173. Applying a capitalization rate of 8.7%, Matheu concluded that the value of the improvements of the Groves was $2,313,700.
The STP Assessor offered the testimony of James Mitchell, MAI, to provide an opinion as to a reasonable method to appraise LIHTC program property, in particular the Groves. Mitchell opined that "the most logical and fair process to appraise the LIHTC [program] apartment properties for assessment purposes is to value the fee simple interest to arrive at a fair market value." He found the methodology taken by the Assessor duly ascertained the fee simple interest value of the Groves and that it was reasonable and conservative. Mitchell criticized Matheu's approach, suggesting that it was not reflective of New Covington's fee simple interest but rather a leased fee interest.
"Fee simple" is a common law term most approximate to Louisiana's concept of perfect ownership. See Wilson v. Aetna Ins. Co., 161 So. 650, 652 (La. App. 2d Cir. 1935); see also La. C.C. art. 477A (providing that ownership is the right that confers on a person direct, immediate, and exclusive authority over a thing, and that the owner of a thing may use, enjoy, and dispose of it within the limits and under the conditions established by law). According to Mitchell's report, citing the third edition of the Dictionary of Real Estate Appraisal published by the Appraisal Institute, "a fee simple estate" is defined as "absolute ownership unencumbered by any other interest or estate," subject only to certain limitations imposed by governmental powers.
Mitchell explained that a "leased fee estate" as defined by the third edition of the Dictionary of Real Estate Appraisal published by the Appraisal Institue is "an ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others," noting that the rights of the lessor/leased fee interest owner and the lessee "are specified by the terms contained within the lease."
DISCUSSION
Standard of Review:
Judicial review of the LTC's decisions is authorized by La. R.S. 47:1998(A). The extent of that review is governed by the Administrative Procedure Act, La. R.S. 49:964(F) and (G). Panacon v. La. Tax Comm'n , 97-2093 (La. App. 1st Cir. 1/8/99), 747 So.2d 572, 573-74. Pursuant to La. R.S. 49:964(G), the district court may affirm or remand the decision of an agency, while the reversal or modification of that decision requires that additional conditions be met. La. R.S. 49:964(G) restricts reversal or modification of agency decisions to instances in which substantial rights of the appellant have been prejudiced because the administrative findings, inferences, conclusions or decisions are:
(1) In violation of constitutional or statutory provisions;Thus, we are called on to review the facts as found by the agency, as set forth in La. R.S. 49:964(G). See EOP New Orleans , L.L.C. v. Louisiana Tax Comm'n , 2001-2966 (La. App. 1st Cir. 8/14/02), 831 So.2d 1005, 1008, writ denied, 2002-2395 (La. 11/27/02), 831 So.2d 286.
(2) In excess of the statutory authority of the agency;
(3) Made upon unlawful procedure;
(4) Affected by other error of law;
(5) Arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion; or
(6) Not supported and sustainable by a preponderance of evidence as determined by the reviewing court. In the application of this rule, the court shall make its own determination and conclusions of fact by a preponderance of evidence based upon its own evaluation of the record reviewed in its entirety upon judicial review. In the application of the rule, where the agency has the opportunity to judge the credibility of witnesses by first-hand observation of demeanor on the witness stand and the reviewing court does not, due regard shall be given to the agency's determination of credibility issues.
When reviewing a final decision of an agency, the district court functions as an appellate court. EOP New Orleans , 831 So.2d at 1008. An aggrieved party may obtain review of any final judgment of the district court by appeal to the appropriate court of appeal. See La. R.S. 49:965. On review of the district court's judgment, no deference is owed by the court of appeal to factual findings or legal conclusions of the district court, just as no deference is owed by the Louisiana Supreme Court to factual findings or legal conclusions of a court of appeal. EOP New Orleans , 831 So.2d at 1008. Compare Williams , 203 So.3d at 564-65 (giving deference to agency determinations of questions of law and mixed questions of law and fact which the agency has been charged to answer as well as the judgments of agencies upon the professional behavior of a member of the profession which the agency is charged to oversee). Consequently, this court will conduct its own independent review of the record in accordance with the standards provided in La. R.S. 49:964(G). Wild v. State , Dep't of Health & Hosps., 2008-1056 (La. App. 1st Cir. 12/23/08), 7 So.3d 1, 5.
Applicable Law:
The valuation of property for taxation purposes is governed by both constitutional and statutory provisions. Article VII, Section 18(D) of the Louisiana Constitution provides that each assessor is to determine the fair market value of all property subject to taxation in his parish or district, at intervals of not more than four years. See La. Const. art. VII, § 18(F). The Louisiana Constitution also requires that the fair market value be determined in accordance with criteria established by law and applied uniformly throughout the state. See La. Const. art. VII, § 18(D); La. R.S. 47:2323(A). The correctness of assessments by the assessor shall be subject to review first by the parish governing authority, then by the LTC or its successor, and finally by the courts, all in accordance with procedures established by law. La. Const. art. VII, § 18(E).
La. R.S. 47:2321 defines fair market value as follows:
Fair market value is the price for property which would be agreed upon between a willing and informed buyer and a willing and informed seller under usual and ordinary circumstances; it shall be the highest price estimated in terms of money which property will bring if exposed for sale on the open market with reasonable time allowed to find a purchaser who is buying with knowledge of all the uses and purposes to which the property is best adapted and for which it can be legally used.La. R.S. 47:2323(C) sets forth the criteria for determining fair market value, providing as follows:
The fair market value of real and personal property shall be determined by the following generally recognized appraisal procedures: the market approach, the cost approach, and/or the income approach.
(1) In utilizing the market approach, the assessor shall use an appraisal technique in which the market value estimate is predicated upon prices paid in actual market transactions and current listings.
(2) In utilizing the cost approach, the assessor shall use a method in which the value of a property is derived by estimating the replacement or reproduction cost of the improvements; deducting therefrom the estimated depreciation; and then adding the market value of the land, if any.
(3) In utilizing the income approach, the assessor shall use an appraisal technique in which the anticipated net income is processed to indicate the capital amount of the investment which produces the net income.
La. R.S. 47:2323 was amended by La. Acts 2016, No. 182, § 1, prospectively prohibiting the use of LIHTCs in valuing affordable housing property after its effective date of January 1, 2017.
La. R.S. 47:2323 was amended by La. Acts 2016, No. 182, § 1, prospectively prohibiting the use of LIHTCs in valuing affordable housing property after its effective date of January 1, 2017.
The issue before the LTC, the district court, and now this court in this judicial review is the proper valuation of New Covington's LIHTC program property. The parties have utilized an income capitalization approach, see La. R.S. 47:2323(C)(3) and LAC § 61.V.303(C), but have applied different methodologies with resulting significant differences in the final determination of the fair market value of the improvements of the Groves.
In a supplemental brief, the STP Assessor cites the recent case of Williams v. Opportunity Homes Limited Partnership , 2016-1185 (La. App. 4th Cir. 5/10/17), 220 So.3d 188, to assert that the methodology he utilized in the application of the income approach was proper. We find Williams distinguishable inasmuch as the issue before the court was whether under La. R.S. 47:2323(C) the assessor erred in utilizing the market approach under Subsection (1) rather than the income approach under Subsection (3) to determine the fair market value of a scattered-site, low-income affordable housing development located in Orleans Parish. Since in the matter before us all parties, including the STP Assessor, utilized the income approach, we find Williams inapposite and the STP Assessor's reliance on it misplaced.
At the hearing before the LTC, Powell stated that he had undertaken a fee simple approach as mandated by Uniform Standards of Professional Appraisal Practice (USPAP) in reaching his fair market valuation of the Groves improvements. To buttress the correctness of this approach, the Assessor offered Mitchell's expertise, who concurred with Powell's methodology. But neither witness addressed the effect of USPAP Advisory Opinion 14 (AO-14) on the fee simple estate approach undertaken by the Assessor.
AO-14 is a "communication by the Appraisal Standards Board (ASB) [that] does not establish new standards or interpret existing standards. Advisory Opinions are issued to illustrate the applicability of appraisal standards in specific situations and to offer advice from the ASB for the resolution of appraisal issues and problems." It addresses appraisals for subsidized housing, which it identifies as including single or multifamily residential real estate targeted for occupancy by low- or moderate-income households as a result of public programs and other financial tools that assist or subsidize the developer in exchange for restrictions on use and occupancy. According to AO-14, an appraiser should be capable of analyzing the impact of the programs and definitions in the local subsidized housing submarket. AO-14 warns that the competency required to appraise subsidized housing extends beyond that of typical residential appraisers, stating:
An appraiser's lack of knowledge and understanding of the impact of the various influences that affect the subsidized housing projects could lead to misleading conclusions. For example, subsidized housing projects may have differences in income, expenses, and rates of returns when compared with nonsubsidized housing projects.
A review of the evidence adduced at the LTC hearing shows that neither Powell nor Mitchell had any prior experience with appraising LIHTC program housing; and nothing in the record suggests that either appraiser had otherwise valued subsidized housing. More importantly, neither witness offered a nuanced explanation accounting for the impact that the various influences that affect LIHTC program property have on valuation.
Powell simply treated the Groves as he did any other Class A luxury apartment complex in St. Tammany with no accommodation for the nature of the LIHTC program property. Although he calculated expenses at a rate above the average expense ratio for Class A luxury apartment complexes, he did not articulate a reasonable basis for the upward adjustment. While Mitchell indicated that in formulating his opinion he had reviewed basic information about the LIHTC program and had read AO-14, nothing in his report articulated any adjustment for the local subsidized housing submarket insofar as formulation of his opinion that fee simple interest valuation was the most logical and fair process to appraise LIHTC program properties.
Mitchell opined that under AO-14, "[s]ince tax credits remain with the property if it is sold, they are a marketable property right." But because the Assessor has not asserted a methodology dependent on valuation of LIHTCs, that opinion is of no moment under the facts of this appeal. See and compare Williams , 203 So.3d at 572-77. --------
Because the methodology the Assessor undertook failed to conform with USPAP, the evidence shows that he did not use an appraisal technique in which the anticipated net income was processed to indicate the capital amount of the investment which produces the net income as required under La. R.S. 47:2323(C)(3). As such, we conclude that it was an incompetent basis on which to assess the LIHTC program property.
The only other valuation of the Groves' improvements was performed by Matheu. He testified that in reaching his valuation, he utilized a methodology that had been applied to other LIHTC program properties. Matheu compared New Covington's income and expense statement to those of other LIHTC program properties and concluded that New Covington's actual income and expenses fell within acceptable ranges. Therefore, those were the figures he used in his calculation of the fair market value of the Groves' improvements. Under the principles set forth in AO-14, Matheu's methodology duly considered the impact that the various influences affecting LIHTC program property has on valuation.
Based on our review of the administrative evidence, we conclude Matheu's valuation constitutes a preponderance of the evidence. As such, the amount of $2,313,700 is the fair market valuation of the Groves improvements as supported and sustainable by a preponderance of evidence.
The Assessor maintained, and the district court concluded, that the LTC had exceeded its authority by substituting its valuation for that of the Assessor's in violation of constitutional and statutory provisions and in excess of statutory authority thereby creating an error of law that affected the substantial rights of the Assessor and warranted a reversal of the LTC's conclusion. But in reaching this conclusion, the district court failed to apply the provisions of AO-14 to the methodology undertaken by the Assessor. The LTC's adjustment of the valuation of the Groves' improvements on review of the correctness of the assessment fell within the ambit of La. Const. Art. VII, § 18(E). And the LTC acted within its statutory authority in correcting the assessment. See La. R.S. 47:1990 (the LTC may change or correct any and all assessments of property for the purpose of taxation in order to make the assessments conform to the true and correct valuation).
DECREE
For all of these reasons, we find the district court erred in reversing the LTC's decision and ordering disbursement of escrowed funds in the amount of $26,685.53 paid by New Covington under protest. The LTC's decision ordering the fair market value of New Covington's land as $870,000 and its improvements as $2,313,700 for a total fair market value of $3,183,700 for the tax year 2014 is reinstated. Appeal costs in the amount of $933.53 are assessed against the St. Tammany Parish Assessor, Louis Fitzmorris.
REVERSED. BEFORE: WHIPPLE, C.J., McDONALD, HIGGINBOTHAM, THERIOT AND CHUTZ, JJ. HIGGINBOTHAM, J., DISSENTS AND ASSIGNS WRITTEN REASONS. HIGGINBOTHAM, J., dissenting.
I respectfully dissent for the same reasons assigned by the district court, because I believe that the Louisiana Tax Commission exceeded its statutory authority. The Louisiana Tax Commission's function is to review rather than assess. Therefore, I would affirm the district court's judgment that reinstated the Assessor's valuation determination.