APPELLATE COURT OF ILLINOIS, SECOND DISTRICT
527 N.E.2d 84, 172 Ill. App. 3d 851, 122 Ill. Dec. 712 1988.IL.1158
Appeal from the Circuit Court of Lake County; the Hon. John L. Hughes, Judge, presiding.
JUSTICE UNVERZAGT delivered the opinion of the court. LINDBERG, P.J., and WOODWARD, J., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE UNVERZAGT
The Lake County Board of Review sought judicial review of an Illinois Property Tax Appeal Board decision which concluded that the method for computing the fair market value of government-subsidized rental property should use the market rent of the property. The trial court reversed the PTAB's decision, finding that actual or contract rent should be used in computing the fair market value of government-subsidized rental property. On appeal, the PTAB contends that the trial court misapplied the guidelines set forth in Springfield Marine Bank v. Property Tax Appeal Board (1970), 44 Ill. 2d 428, for ascertaining the fair market value of rental property for taxation purposes.
The Brookhaven Partnership owns and operates a government-subsidized apartment complex located in Gurnee, Illinois. The complex consists of a 15.8-acre parcel of land upon which seven cluster-building groups have been erected. Each group contains one-, two-, and three-bedroom apartments. The complex also has tennis courts, a swimming pool, wheelchair ramps and specially equipped units for the handicapped.
The complex was built in conjunction with the Illinois Housing Development Authority and the United States Department of Housing and Urban Development . Pursuant to section 7.2 of the Illinois Housing Development Act (Ill. Rev. Stat. 1987, ch. 67 1/2, par. 307.2), Brookhaven obtained a 90% federally insured IHDA loan. Pursuant to section 8 of the United States Housing Act of 1937 as amended (see 42 U.S.C.A. § 1437f (West Supp. 1988)), Brookhaven and HUD executed a contract whereby HUD agreed to subsidize 100% of the complex's units for 20 years. The rent-subsidy contract permitted Brookhaven to charge rent at a rate 38% above projected market rates. Tenants paid 25% of their annual incomes as rent, and HUD paid the difference between the contract rent and the amount received from tenants. The rent-subsidy contract was freely transferable if the complex were to be sold to a prospective purchaser. In 1982, Brookhaven collected $1,312,650 in rent, $393,934 from its tenants and $919,716 from HUD.
On February 23, 1983, Brookhaven filed an appeal with the PTAB alleging that the Lake County Board of Review (county board) improperly assessed the value of its complex for 1982. Each party submitted a written appraisal and testimony from its respective appraiser. Both appraisers used the three accepted methods of valuation in determining the fair market value of the complex: (1) the cost approach, which considers the value of the land plus the depreciated reproduction cost of any improvements; (2) the income approach, which considers the capitalization of net operating income; and (3) the market approach, which compares the prices actually paid, asked, or offered for similar properties.
James Curtis, Brookhaven's appraiser, stated that the cost approach provided limited reliability in determining the complex's value because of the complex's inherent functional and economic obsolescence, along with other factors. Under the cost approach, Curtis ascertained that the complex's value was $5,645,000. Curtis further stated that, although the income method was most applicable in determining the value of investment-oriented real estate, it was not reliable in the valuation of the complex due to the complex's inability to generate market rentals high enough to justify the complex's quality, size, and layout. In determining the complex's value under the income approach, Curtis used the market rental value of each unit as opposed to the contract rent actually received for each unit. Curtis determined that the market rent for 1982 was $838,380 and that the complex's value was $5,065,000. In Curtis' opinion, the best method of valuation for the complex was the market approach. Under the market approach, the complex's value was $5,625,000.
William McCann, the county board's appraiser, arrived at a different assessed value for the complex. McCann stated that because the complex was new, the cost approach was a good indicator of its value. Under the cost approach, the complex's value was $6,950,000. McCann did not believe the income approach was accurate in determining the complex's value because that approach was subject to rapid fluctuations in net income caused by vacancies, collection losses, repairs and varying interest rates. In determining the complex's value under the income approach, McCann used the contract rent received from each unit in 1982, which totaled $1,312,650. Under the income approach, McCann determined that the complex's value was $7,150,000. McCann further stated that the market approach was a good indicator of the complex's value and, under that approach, its value was $6,900,000. McCann concluded that the complex's value was $7 million, yet failed to specify which approach he adopted.
On October 29, 1984, the PTAB conducted a hearing on Brookhaven's appeal. At the hearing, Martin Dempski, one of the developers of the complex, testified that the complex's occupancy rate was between 98% and 100%. Dempski indicated that his company would not have built the complex had it not received an IHDA loan and a HUD rent subsidy. Curtis testified that he was required by law to use market rent in determining the value of rental property where the actual rent charged was higher than the market rent. Although he appraised the complex as if it were not government-subsidized, Curtis admitted that the complex would not have been economical to develop without an IHDA loan and a HUD rent subsidy. McCann testified that he considered the HUD rent subsidy in determining the complex's fair market value because the income derived from the subsidy was an integral part of the complex.
On May 22, 1985, the PTAB issued a ruling which found that all encumbrances, including the HUD rent subsidy, must be excluded from the assessment valuation process. The PTAB concluded that the county board's appraisal was seriously compromised because it relied on contract rent rather than market rent in ascertaining the complex's value. The PTAB considered Curtis' appraisal, which ...