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COURT OF APPEALS DECISION DATED AND RELEASED JANUARY 14, 1997 |
NOTICE |
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A party may file with the
Supreme Court a petition to review an adverse decision by the Court of
Appeals. See § 808.10 and
Rule 809.62(1), Stats. |
This opinion is subject to
further editing. If published, the
official version will appear in the bound volume of the Official Reports. |
No. 96-2216-FT
STATE
OF WISCONSIN IN COURT OF
APPEALS
DISTRICT III
RHINELANDER FAMILY
HOUSING,
A DOMESTIC LIMITED
PARTNERSHIP,
Plaintiff-Appellant,
v.
CITY OF RHINELANDER
BOARD OF REVIEW,
Defendant-Respondent.
APPEAL from a judgment
of the circuit court for Oneida County:
ROBERT E. KINNEY, Judge. Affirmed.
Before Cane, P.J.,
LaRocque and Myse, JJ.
PER CURIAM. Rhinelander Family Housing, a partnership,
appeals a judgment affirming the City of Rhinelander Board of Review's tax
assessment.[1] Rhinelander Family Housing argues that the
assessment violates Metropolitan Holding Co. v. Board of Review,
173 Wis.2d 626, 495 N.W.2d 314 (1993), which requires the tax assessor to take
account of federal rental income restrictions when determining fair market
value of subsidized rent restricted housing.
Because Rhinelander Family Housing failed to meet its burden to show
that the assessment was not made according to law, we affirm the judgment.
1.
Facts
The underlying facts are
not disputed.[2] Westridge Village, built in 1991, is a
thirty-two unit income restricted federally subsidized apartment complex. Its purpose is to provide affordable housing
for low income and elderly persons in rural areas. The Farmers Home Administration (FmHA) provides financial
assistance in the form of an interest subsidy.
In return for a financing package that includes a fifty-year loan for
95% of the construction cost at one percent,[3]
the apartment complex is restricted to a maximum of 8% return on its initial
investment and must provide FmHA approved below marked rental rates for the
duration of the loan. Rhinelander
Family Housing claims to have received 36% less income than would an owner of a
building who charges market rental rates.
It is undisputed that absent the federal subsidy, the property would not
have been built at its present location.
For the 1993 tax year,
the board adopted the city assessor's determination of value. The assessor used a cost less depreciation
method resulting in a $1,081,400 assessment, consisting of $50,000 for land
and $1,031,400 for improvements. Rhinelander Family Housing challenged the
assessment in circuit court, and the court remanded to the board to revalue the
property. Shortly thereafter, the city
assessor reduced the assessed value of Westridge Village to $960,000; $50,000
was attributed to the land and $910,000 to improvements. Rhinelander Family Housing challenged this
assessment before the board, and the board upheld the $960,000 valuation for
tax years 1993 and 1994. Rhinelander
Family Housing challenged the board's decision in circuit court, which affirmed
the assessment. Rhinelander Family
Housing appeals the circuit court's judgment.
At the hearing before
the board, Rhinelander Family Housing relied on the expert testimony of Albert
Gay, a real estate appraiser. Gay
testified that for income property such as Westridge Village, the income
approach was the most reliable method to estimate fair market value. Using various capitalization rates as
applied against the income, he determined an appraised value of $500,000. In general, the higher the capitalization rate,
the lower the indicated value.
Both Gay and the city
assessor agreed that the limited number of comparable sales prevented a
reliable market sales comparison.
Nonetheless, using the market approach and three comparable sales in
Waupun, Crandon and Twin Lakes, Gay made cash equivalency adjustments and
reached an estimated value of $500,000.
Gay qualified his opinion by stating that there has not been sufficient
numbers of comparable sales in the state to put any degree of importance on a
market approach.
Next, using a cost
approach, and a replacement cost of $1,032,487, minus a factor for physical,
functional and economic obsolescence, Gay obtained an appraised value of
$465,400. Taking all three approaches
into consideration, Gay concluded the property's fair market value as of
January 1, 1994 was $500,000.
Next,
the board heard opinions from two additional witnesses. Mike Muelver, city assessor, agreed that the
comparable sales valuation method would be unreliable to value the subject
property due to insufficient data.
Muelver testified that he had retained appraiser Kyle Zastrow to analyze
the information provided to the board and to review Gay's opinions, but not to
conduct a full appraisal of the property.
Zastrow reviewed the cost, income and market approaches with information
provided by the city assessor and Gay's appraisal. Because the property was investment property, Zastrow also
compared it to an annuity.
Muelver and Zastrow
disagreed with Gay's valuation methods and conclusions. For example, Zastrow concluded that Gay
utilized an erroneous capitalization rate in his income approach. Zastrow believed that because actual
restricted rent rates were used, the government subsidized 1% interest rate
should be a component of capitalization rate calculation. Gay, on the other hand, had testified that
the mortgage face value of 8.75% was appropriate.
Based on a variety of
factors, Muelver and Zastrow concluded that $960,000 was the correct
value. After the hearing, the board set
the assessments for 1993 and 1994 at $960,000.
Rhinelander Family Housing appealed the assessments to the circuit
court, which upheld the board's decision.
Rhinelander Family Housing appeals the judgment.
2.
Standard of Review
On certiorari review of
a property tax assessment, we are bound by the record before the board, but not
by the trial court's conclusions. State
ex rel. Wis. Power Co. v. Board of Armenia, 125 Wis.2d 94, 97, 370
N.W.2d 580, 582 (Ct. App. 1985). Our
scope of review is limited to determining whether (1) the board acted within
its jurisdiction; (2) it acted according to law; (3) its action was arbitrary,
oppressive or unreasonable; and (4) the evidence is such that the board might
reasonably make the determination it did.
Waste Mgmt. v. Kenosha County Bd. of Review, 184 N.W.2d
541, 554, 516 N.W.2d 695, 701 (1994).
If there is a conflict
in the testimony respecting the value of the property, the court does not
substitute its opinion of the value for that of the board. Rosen v. City of Milwaukee, 72
Wis.2d 653, 662, 242 N.W.2d 681, 684 (1976).
If there is credible evidence before the board that may in any
reasonable view support the assessor's valuation, that valuation must be
upheld. Id. If the assessment is made according to the
statutory mandate, it must be upheld if it can be supported by any reasonable
view of the evidence. Waste Mgmt.,
184 Wis.2d at 555, 516 N.W.2d at 701.
3. Tax
Assessment Law
Section 70.32(1), Stats., governs the valuation of real
property and requires an assessor to value real property "in the manner
specified in the Wisconsin property assessment manual" from actual view or
the best information available. It must
be valued at the "full value" which could be ordinarily obtained at a
private sale. Metropolitan
Holding, 173 Wis.2d at 631, 495 N.W.2d at 316. "Full value" is defined as fair
market value or the amount obtainable in an arm's length transaction on the
open market. Waste Mgmt.,
184 Wis.2d at 556, 516 N.W.2d at 701.
The burden is on the challenger to overcome the presumption that the
assessor's valuation is correct. Rosen,
72 Wis.2d at 662, 242 N.W.2d at 684.
"[I]n the absence
of a sale of the property in question the sale of 'reasonably comparable'
property provides the 'best information' of market value." Id. at 665, 242 N.W.2d at
686. Here, there was no direct sale of
the property, and the parties agreed that there were insufficient comparable
sales to provide reliable data. Where
there are no comparable sales, the assessor may consider all the factors that
according to professionally acceptable appraisal practices have a bearing on
the value, including costs, depreciation, replacement value and income. Id. at 663, 242 N.W.2d at
685. Net income may never be the sole
basis for a property valuation, but may be considered along with other
factors. Waste Mgmt., 184
Wis.2d at 558, 516 N.W.2d at 702.
1 Wisconsin Property Assessment Manual
9-27 (1997) cautions against using the cost approach to value federally
subsidized housing, as do other state courts.
The
great dilemma in assessing federally assisted housing projects is that the
"value" of these projects is inherently ambiguous. Construction costs are known; but these
overstate the market value of the project, since in the absence of subsidy the
rental stream produced by the property would not justify the actual expenditure
on construction.
Congresshills
Apts. v. Township of Ypsilanti, 341 N.W.2d 121, 124 (Mich.
App. 1983) (quoting Community Dev. Co. v. Board of Assessors, 385
N.E.2d 1376, 1378 (Mass. 1979)).
Faced with this dilemma,
both experts relied heavily on the income approach. Using a net income approach, an assessor converts future benefits
likely to be derived from real estate into an estimate of present value. Waste Mgmt., 184 Wis.2d at 561, 516 N.W.2d at 703. "The income approach is often the most
useful and often the only method for valuing subsidized housing because of the
conditions of the agreement and the limited availability of data." 1 Wisconsin Property Assessment Manual
9-27 (1997).
The basic mechanics of
the income approach are as follows:
An
assessor first determines the net annual income of the property. This figure is reached by deducting
estimated operating expenses from the property's gross income. The assessor also selects a capitalization
rate by considering the discount and recapture rates suitable for such
investment as well as the applicable effective tax rate. Finally, the assessor applies a
capitalization rate to the net annual income to yield the present value of the
expected income stream over the life of the property.
Waste
Mgmt., 184 Wis.2d at 561, 516 N.W.2d at 703-04.
The Wisconsin Property Assessment Manual
expresses this method as a formula:
Income/capitalization rate = value.
Id. at 7-20.
"[N]o formula, however, can be any more accurate than the variables
upon which it relies." Tradewinds
East Ass'n v. Hampton Ch. Tp., 406 N.W.2d 845, 851 (Mich. App.
1987).
The focus of the debate
here is the methodologies used to arrive at the formula's two components, income
and the capitalization rate. To
calculate net operating income to value federally funded rent restricted
housing, actual rental rates, not estimated market rates are to be used. Metropolitan Holding, 173 Wis.2d
at 632, 495 N.W.2d at 317. It is error
to calculate annual income based on estimated market rents and expenses: The "use of estimated market rents
violated sec. 70.32(1), because the estimated market rents did not reflect the
true market value of Layton Garden."
Id. at 631-32, 495 N.W.2d at 317.
Also, selecting an
appropriate capitalization rate is critical and "[d]etermining this rate
is the most difficult factor in determining valuation under the
capitalization-of-income approach."
Dowagiac Ltd. Dividend Housing Ass'n v. Dowagiac, 420
N.W.2d 114, 118 (Mich. App. 1987).
Therefore, we first address the capitalization rate.
4. Calculation of the Capitalization Rate
Rhinelander Family
Housing challenges the capitalization rate utilized by Zastrow and the city assessor. Because Rhinelander Family Housing's
argument is brief, we quote it in its entirety:
Mr.
Zastrow incorrectly applied the band-of-investment method when performing the
income approach to valuation. When
computing his capitalization rate through this approach, Mr. Zastrow utilized a
debt component of 1%, presumably employing the Note rate, less the payments
made to the lender by the government under the FmHA §515 program. The debt component must, however, utilize
the actual mortgage rate, or 8.75%. Mr.
Zastrow erroneously assigned the "value" of the subsidized mortgage
to the owner, rather than to the tenants.
If one were to use the actual mortgage rate as a component of the band
of investment analysis, one would arrive at a value approximately that employed
by Mr. Gay, or $422,232.58. ($72624/.0172).
Rhinelander Family
Housing's briefs suggest that Metropolitan Housing controls this
issue. Metropolitan Housing,
however, concerned itself solely with the calculation of net operating income,
not with the determination of the second half of the fraction, the
capitalization rate. Because Metropolitan
Housing did not address the determination of a capitalization rate, it
serves as guidance only in the general sense that it requires the use of actual
rental income and actual expenses in the valuation process.
The Wisconsin
Property Assessment Manual addresses the calculation of capitalization
rates for income properties generally, but not government subsidized housing
specifically. The manual advises that
the capitalization rate is composed of a number of elements, including: (1) the
discount rate, defined as the rate of return required by investors to
compensate for the risk assumed, the non-liquidity of their investment and the
use of their money; (2) the recapture rate, defined as the annual rate of
return which will provide the investor with a return of the depreciable portion
of the investment over the remaining economic life of the asset; and (3) the
effective tax rate. 1 Wisconsin Property Assessment Manual
9-13, 14 (1997).
The manual suggests the
use of market interest rates, rather than the face value of the instrument in
question, in the calculation of capitalization rates, but this position is
advanced by neither party.[4] Without an exhaustive discussion of the
variety of methods to determine capitalization rates, we conclude that the
assessment manual provides no direct support for Rhinelander Family Housing's
argument. The manual does not directly
address the issue whether the face value of the instrument, rather than the
government interest rate, should be a component of the capitalization rate
calculation. In any event, the
legislature intended the manual to conform to, rather than establish, Wisconsin
law. Metropolitan Holding,
173 Wis.2d at 633, 495 N.W.2d at 317.
We find, however, no specific legislative guidance on the question
before us. We conclude that the manual
provides no authority for Rhinelander's claim that the assessment is not
according to law.
We conclude that the basic principles of law
apply to the valuation of federally subsidized housing complexes in the same
manner as they apply to valuation of other property. As one jurisdiction has observed:
An
overriding theme in the decisions addressing the ad valorem taxation of
federally subsidized real property is that the valuation process must consider
both the positive and negative aspects of the regulatory agreement voluntarily
entered into between the owner and government.
This comports with the well-established rule that all factors relevant
to property value should be considered in the assessment process.
Meadowlanes
Ltd. Dividend Housing Ass'n v. City of Holland, 473
N.W.2d 636, 649 (Mich. 1991).[5]
Rhinelander fails to
demonstrate that the board did not act according to law by accepting Zastrow's
testimony in support of the assessment.
Here, both the city assessor and Zastrow used information provided by
the taxpayer to value the property using the income approach. Zastrow explained that he used the
government subsidized 1% interest figure in calculating the capitalization rate
for the income approach because "if you're using actual rents and actual
expenses, then you use actual rates."
Because the property was investment property, Zastrow also compared the
property to an annuity, a method of valuation specifically suggested by the
manual. 1 Wisconsin Property Assessment Manual 9-18 (1997). The annuity method supported his
conclusions. Rhinelander Family Housing
has offered no legal authority that the board's acceptance of this methodology
was an error of law. We conclude that
Rhinelander Family Housing has not met its burden to demonstrate that the board
erred as a matter of law by accepting Zastrow's opinions that included
valuation through an income approach that utilized a subsidized 1% mortgage
rate in its calculations.
5. Calculation of Net Operating Income
Rhinelander Family
Housing also suggests that because the tax assessor failed to consider federal
rent restrictions, the assessments for 1993 and 1994 were not set according to
law. We conclude that the record fails
to support this claim.
Rhinelander Family
Housing fails to demonstrate that the assessment violates Metropolitan
Holding's requirement that actual rents be considered. The city's expert witness, Zastrow, used the
figure of $72,624 to represent net operating income. He testified that he arrived at this figure using actual, not
market rents. Rhinelander Family
Housing's expert, Gay, also used the sum of $72,624 to represent net operating
income at his first appearance before the board. At the second hearing, Gay used the sum of $69,395 to represent
net operating income. Nonetheless, the
record fails to show that Zastrow used actual market rents when calculating net
operating income. Because the witnesses
used different anticipated vacancy rates, the board could infer that different
vacancy rates accounted for the relatively minor discrepancy in net
income. Consequently, the record fails
to demonstrate that the assessor used actual market rents when determining net
operating income to calculate value by the income approach to valuation.
6. Conclusion
Because Rhinelander
failed to demonstrate that the income approach used by Zastrow and the city
assessor was not according to law, the board had before it credible evidence to
support its assessment. If there is
credible evidence before the board that in any reasonable view supports the
assessor's valuation, that valuation must be upheld. Rosen, 72 Wis.2d at 662, 242 N.W.2d at 684. This issue is dispositive, and therefore we
do not reach Rhinelander Family Housing's other arguments.
By the Court.—Judgment
affirmed.
This opinion will not be
published. See Rule 809.23(1)(b)5, Stats.
[2] To support its statement of facts, Rhinelander Family Housing's appellate brief cites to R20, the City of Rhinelander Board of Review's trial brief in opposition to a writ of certiorari. City of Rhinelander Board of Review's response brief does not contain any citation to the record, but cites pages A25 and A26 of its appendix. These are two pages of a transcript dated September 12, 1994. Because we must review the record before the board, it would be helpful to cite directly to the record. See Keplin v. Hardware Mut. Cas. Co, 24 Wis.2d 319, 324, 129 N.W.2d 321, 323 (1964).
[4]
The manual refers the reader to its chapter on commercial valuation for
a more detailed explanation of capitalization rate calculation. That chapter discusses a variety of methods,
including the mortgage-equity method:
This method is based on the
premise that an overall rate can be developed through a knowledge of the
mortgage and equity requirements of property purchase. Its simplest application is a band of
investment method. The assessor needs
to know what percent of value the lending institutions require as a
downpayment, or equity from investors.
The assessor also needs to know the interest rate required or mortgages
by lending institutions, and the yield rate required on the equity by
investors. Much of this information can
be obtained from lending institutions.
The balance may be gathered from discussions with investors, brokers,
appraisers, and studies of sales.
The band of investments method
involves multiplying the mortgage percent of property value times the mortgage
constant. The mortgage constant is a
percentage which represents the total annual debt service (interest plus
amortization of the loan). To this is
added the equity percent of the property times the equity interest rate required
by investors.
....
There are more sophisticated
methods of mortgage-equity capitalization which take into account additional
factors. ... Explanation of this method is too complex for this manual. If the assessor is interested, there are
books or courses available to further explore this method.
1 Wisconsin Property Assessment Manual 9-16, 18 (1997).
[5]
In Meadowlanes Ltd. Dividend Housing Ass'n v. City of Holland,
473 N.W.2d 636, 647-48 (Mich. 1991), the Michigan Supreme Court stated:
[A]lthough the mortgage-interest subsidy is an intangible, and not taxable in and of itself, it is a value-influencing factor. In Antisdale, supra at 284, 362 N.W.2d 632, we recognized that without the subsidy these types of properties would not exist. Therefore, the value of the subsidy, if any, should be reflected in the assessment process. ... [T]he subsidy is not taxed in and of itself. ... The interest subsidy reduces the property's total operating costs and adds value by increasing the amount of debt the property can carry.