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Horan v. Kenai Peninsula Borough Bd. of Equalization

Supreme Court of Alaska

March 11, 2011

Shane HORAN, Kenai Peninsula Borough Assessor, Appellant,
KENAI PENINSULA BOROUGH BOARD OF EQUALIZATION, and Pacific Park Limited Partnership, Co-Appellees. Pacific Park Limited Partnership, Cross-Appellant,
Shane Horan, Kenai Peninsula Borough Assessor, Cross-Appellee.

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[Copyrighted Material Omitted]

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Scott Bloom, Soldotna, for Appellant/Cross Appellee.

D. Kevin Williams and William M. Bankston, Bankston Gronning O'Hara, P.C., Anchorage, for Co-Appellee/Cross-Appellant.

Before: CARPENETI, Chief Justice, FABE, WINFREE, CHRISTEN, and STOWERS, Justices.


WINFREE, Justice.


A property owner and a borough property tax assessor each contend, for different reasons, that the superior court erred in affirming the borough board of equalization's final valuation for a low-income housing tax credit property. We affirm a portion of the superior court's legal rulings upholding the board's interpretation of the relevant appraisal statute and we affirm the superior court's legal ruling affirming the board's choice of appraisal methodology. But because we cannot discern (1) how the board treated relevant federal tax credits in its valuation of the property, (2) the comparable properties for the board's finding that the assessor's valuation was " grossly disproportionate as compared to similar properties," or (3) the basis for the 40% economic obsolescence factor by which the board reduced that valuation, we remand for clarification by the board.


A. LIHTC Program Properties

Congress created the low-income housing tax credit (LIHTC) program as part of the Tax Reform Act of 1986.[1] The program is intended " to encourage the private sector to develop affordable rental housing." [2] Each state receives and distributes an annual allotment of low-income housing tax credits based on the state's population.[3] A developer can apply for a ten-year allocation of federal income tax credits,[4] but must commit to record

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a restrictive covenant to rent to low-income households at restricted rental rates for not less than 30 years,[5] certify compliance annually,[6] and keep compliance records.[7] The tax credits depend on continuing compliance and may be recaptured.[8]

Typically a developer finances a LIHTC project by attracting limited liability partners to invest in return for use of the stream of tax credits.[9] Tax credits can also be transferred through sale of the property, provided the new owner continues to comply with the LIHTC program.[10]

B. Other Jurisdictions' Property Tax Treatment Of LIHTC Properties

Rental restrictions and federal tax credits pose difficult questions in property tax assessments of LIHTC properties, and courts are not in agreement in resolving these questions.

Courts differ on whether and why rental restrictions must be considered. Arizona, Kansas, South Dakota, and Washington all assess property value based on standards similar to Alaska's statutory " full and true value" standard, [11] and their courts have held that rental restrictions on LIHTC properties must be considered.[12] The Supreme Courts of Idaho and Oregon, basing their decisions on statutes dissimilar to Alaska's,[13] likewise have held LIHTC rental restrictions must be considered.[14] The Ohio Supreme Court has held that LIHTC rental restrictions must be considered because they are " police power" restrictions enacted under the General Welfare Clause of the Federal Constitution.[15] Reaching the opposite conclusion, the North Carolina Supreme Court reasoned that because taxpayers choose to participate in the LIHTC program, the taxing authority does not need to consider the rental restrictions.[16]

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That court noted that the unfavorable rental restrictions are balanced by the favorable federal tax credits.[17]

Courts also differ on whether LIHTC tax credits should be considered. The Arizona Tax Court, Washington and Missouri intermediate courts of appeal, and Ohio and Oregon Supreme Courts have determined that regardless of whether rental restrictions are taken into account in property tax assessments, the tax credits should not be considered.[18] The Arizona court reasoned that the tax credits (1) are intangible property in that they are " paid by the federal government as an incentive to invest in the project and are not income flowing from the rental of the property" and (2) do " not significantly affect the marketability" of the property because a buyer of a limited partner's interest receives only the remainder of the credits, which are subject to recapture.[19] The Missouri, Ohio, and Washington courts focused on the tax credits' intangibility in concluding they must not be considered. [20] The Oregon court reasoned that the tax credits would not affect the most probable price for the property because " the credits would be recaptured if the property were not maintained as low-income housing." [21]

Reaching the opposite conclusion, courts in Georgia, Idaho, Illinois, Indiana, Michigan, Pennsylvania, South Dakota, and Tennessee have held that LIHTC tax credits cannot be ignored when rental restrictions are taken into account in the absence of contrary statutory authority.[22] The Georgia court rejected the argument that tax credits should be ignored as valueless because they are allocated to a limited partner and expire before the rental restriction period ends.[23] Illinois and Michigan courts rejected the argument that tax credits should be ignored as intangible.[24]

C. Alaska Property Tax Framework For LIHTC Properties

Alaska Statute 29.45.110(a) requires that property be assessed at its " full and true value," defined there as " the estimated price that the property would bring in an open market and under the then prevailing market conditions in a sale between a willing seller and a willing buyer ...

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