Horan v. Kenai Peninsula Borough Board of Equalization

This case of limited application deals with the property tax valuation of property participating in the low-income housing tax credit (LIHTC) as part of the Tax Reform Act of 1986. In it a developer can receive federal income tax credits by committing to rent to low income households at restricted rental rates. This raises issues of how the tax credits and restricted rents affect property tax assessment. Other states are briefly surveyed but have little consistency in the resolution of these issues.

Although AS 29.45.110(d) provides that the assessment is based on the actual income from the property without adjustment based on the amount of any federal income tax credit ($383,833 here), local governments can determine by ordinance whether to determine on a parcel by parcel basis whether to use the mandatory income approach. In 2005, 2006, and 2007 the Assessor valued the apartments owned by Pacific Park Limited Partnership (Pacific Park) at $2,930,700 using the cost approach. In 2007, Pacific Park had the apartments independently appraised using the income approach and the restricted rents resulting in a value of $652,000.

Pacific Park appealed the Assessor’s valuation to the Borough’s Board of Equalization (Board). The Board approved the use of the cost method, but based on the rent restrictions or economic obsolescence reduced the apartment’s improvement value by 40%. The Assessor appealed the Board’s decision to the superior court and Pacific Park cross-appealed. The superior court addressed four issues. First, the Board did not err by not adopting the income approach to value the apartments. Second, the Board did not violate state law, borough code, or legislative intent by adjusting the Assessor’s valuation. Third, the Board did not err by finding the Assessor’s application of the cost approach resulted in an overvalued and grossly disproportionate valuation. Finally, the facts and law supported the Board’s valuation , including the 40% reduction.

The Supreme Court affirmed the use of the income approach holding that a taxing authority is allowed to choose a reasonable method for determining the value of a property “so long as there was no fraud or clear adoption of a fundamentally wrong principle of valuation.” It further affirmed the superior court’s approval of the Board’s consideration of the rental restrictions when valuing the apartments under the cost approach. However, it found the record not clear on why 40% was chosen for the reduction or the basis for finding that the valuation was grossly disproportionate to similar properties and remanded for further proceedings on those issues.

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