State Housing Authority v. Town of Northfield (2006-086 & 2006-087)
2007 VT 63
[Filed 13-Jul-2007]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
2007 VT 63
Nos. 2006-086 & 2006-087
State Housing Authority Supreme Court
On Appeal from
v. Property Valuation and Review
Division
Town of Northfield March Term, 2007
The Housing Foundation, Inc.
v.
Town of Northfield
Merle R. Van Gieson, State Appraiser
Robert A. Gensburg of Gensburg, Atwell & Broderick, St. Johnsbury, for
Plaintiffs-Appellees.
Glenn C. Howland and Elizabeth H. MaGill of McKee, Giuliani & Cleveland,
Montpelier, for Defendant-Appellant.
PRESENT: Reiber, C.J., Dooley, Johnson, Skoglund and Burgess, JJ.
¶ 1. SKOGLUND, J. The Town of Northfield brings these
consolidated appeals from decisions by the state appraiser regarding the
valuation of two different subsidized housing complexes within the Town.
The Town contends that (1) the appraiser erred by applying a statutory
amendment that had not yet become effective, (2) the appraiser accepted
testimony on behalf of the housing authority in each case without requiring
the authority to submit its own appraisal, (3) the appraiser erroneously
applied the income approach to value rather than the cost or market
approach, (4) the Town was penalized because the listers did not have
access to the information they needed to apply the income approach, and (5)
the appraiser wrongly relied on unsworn materials to support the base
capitalization rate he applied. We affirm.
¶ 2. This appeal concerns two different subsidized housing projects.
The first, Green Mountain Apartments, rents twenty one-bedroom apartments
to low-income seniors and disabled persons under sections 515 and 521 of
the Housing Act of 1949 (codified at 42 U.S.C. §§ 1485, 1490r). It is
owned by the Vermont State Housing Authority, a government unit using
federal resources to improve low rent housing conditions in Vermont. Green
Mountain Apartments is financed by a fifty-year mortgage through the United
States Department of Agriculture (USDA) that cannot be prepaid. Green
Mountain Apartments cannot be transferred except to a "qualified entity"
which may not be a for-profit company.
¶ 3. The second development, the Dogwood complex, is an affordable
housing development that was built in two stages with two different
missions. The Dogwood complex is owned by The Housing Foundation, Inc., a
wholly owned subsidiary of the Vermont State Housing Authority. (FN1)
Dogwood I, the first part of the project, consists of four two story
apartment buildings totaling thirty two units. The units are rented
pursuant to section 521, and this portion of the project, like the Green
Mountain Apartments, is financed with a fifty-year USDA mortgage that
cannot be prepaid and carries the same limitations on transfer. Dogwood II
operates pursuant to the United States Department of Housing and Urban
Development's (HUD) section eight program. The means-testing and maximum
rent requirements are similar in all material respects to section 521, but
the mortgage requirements differ. The Housing Foundation prepaid the HUD
mortgage in 2005. Like Green Mountain Apartments, rents charged at the
Dogwood complex cannot exceed 30% of a tenant's household income, 42 U.S.C.
§ 1437a(a)(1), and they cannot be raised without federal approval. Each
year, the government determines the fair market rent for apartments in the
area and then pays the difference between the 30% of household income that
the tenants pay, and the project's operating costs. Id. § 1437f(c).
¶ 4. In 2004, the Town of Northfield undertook a town wide
reappraisal of its property, and the listers, using the cost approach to
value, determined that the grand list value of the Green Mountain
Apartments was $1,150,000. They set the grand list value of the Dogwood
complex at $2,223,630. The authority appealed both decisions to the Board
of Civil Authority which affirmed the listers' decisions in both cases.
The authority appealed again to the director of the division of property
valuation and review pursuant to 32 V.S.A. § 4461. The director assigned
the state appraiser to hear both appeals. In each appeal, the authority
submitted the projects' actual income and expenses for the fiscal year
ending on September 30, 2003. The appraiser subtracted the properties'
actual expenses from their actual income to determine the net operating
income of each complex. In both cases, the state appraiser applied a
capitalization rate of 11.76% (a base rate of 9.5% plus the tax rate of
2.26%) to those numbers, and he determined that Green Mountain Apartments'
appraised value was $384,600 and the Dogwood complex's appraised value was
$1,284,300. The Town appeals.
¶ 5. This Court has held that any valuation method resulting in a
rational determination of fair market value will survive scrutiny. See
Woolen Mill Assocs. v. City of Winooski, 162 Vt. 461, 464, 648 A.2d 860,
863 (1994). "Where the record contains 'some basis in evidence for [the
state appraiser's] valuation, the appellant bears the burden of
demonstrating that the exercise of discretion was clearly erroneous.' "
Vt. Elec. Power Co. v. Town of Vernon, 174 Vt. 471, 475, 807 A.2d 430, 436
(2002) (mem.) (quoting Lake Morey Inn Golf Resort, Ltd. P'ship v. Town of
Fairlee, 167 Vt. 245, 248, 704 A.2d 785, 787 (1997)) (alteration in the
original).
¶ 6. As noted above, the Town challenges the materials that the
appraiser considered on three fronts. First, the Town contends that the
appraiser applied a statutory provision, 32 V.S.A. § 3481, that had not yet
become effective. Second, the Town argues that the appraiser should have
required the authority to submit its own appraisal in each case, and third,
the Town challenges the admission in both hearings of a letter upon which
the appraiser relied to determine the base capitalization rate.
¶ 7. We first address whether or not the appraiser improperly
applied the methods approved in § 3481. Before 2005, towns had various
methods for valuing subsidized housing and the low-income housing tax
credits provided by section 42 of the Internal Revenue Code. The Town of
Manchester had included low-income housing credits in a housing project's
appraisal value, and in 2004 the Bennington Superior Court approved
Manchester's use of the credits. Manchester Knoll Housing Ltd. P'ship v.
Town of Manchester, Docket No. 52-2-02 Bncv (Mar. 31, 2004). The
Legislature reacted by imposing a moratorium on the inclusion of tax
credits in an affordable housing project's appraisal value. It created a
study committee to consider whether the value of federal affordable housing
tax credits, I.R.C. § 42, or the Vermont equivalent, 32 V.S.A.§ 5930u,
should be included in an income-method property tax appraisal. 2003 No.
163 (Adj. Sess.) § 35. After a year of study, and a unanimous report by
the study committee, the Legislature imposed an income approach appraisal
method with four elements. 32 V.S.A. § 3481(1). The statute requires an
appraiser to apply these four elements to determine the fair market value
of rental property subject to legal restrictions on rent. (FN2) Id. The
process applies "to grand lists of April 1, 2006, and after." 2005, No.
38, § 22(1).
¶ 8. The town claims that the appraiser applied the statute
retrospectively to the 2004 tax year. We find that he did not. The
appraiser did discuss the amendments to the definition of fair market
value, and he even went so far as to demonstrate that the results would be
the same under the statute as under the process which he used.
Nevertheless, the appraiser's method differed in several key ways from the
method outlined in the new statute. First, the state appraiser did not use
imputed market rents as required by the statute. 32 V.S.A. § 3481(1)(A).
The appraiser used actual 2004 revenues from both Green Mountain Apartments
and the Dogwood complex. From that actual revenue, he subtracted the
actual operating expenses of each unit to determine each unit's net
operating income. These actual operating expenses included the actual
vacancy rates and credit losses. The statute, by contrast, uses a set
vacancy rate. Id. § 3281(1)(C). The appraiser then applied a
capitalization rate of 9.5% plus the 2004 Northfield tax rate of 2.26% to
the net income to arrive at the appraisal value. This was a classic use of
the widely accepted direct capitalization approach to value. See Appraisal
Institute, The Appraisal of Real Estate 529 (12th ed. 2001). "Direct
Capitalization is a method used in the income capitalization approach to
convert a single year's income expectancy into a value indication." Id.
¶ 9. The housing authority concedes that in both cases, the
appraiser erred by subtracting the theoretical vacancy and credit losses
from each project's actual income. This subtraction was in error because
the actual vacancy rate and credit losses were already included in its
actual gross income. In each case, this led to a slightly lower appraised
value. The appraiser subtracted a theoretical vacancy and credit loss of
$2,118 from Green Mountain Apartments' actual gross income of $141,214,
thus calculating Green Mountain Apartments' value at $384,660. The
authority concedes it should be $402,610. After subtracting $5,421 from
the Dogwood complex's net operating income, the appraiser valued the
Dogwood complex at $1,284,300; the authority acknowledges that it should be
$1,330,400. (FN3) Though apparently cognizant of the new statute's
requirements, the appraiser's methodology was rational and sound. Apart
from the above-noted arithmetic, there was no error.
¶ 10. The Town next contends that the authority should have been
required to produce an appraisal performed by a third party to rebut the
listers' valuation of the properties. A taxpayer must submit admissible
evidence to rebut the listers' assessment, but we find no rule that
requires an appraisal by a third party in such cases. In general, "[t]he
owner of real or personal property shall be a competent witness to testify
as to the value thereof." 12 V.S.A. § 1604. This rule applies to
corporate entities as well as individuals. O'Bryan Constr. Co. v. Boise
Cascade Corp., 139 Vt. 81, 90, 424 A.2d 244, 249 (1980). A designated
representative of a corporation is qualified to testify under this section
as to the value of corporate property once he has been shown to have a
thorough familiarity with that property. Id. The Vermont State Housing
Authority's director of property and asset management testified in both
cases as to her belief of the appraised value, and offered evidence to
support her opinion. During that testimony, the appraiser had ample
opportunity to evaluate the director's knowledge of the properties in issue
and to make a judgment about her credibility. These are both
determinations within the discretion of the hearing officer. See Crabbe v.
Veve Assocs., 150 Vt. 53, 58, 549 A.2d 1045, 1049 (1988) (holding that
where the evidence of value is conflicting, a determination is properly
left up to the fact finder). Therefore, we cannot find error in the
appraiser's decision to allow the director to testify as to the value of
the two properties.
¶ 11. The Town further argues that the appraiser admitted an advice
letter from the Allen and Brooks accounting firm in error. The letter was
addressed to the Executive Director of the Vermont Housing Finance Agency
and the District Advisor Supervisor of the Property Valuation and Review
Division of the Vermont Department of Taxes, and it was unsigned. It is
clear from a thorough reading of the transcript that the Allen and Brooks
firm was familiar to all the parties because the firm had advised the
Legislature during the study committee and on the amendments to the
statute. At the beginning of each hearing, the appraiser accepted the
letter into evidence with a number of other uncontested exhibits, and the
Town did not object to its admission. The appraiser found that the
letter's analysis of the capitalization rates provided convincing evidence
that the base capitalization rate should be 9.5% for properties with
subsidized housing covenants. The Town advocated for an 8.5% to 9.0%
capitalization rate, while the authority recommended a rate in the 10% to
12% range. The appraiser appropriately applied a capitalization rate
between the figures suggested by both parties.
¶ 12. Finally, the Town complains that the appraiser should not
have used the income approach to value because the listers did not have the
information necessary for them to conduct such an appraisal. The Town also
contends that the appraiser used unreliable data which led to an unreliable
appraisal. The fact that the listers did not have the housing authority's
actual income and expense numbers will not, by itself, suffice to reverse
the appraiser's decision. In the Green Mountain Apartments hearing, the
Town's witness stated, "[i]n calculating the value of the property, I would
agree that the income approach is the most reliable; again, we didn't have
market information at the time." While the Town now characterizes this as
a general statement, in the context of a hearing about how to appraise a
particular property, it remains a concession. Indeed, a few sentences
later the Town's witness discusses the income approach as applied to Green
Mountain Apartments. Therefore, the appraiser's conclusion that the Town
conceded the income approach, in the Green Mountain Apartments case, was a
reasonable conclusion under the circumstances.
¶ 13. The Town is correct that its witness did not make any such
concession in the Dogwood hearing. Nevertheless, the appraiser has the
discretion to correct the listers' valuation if he determines that the
method used was not the one most appropriate for the type of property at
issue. Vt. Elec. Power Co., 174 Vt. at 475, 807 A.2d at 436.
¶ 14. Using the cost approach to value, the Town had set the Dogwood
complex's value at $2,223,600, a value consistent with a typical
cost-approach analysis. As applied to a low-income housing project,
however, this approach makes no sense. The record shows that the Dogwood
complex does not produce any cash or other economic reward to the owner,
and it will not, at least until the section 515 mortgage is paid off twenty
years from now. The appraisal value is supposed to reflect the price that
the property would bring if offered on the open market. 32 V.S.A. §
3481(1). The Dogwood complex will not bring $2,223,600 on the open market,
and Green Mountain Apartments will not bring anywhere near the $1,150,000
value set by the Town because of these restrictions. Section 515 housing
projects can be sold only to other tax-exempt organizations who are willing
to abide by the rent and mortgage restrictions currently in place.
¶ 15. Similarly the market approach to value has no application in
this case. In the market approach, the appraiser finds similar properties
that have been sold recently, and extrapolates a value for the subject
property by comparing it to those recent sales. See Lake Morey Inn Golf
Resort Ltd. P-ship v. Town of Fairlee, 167 Vt. 245, 249, 704 A.2d 785,
787-88 (1997) (describing the "market data approach"). There is no real
market for section 515 housing projects because they can be sold only to
other tax exempt organizations that, by definition, make no profit. The
Town did not produce any evidence of any similar sales, and all parties
concede there have been none. For this reason, comparing the projects to
similar properties recently sold on the open market is to no avail.
¶ 16. The record is replete with evidence from which the appraiser
could have reasonably come to his conclusions. We remand solely for the
appraiser to correct the arithmetic regarding the actual vacancy and credit
loss rate. In all other respects we affirm.
Affirmed in part and remanded for the appraiser to correct the
arithmetic regarding the actual vacancy and credit loss rate.
FOR THE COURT:
_______________________________________
Associate Justice
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Footnotes
FN1. For purposes of this appeal, both the Vermont State Housing Authority
and the Housing Foundation, Inc., will be referred to as "the authority."
FN2. The statute reads in relevant part:
For residential rental property that is subject to a housing subsidy
covenant or other legal restriction, imposed by a governmental,
quasi-governmental, or public purpose entity, on rents that may be charged,
fair market value shall be determined by an income approach using the
following elements:
(A) market rents with utility allowance adjustments for the
geographic area in which the property is located as determined by
the federal office of Housing and Urban Development;
(B) actual expenses incurred with respect to the property as
provided by the property owner and certified by an independent
third party;
(C) a vacancy rate that is 50 percent of the market vacancy rate
as determined by the United States Census Bureau with local review
by the Vermont housing finance agency; and
(D) a capitalization rate that is typical for the geographic area
determined and published annually prior to April 1 by the division
of property valuation and review after consultation with the
Vermont housing finance agency.
32 V.S.A.§ 3481(1)
FN3. This is a matter of simple arithmetic. The Court will remand to the
appraiser for the sole purpose of correcting the arithmetic.