Administrative Review of the Illinois Property Tax Appeal Board No. 97-189-C-3
The opinion of the court was delivered by: Justice Knecht
Rainbow Apartments (Rainbow) seeks administrative review of the decision of the Illinois Property Tax Appeal Board (PTAB) to include the present value of federal low-income housing credits as part of its assessed real-property value. We affirm.
Rainbow is a limited partnership owning a 72-unit rental property built in 1995. The property was designed as low-income housing to qualify for tax credits pursuant to section 42 of the Internal Revenue Code (26 U.S.C. §42 (1994)). The developer syndicated the project and allocated the available tax credits to the limited partners, who could use them to reduce their tax liabilities annually from 1996 to 2005.
The project must comply with tenant-eligibility, rent, and other restrictions to avoid credit recapture. Michael Amundson, Rainbow's appraiser, noted these requirements reduce demand for section 42 housing and lower rents below market rates for unencumbered properties. He believed the highest and best use of the property as improved was rental as section 42 housing. Amundson recommended valuing the property using the income-capitalization approach, which divided net annual operating income by a 10% rate of return. He determined the real property to be worth $1,372,000 as section 42 housing and $2,052,000 if unencumbered by section 42 restrictions. He calculated the present value of the tax credits as $1,460,000.
PTAB found the January 1, 1997, value of the property to be $2,832,000, which is the sum of Amundson's appraised values of the tax credits and the real property as section 42 housing. Rainbow sought direct appellate review in this court.
Before turning to the merits of this appeal, we note our court has jurisdiction over this matter pursuant to section 16-195 of the Property Tax Code (Code) (35 ILCS 200/16-195 (West 2000)) and Supreme Court Rule 335 (155 Ill. 2d R. 335), which provide for direct appellate review of final administrative decisions of PTAB in cases where a change in assessed valuation of $300,000 or more is sought.
In this case, the issue is whether PTAB erred as a matter of law by including the value of tax credits in determining the property's fair cash value. The facts are undisputed. An administrative agency's findings on questions of law are not binding on the courts and are reviewed by this court de novo. Kankakee County Board of Review v. Property Tax Appeal Board, 305 Ill. App. 3d 799, 802, 715 N.E.2d 274, 276 (1999).
The standard for determining the fair cash value of property is the price at which ready, willing, and able buyers and sellers would agree. Kankakee County Board of Review v. Property Tax Appeal Board, 131 Ill. 2d 1, 16, 544 N.E.2d 762, 768 (1989). A property's income-earning capacity is the most significant element in arriving at its fair cash value for assessment purposes. Kankakee County, 131 Ill. 2d at 15, 544 N.E.2d at 768. In Kankakee County, the supreme court held a subsidy agreement affecting a property's income-earning capacity must be considered in calculating fair market value if the property is designed for use as subsidized housing, its best and highest use is as subsidized housing, and it is transferable to others for use as subsidized housing. Kankakee County, 131 Ill. 2d at 18-19, 544 N.E.2d at 770.
Rainbow asserts it receives no subsidy and its property's income-earning capacity is limited to its rental income. We disagree for two reasons. First, Rainbow does not obtain its entire income from market-determined rents; it allocates to its partners the tax credits as an additional cash-flow stream derived from its ownership interest in the property. Next, those tax credits are practically equivalent to a government subsidy. They allow the partners to reduce their tax liabilities dollar-for-dollar. In addition, the area's market rents did not justify developing the project without the tax-credit incentive.
Further, we note Rainbow's rents as low-income housing are below the area's market rents. The property was designed as section 42 low-income housing, and its highest and best use is rental in compliance with section 42 restrictions. Ignoring the effect of the tax credits would distort the earning capacity, and thus the fair cash value, of the property as low-income housing. See Kankakee County, 131 Ill. 2d at 17, 544 N.E.2d at 769 ("The taxing authority must weigh both the positive and the negative aspects of the subsidy agreement and adjust the actual income figure to accurately reflect the true earning capacity of the property in question").
We also note the property is transferable with the consent of the Illinois Housing Development Authority, and Rainbow may avoid liability for tax-credit recapture by posting satisfactory bond. See 26 U.S.C. §42(j)(6) (1994). A willing buyer would most certainly consider the availability of ...