Diving into the Issues Creating an Uphill Battle for the Georgia LIHTC Program
In a recent blog post, we wrote about agricultural tax credits, including several surprising ways commercial real estate owners can leverage them to reduce their tax burden. Today, we’ll take a look at another type of tax credit you may be familiar with, the Low-Income Housing Tax Credit (LIHTC). Specifically, we’ll discuss assessment and taxation of LIHTC properties in Georgia, which carry challenging real estate tax implications for real estate owners and developers alike.
Since the emergence of the Low-Income Housing Tax Credit, enacted through the Tax Reform Act of 1986, there have been polarized views on the overall direction of the LIHTC program due to its complexity. Much of this complexity stems from the fact that the federal government simply outlines broad directions for the program, giving states full jurisdiction to regulate these credits as they see fit.
And while the programs themselves may be complex, so are the real estate tax implications. For LIHTC properties, our teams have seen first-hand the lack of standardization in assessment methodologies nationwide, and more specifically around how these unique affordable unit properties are erratically valued for assessment purposes. But let’s unpack the basics first. Similar to other asset types, there are three approaches to valuing LIHTC properties for assessment and appraisal purposes: income, sales, and cost.
The income approach is most commonly used, and typically the most appropriate for valuing LIHTC properties. However, certain considerations must be given to the unique nature of a LIHTC property;
The sales approach is sometimes employed, but academically and in practice, this approach doesn’t work very well due to low transaction volume involving LIHTC properties;
The cost approach is also sometimes used but isn’t effective because the assessed value typically isn`t reflective of true fair market value – and how a property would trade in the open market.
Let’s look at one example where the use of a less effective or appropriate approach to valuation for LIHTC properties has led to over-taxation and unnecessary complications in the assessment process. In Georgia, LIHTC properties are often valued using the cost approach, which as stated above, often results in a less effective illustration of value. As a refresher, the cost approach to valuation includes land value, plus an improvement value developed by calculating the structure’s replacement cost less depreciation. But for LIHTC properties, the major downside of this approach is that it fails to properly extract the value of the real estate as an investment.
A Georgia Superior Court’s December 2022 affirmation in Freedom Heights, LP vs. Lowndes County further encourages the use of the cost approach, whereby LIHTCs are included in the valuation of real property for assessment purposes as additional value beyond replacement costs themselves. In our estimation, this methodology ignores the fact that value for the credit stream is inherently included in the replacement costs of LIHTC properties. That is because the project likely would not exist without the necessary tax credit equity resulting from the subsidies, which is contributed solely for an interest in the tax credits. An LIHTC property in the latter years of the 10-year credit stream cannot reliably be valued via the cost approach because the cost to replace would theoretically require the same amount of tax credits that were required for the initial tax equity contribution. Due to the array of issues with this approach, LIHTCs have become a source of ongoing litigation in Georgia, with developers stating that low-income developments are being overtaxed.
While litigation plays out, developers and potential residents are left in limbo. While the state and federal credits make low-income housing projects more enticing for developers, the way they are currently assessed dulls that luster. In turn, this negatively impacts low-income and fixed-income Georgia residents while simultaneously stymieing development.
So, what’s the solution? While the courts will provide the final answer, tax service providers like Cavalry would prefer to see a standardized approach to low-income housing valuation – and LIHTCs – based on the income approach, which is appropriately mandated in many states. This change would make LIHTC programs easier to navigate, a better value proposition for developers that desire a predictable real estate tax liability, and more importantly, provide more housing opportunities for people who need it.
For now, if you find yourself in an LIHTC pickle – be it in Georgia or elsewhere – drop us a line. We can help you evaluate your current options and set you up for long-term tax success – a win for you and residents of your development.BACK TO ARTICLES