Low income housing – LIHTC post-rehab real estate tax assessmentsKyle Shoemaker
The low income housing industry has many current challenges including uncertainty with corporate tax reform affecting low income housing tax credit equity pricing, increasing competitiveness for soft loans and rising labor & material costs. Another more subtle challenge relates to real estate tax assessments for low income housing properties renovated with LIHTC’s.
Many real estate investors and professionals expect a local real estate tax assessor to revisit a property’s market or assessed value post-sale, especially if the property’s sale price is significantly above the published fair market value used for real estate tax calculations. Re-assessment assumptions are often part of negotiations during a sale transaction. Some tax assessors/appraisers have taken the stance that low income housing tax credits add to the market value of a property, despite the income and rent deed restrictions that accompany the tax credits.
When assessors include the value of the tax credits in the value, the resulting increase in real estate taxes has caused issues for many owners of low income housing properties that already operate on tight margins. This especially causes problems for properties with rental subsidies that are not open to re-negotiation, such as mark-to-market HAP contracts limited to OCAF increases. Low income housing rent subsidies that offer budget-based increases or the ability to renegotiate allow owners an avenue to offset the increased tax expense with increased revenue.
The treatment of tax credits for low income housing property tax assessments varies based on the municipality. In Kentucky, the Kentucky Claims Commission recently ruled that tax credits must be excluded from the value of a low income housing property. More information on that ruling can be seen at the following summary: Kentucky Claims Commission Holds Tax Credits Must be Excluded from Value of Low-Income Housing.
It is always important to engage local counsel and professionals to understand the future real estate tax impacts as part of due diligence for a future LIHTC renovation project.