Cascade Court Limited Partnership v. Noble

Citation: 20 P.3d 997Docket: 42539-1-I

Court: Court of Appeals of Washington; April 2, 2001; Washington; State Appellate Court

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The case involves the valuation of ten low-income housing projects for property tax purposes, with the Board of Tax Appeals (BTA) initially ruling that these projects should be assessed as unrestricted market-rent housing. The appellants, consisting of several nonprofit organizations, argued that the properties should be valued based on restricted rents due to covenants limiting tenant eligibility and rent amounts. The Assessor initially used various valuation methods, including market-rate comparisons, but later agreed with the appellants on the valuation approach for six projects related to state loans, advocating for income valuation based on restricted rents. For the four federally tax-credit projects, the Assessor proposed valuing them using restricted rents but also including the value of the tax credits. The BTA upheld the original assessments, stating that the voluntary nature of the rent restrictions meant the Assessor was not obligated to use restricted rents for income valuation. The BTA also ruled that tax credits were assessable as part of the real property. The appellants subsequently appealed this decision, arguing that the BTA misapplied the law. The court's review of agency decisions is governed by the Administrative Procedure Act, which allows for reversal on legal errors, with the court giving substantial weight to the agency's interpretation of law within its expertise.

The Board's valuation of properties raised the question of whether rent restrictions should be considered. Under RCW 84.40.030, properties must be assessed at their "true and fair value in money," interpreted as fair market value. Fair market value reflects the price a willing buyer would pay to a willing seller, factoring in all reasonable influences on property valuation, including zoning or legal use restrictions. The Board of Tax Appeals (BTA) declined to include rent restrictions, arguing they were voluntary and thus irrelevant under the statute. However, the statutory framework pertains to comparable sales within five years, while the BTA's analysis utilized the income approach, making the statute inapplicable. The voluntary nature of rent restrictions does not negate their economic impact on property valuation, as established in case law. For instance, in Twin Lakes, the Supreme Court determined that recorded use covenants must be factored into property value assessments due to their economic consequences. This principle was reaffirmed in Sahalee Country Club, which emphasized that the market value of the subject property is paramount. In Folsom v. County of Spokane, the Court ruled that actual rental income from long-term below-market leases should be capitalized instead of market rents, aligning with the "willing buyer-willing seller" standard. Ignoring such leases would result in an inflated valuation that does not reflect true market conditions, contravening the statutory requirement for fair market value.

Project owners are prohibited from charging market rents due to covenants lasting up to 60 years, affecting any future owners similarly. According to Washington law, property assessments must reflect the price a willing buyer would pay, which should factor in the restricted rents. Assessors using the income method must capitalize on the maximum allowable rents, while those using the cost method should account for depreciation from functional and economic obsolescence. The Board of Tax Appeals (BTA) erred by not requiring the Assessor to consider restricted rents and mistakenly included federal tax credits in the assessed value, as these credits are intangible personal property exempt from real property taxation. The appellants’ request for attorney fees, based on RCW 4.84.350, is denied since the Assessor does not qualify as an "agency" under RCW 4.84.340, which defines agencies as entities authorized to make rules or conduct adjudicative proceedings. The final decision of the BTA is reversed, and the case is remanded for a reassessment in line with the court's findings, directing adjustments to King County's tax rolls.

Incurable functional obsolescence refers to structural deficiencies or superadequacies in a property that are not worth rectifying due to costs outweighing potential utility gains. Tax credit properties may exhibit such obsolescence due to unique characteristics and high development costs. Deed restrictions can impair the income-generating capacity of properties, potentially leading the Assessor to determine that these restrictions contribute to economic obsolescence. While the Assessor is not limited to a single appraisal method, it is essential to consider rent restrictions in any evaluation. The Department of Revenue favors capitalizing net operating income for valuing low-income housing, while the cost method is typically recommended only when properties cannot be valued through income capitalization. Furthermore, appraisal literature and case law generally advise against using the cost method for rent-restricted low-income housing.

Construction costs for federally rent-controlled low-income housing inflate the market value of such projects because, without government subsidies, the rental income would not cover the actual construction expenses. This was affirmed in Bayridge Assoc. Ltd. Partnership v. Dep't of Revenue, 13 Or. Tax 24, 31 (1994) and upheld in 321 Or. 21, 892 P.2d 1002 (1995), indicating that the cost approach under governmental restrictions may inaccurately represent value. 

The Low-Income Housing Tax Credit, outlined in IRC § 42(a)(c)(2)(g), requires owners or investors in low-income housing projects to make a specified number of rental units available to the general public for at least 15 years to qualify for the credit. 

Under RCW 4.84.350, a court must award a qualified party that prevails in a judicial review of an agency action reasonable fees and expenses, including attorney fees, unless the agency's action is deemed substantially justified or an award is otherwise unjust. A qualified party prevails if they gain relief on a significant issue that provides some benefit. The term "agency action" encompasses various actions such as licensing, rule enforcement, and benefits management as defined in RCW 84.08.010 and RCW 34.05.0103.