Why LIHTC Properties Are Over Assessed And What Owners Can Do About It
Affordable housing developers and owners operate on thin margins. Rent restrictions cap revenue, AMI limits determine renter eligibility, and financing structures can be more complex than market-rate deals. So, when a jurisdiction hands a LIHTC or similarly restricted property a real estate tax assessment built for a comparable market-rate property, the math breaks. The good news: this is one of the most winnable fights in property tax, and the statutes are on the owner’s side.
The Core Problem: Assessors Default to the Wrong Model
Most jurisdictions assess commercial real estate using cost, sales comparison, or income approaches designed for unrestricted properties. Applied to a Section 42 development, (Section 42 of the Internal Revenue Code establishes the federal Low-Income Housing Tax Credit or LIHTC program) that default produces an assessed value that has nothing to do with the property’s actual economics. An assessor pricing in market-rate rents on a building where rents are capped by regulatory agreement isn’t measuring value – they’re measuring a property that doesn’t exist.
The Statutes Say Otherwise
Most states have language requiring assessors to account for affordability restrictions. For example, in Maryland and North Carolina, the income approach isn’t optional, it’s mandated. Maryland’s Tax Property Article §8-105(3) directs assessors to consider the impact of rent restrictions and affordability requirements tied to Section 42. North Carolina’s §105-277.16 goes further, requiring the income approach outright and factoring in rent restrictions. Virginia’s §58.1-3295 lists three specific factors assessors must weigh: contract rent, restrictions on transfer, and actual operating expenses.
The guidance underneath these statutes matters just as much as the statutes themselves. Maryland’s guidelines instruct assessors not to rely on construction cost, even if fresh, and to apply capitalization rates 150 to 200 basis points above conventional apartment rates, recognizing that restricted income growth suppresses future value. That’s a meaningful spread, and it’s one many first-pass assessments simply ignore.
Where It Goes Wrong And Where to Find Wins
The recurring failure point across all three states is the same: third-party appraisal groups brought in for revaluations default to market-based rents and cap rates pulled from unrestricted comparables, with no consideration of Section 42 nor the underlying investment fundamentals associated with committed affordable units. Combine that with long assessment cycles (North Carolina’s can run eight years) and an inflated valuation can sit on the books for a long time before anyone catches it.
That’s precisely why the appeal matters. A senior affordable development in Maryland saw its assessment cut from $20.8 million to just under $11 million once the correct income parameters and cap rate were applied. Another new construction development, initially assessed on new construction cost estimates, was reduced by millions after Cavalry educated the assessment office on the applicable code and affordable housing guidelines.
The Takeaway
Owners shouldn’t assume the first assessment reflects reality, and they shouldn’t wait for the next reassessment cycle to find out. The statutory framework already requires assessors to account for rent restrictions and actual income. The burden is proving it wasn’t applied correctly, and that’s a case built on data, not guesswork.
If your LIHTC property’s assessment doesn’t reflect a restricted income approach, it’s worth a second look before the next tax bill locks in another year of overpayment.
