Riegel: An arcane ruling with potentially big implications for affordable housing
A recent ruling by the Fourth Circuit Court of Appeals in New Orleans could have negative implications for the development of quality affordable housing in a state that badly needs it.
At issue is how to determine the fair market value of affordable housing—rent-restricted property developed using Federal Low Income Housing Tax Credits—for the purpose of assessing it. In most parts of the state, assessors use an income-based approach. They valuate the property based on the income it generates, which is limited since affordable housing is, by definition, rent restricted.
In New Orleans, however, Orleans Parish Assessor Errol Williams has been using a sales-comparison approach for certain types of developments. In other words, he treats the properties as if they were market-rate and bases their value on the recent sale prices of other nearby, comparably sized properties—or “comps”—much as appraisers do.
Last year, Opportunity Homes Limited Partnership, the developer of 64 double-unit affordable housing residences on 32 scattered sites around New Orleans, sued Williams. The developer argued the assessor way overvalued its properties, using flawed comps that failed to account for the vast income difference between market-rate and rent-restricted properties.
The Louisiana Tax Commission, which administers tax policy for the state, agreed with the developer and joined its suit. They won at trial. But earlier this month, the Fourth Circuit reversed the lower court decision, opining that “… a plain reading of the statute supports the assessor’s position that he may use any … generally accepted methodology in assessing affordable housing.”
Developers and appraisers will tell you this is ridiculous. Determining the fair market value of a rent-restricted property based on the comps of nearby market-rate properties is literally comparing apples to oranges.
It’s also unfair, and punishes those willing to take the considerable risk of developing a property that, by its very nature, will not generate sufficient rental income to cover the cost of construction or upkeep.
The assessors say this is why developers receive Federal Low Income Housing Tax credits. It’s true the credits help make it feasible to develop affordable housing. That’s the whole point of them, and the 30-year program has been very successful. It hasn’t exactly been a boondoggle for developers, though, who say it just levels the playing field.
But boondoggles are in the eye of the beholder, and some assessors are of the opinion that developers who already get a tax credit don’t need a perceived tax break, too.
The reality, however, is that the margin on these projects is slim, and the difference in a tax bill calculated using an income-based assessment method versus a comparable-sales assessment method can be the difference between a sustainable project and one that goes belly up.
How big is that difference? In the New Orleans case, Williams assessed the OHLP properties at some $4 million. The Louisiana Tax Commission said the actual fair market value was $1.52 million.
“The unintentional impact of this could essentially bring to its knees a program that has done a lot of good and has attracted hundreds of millions of dollars in federal investment to the state,” says appraiser Wesley Moore of Cook Moore and Associates. “Developers could abandon the program and just shut down some of these developments.”
That would be unfortunate. More than 50% of renters in Louisiana spend more than 30% of their income on rent. There is a serious need for affordable housing, which, if done right, can go a long way toward addressing that need. The Elysian in Downtown East is a beautiful example of one such project. Several others are currently under construction in north Baton Rouge.
The controversy over this issue isn’t new, by the way, nor is it unique to Louisiana. A 2006 study by the John Marshall Law School in Chicago found that 18 states had lawsuits over the issue, and 22 had legislation to address it.
In the past three years, proposed laws related to the issue have twice been introduced—and killed—in the Louisiana Legislature. A 2014 bill would have favored assessors. A bill in 2015 would have favored developers.
Now, there’s a court ruling on the matter, and that has plenty of folks who follow this, besides Moore, worried.
“The methodology used in this particular case puts current and future development of affordable housing in jeopardy,” says Lawrence Chehardy, chairman of the Louisiana Tax Commission.
Though the Fourth Circuit decision is limited to the New Orleans case and doesn’t automatically apply to other parishes, it could influence what other assessors do and how they think—particularly if their local governments are cash strapped, which local governments always are.
East Baton Rouge Parish Assessor Brian Wilson says he won’t necessarily change the way he assesses affordable housing in Baton Rouge, adding he will review the ruling and how he’s doing things.
The New Orleans case could be the proverbial camel’s nose under a tent that has provided a lot decent shelter for people who need it. Let’s hope other assessors around the state don’t follow Williams’ lead.