Dec. 22, 2016 – A company that owns 72 residential apartment units in the City of Racine claimed the city imposed excessive property taxes. Recently, the Wisconsin Supreme Court ruled the company is entitled to a refund for excessive taxation.

For 2012 and 2013, Racine’s appraisers valued residential property held by Regency West Apartments LLC at about $4.4 million and $4.2 million, respectively. Regency West argued that those appraisals were excessive and did not comply with state law.

In Regency West Apartments LLC v.  City of Racine, 2016 WI 99 (Dec. 22, 2016), the supreme court ruled (5-2) that “the valuation methodologies Racine used for the 2012 and 2013 assessments did not comply with Wisconsin law” and Regency West “proved that Racine’s tax assessments for 2012 and 2013 were excessive.”

The 5-2 majority reversed lower court decisions. A circuit court had dismissed Regency West’s excessive tax claims and an appeals court affirmed.

Justice Shirley Abrahamson dissented, joined by Justice Ann Walsh Bradley, concluding the majority “flouts the longstanding principle that property tax assessors should use the best information possible in order to determine real property’s full value, upends the proper scope of appellate review, and inserts itself as a fact-finder.”

The Appraisal

The city’s appraiser appraised Regency West’s apartment property, which included nine two-story buildings with 72 residential units. The units are regulated under 26 U.S.C. section 42, which gives tax credits to property owners that provide affordable housing.

At trial, the jury heard about appraisal methodologies. For instance, the assessor used a comparable sales approach rather than an income approach, and compared housing units regulated under different federal provisions, such as section 8 of the U.S. Housing Act, which does not impose rent restrictions but entitles tenants to rent subsidies.

Regency West, in its claim for a refund, argued that section 42 properties cannot be reasonably compared to section 8 units under a comparative sales approach. This was just one piece of Regency West’s overall challenge to the appraisal methods used.

The appeals court had ruled that Regency West could not overcome the “presumption of correctness” attached to tax assessments under Wisconsin law.

Majority Says Assessments Excessive

A 5-2 majority of the supreme court concluded that Regency West did overcome the presumption of correctness with proof that showed the assessments were excessive.

The majority noted that assessors must estimate full market value of a full property interest under methods described in the Wisconsin Property Assessment Manual and noted that an income approach, which measures a property’s expected income during useful life, “is often the most reliable method for assessing subsidized housing.” To be “comparable,” properties must have “similar restrictions,” the majority noted.

In an opinion by Chief Justice Patience Roggensack, the majority concluded the city’s accepted appraisal technique “fail[ed] to account for the vast differences in federally regulated housing” and “distort[ed] the actual value of Regency West’s property.”

The state property assessment law, Wis. Stat. section 70.32(1), requires property to be valued “from the best information that the assessor can practicably obtain, at the full value which could ordinarily be obtained therefor at private sale,” Roggensack noted.

“We conclude that in that regard, Racine did not comply with the directive of § 70.32(1) because it did not use the ‘best information’ that was available to its assessor,” wrote the chief justice, noting the property should have been valued with an income approach.

When valuing federally regulated real estate, the majority held, appraisers cannot derive a “capitalization rate” from market rate properties.

“Appraisers who fail to consider property classified as federally regulated housing and the restrictions attendant thereto when deriving capitalization rates are overlooking major characteristics of such property,” Chief Justice Roggensack wrote.

The majority accepted appraisals from Regency West experts, which derived capitalization rates based on section 42 properties, with attendant restrictions, to value Regency West’s residential properties at $2.7 million for both 2012 and 2013.

“This is sufficient evidence to meet Regency West’s burden to show that the city’s tax assessment was excessive,” wrote Roggensack, noting that refund is due.

Dissent

Justice Abrahamson wrote a 19-page dissent, joined by Justice A.W. Bradley, saying the majority’s opinion allows assessors of federally subsidized housing to apparently go “straight to an income approach, a third-tier method of assessment, bypassing the best information and other proper assessment methodologies along the way.”

The dissenters said the majority disregarded Racine’s expert witnesses, outside appraisers who applied several methodologies that resulted in even higher valuations.

“The evidence presented by Furdek and Weissenfluh adheres to the [Wisconsin Property Assessment] Manual,” Abrahamson wrote. “They considered the impact of the Section 42 restrictions in their sales comparison valuation.

“In sum, the majority opinion is based on errors of law regarding the interpretation and application of the three tiers of valuation and in entirely disregarding [Racine’s experts].”