United States: Kentucky Claims Commission Holds Tax Credits Must Be Excluded From Value Of Low-Income Housing

The Kentucky Claims Commission ("Commission") recently held that tax credits awarded under Section 42 of the Internal Revenue Code ("IRC") must be excluded from the value of a low-income housing tax credit ("LIHTC") apartment complex.1 The property at issue in the appeal, known as the Buffalo School Apartments, is an adaptive reuse of an historic school into 19 units of affordable housing for senior citizens in LaRue County. The LaRue County Property Valuation Administrator ("PVA") assessed the property at a value of $2,671,454 for tax year 2016. Upon the appeal of the taxpayer, the local board of assessment appeals lowered the assessment to a value of $1,323,936. The taxpayer appealed the decision of the local board to the Commission, and the PVA filed a cross-appeal.

The objective of the LIHTC program is to facilitate the construction of affordable housing through the issuance of tax credits, which are used by private investors to offset their income. Pursuant to IRC § 42, each state receives an allocation of tax credits based on its population. The Kentucky Housing Corporation ("KHC") is responsible for administering the LIHTC program in Kentucky. Developers of LIHTC properties compete for tax credits awarded through the KHC. The tax credits are then sold to private investors, and the revenue generated by the sale of the tax credits provides the capital to build LIHTC properties. The tax credits are utilized by investors to offset their taxable income over a 10-year period.

In exchange for the tax credits, LIHTC properties in Kentucky are required to be operated in accordance with rent and income restrictions for a period of 30 years. The residents of Buffalo School Apartments are restricted to incomes not to exceed 60% of area median income, and the rent charged for the dwelling units is restricted to 50% of area median market rents. The rent and income restrictions are recorded in a restrictive covenant placed on the deed to the property. Thus, any prospective purchaser of the property is also subject to these restrictions.

The primary point of contention between the taxpayer and the PVA was whether the value of the tax credits should be excluded from the value of the real property. The taxpayer presented an appraisal report prepared by an MAI certified appraiser. The appraiser testified that the property should be valued at no more than $230,000 using the income approach to valuation, which takes into account the restricted rents and higher expenses of LIHTC properties. The appraiser also testified that the tax credits should be excluded from the property's value because they are separate from the market value of the real estate.

Following the hearing, the Commission's hearing officer issued a Recommended Order finding in favor of the taxpayer and setting the value of the property at $230,000. In a Final Order issued July 6, 2017, the Commission adopted the hearing officer's Recommended Order. The Commission relied upon the appraiser's testimony and Kentucky case law holding that the value of the tax credits should be excluded from the value of the real property. The Commission also held that the tax credits are intangible property, which is exempt from state and local property tax pursuant to KRS § 132.208.

The authors' firm represents the taxpayer in this case.

Footnotes

1 Buffalo School Apartments, LLLP v. LaRue County Bd. of Assessment Appeals, et al., File Nos. K16-S-30 & K16-S-77, Final Order No. K-25305 (Ky. Claims Comm'n July 6, 2017).

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