The Arizona real estate market continues to soar. In response, the Section 42, Low-Income Housing Tax Credit (LIHTC) program aims to promote the development and rehabilitation of affordable rental housing for low-income individuals and families.
Arizona assessors have struggled with the valuation of Section 42, LIHTC properties. Senate Bill 1076 creates a new statutory valuation method for low-income multifamily residential rental properties and was recently signed by Arizona Governor Doug Ducey to rectify this situation. The Arizona Legislature clarified that the legislative intent is to promote investment in affordable housing for low-income families.
Arizona assessors must now value Section 42, LIHTC properties using the following statutory valuation method, if requested by the taxpayer:
- Property must be a Section 42, LIHTC property, and the program must be administered by the Arizona Department of Housing.
- Owner received an allocation of the Federal Income Tax Credits under the LIHTC program.
- Land use restrictive covenant agreement is recorded and is in effect, or if not yet recorded, the property is subject to both income and rent restrictions.
- Property is both income and rent restricted, consistent with the LIHTC program.
- Restrictions apply to “ALL UNITS” on the property except employee units.
- There are no findings by federal, state, or tribal courts that the owner has breached or violated the covenants.
- Owner must timely “OPT IN” and elect the statutory income method for valuing LIHTC properties.
The required documentation for utilizing this methodology is as follows:
- Written documentation provided by owner to the county assessor confirming that the property has been placed in service as low-income multifamily residential property consistent with Section 42 of the Internal Revenue Code.
- Internal Revenue Service Form 8609, or an equivalent form designated by the Internal Revenue Code, signed by the Arizona Department of Housing or the Certificate of Occupancy and the recorded Restrictive Covenants agreement.
How Does This Affect Property Owners?
The capitalization rate used is based on conventional multifamily properties but must be adjusted to include the additional risk that the recorded affirmative land use restricted covenants agreement places on the net income of the property, the restriction to the use of the property for affordable housing, the time period that the income and use restrictions remain in effect on the property, and the illiquidity caused by the reduced pool of qualified potential buyers. Once the capitalization rate is determined, it is added to the effective tax rate before calculating the full cash value.
Property owners must submit the three most current “audited” financial statements before September 1 of the year immediately preceding the year for which the property will be valued. If a property is new and does not have a three-year history, the owner will submit all years available and the proforma income and expense data that was provided to the Arizona Department of Housing at the time the LIHTC application was submitted.
How Can the Local Experts at Ryan Assist?
Recent assessor presentations to the Arizona Appeal Board training sessions indicate an anticipated point of contention of capitalization rates for LIHTC properties versus market rent apartments. While research supports segregating LIHTC capitalization rates from market rent apartments, there will be a need for a formal cap rate study to determine the incremental increase in the capitalization rates and the lower valuations generated for LIHTC rent-restricted properties.
The subject matter experts at Ryan are assisting our clients to minimize their property tax liabilities where possible. We urge you to reach out to our local team, as we are assisting our clients to determine if they will opt in to the new statutory valuation method or if a formal appeal is required to maximize the benefits of the new statutory valuation method.
TECHNICAL INFORMATION CONTACT:
Jeff Nolan
Principal
Ryan
623.738.3475
jeff.nolan@ryan.com
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.
- Topics
- Jeff Nolan
- Property Tax
- Arizona