NC Court of Appeals Examines the Meaning of “Ownership” for Property Tax Exemption in LIHTC Developments, and NC Supreme Court Refuses to Further Rule

By Sherrod Banks and Barbara Herrera

In a case of first impression, the North Carolina Court of Appeals in In re Blue Ridge Housing of Bakersville LLC[i] upheld a North Carolina Tax Commission decision that Cane Creek Village, a low-income housing development created with low-income housing tax credits (LIHTC), was tax exempt under N.C. Gen. Stat. § 105-278.6(a)(8).  At issue was whether the non-profit organization that held 0.1% ownership interest in the LLC holding title to the property had a sufficient ownership interest for the property tax exemption.  The North Carolina Supreme Court heard oral arguments on January 7, 2014 after granting discretionary review of the Court of Appeals decision, but has refused to further rule in the case.

Northwestern Housing Enterprises, Inc. (“NHE”), a North Carolina nonprofit corporation and an affiliate of Northwestern Regional Housing Authority (“NRHA”), developed Cane Creek Village in Mitchell County, North Carolina. Cane Creek Village is a low-income housing development consisting of 24 dwelling units. NHE applied for and received low income housing tax credits (“LIHTCs”) to assist in the financing of the development

NHE established Blue Ridge Housing of Bakersville, LLC (“Blue Ridge Housing”) as the for-profit owner entity of Cane Creek Village. Blue Ridge Housing has two members: NHE is the managing member holding 0.1%, and a for-profit partnership named North Carolina Equity Fund III Limited Partnership (“NCEFIII”) is the investor member holding 99.9%.

In 2000, NHE applied for and received property tax exemption for Cane Creek Village from the Mitchell County Board of Commissioners, under N.C. Gen. Stat. § 105-278.6(a)(8), which states:

(a)        Real and personal property owned by:

. . .

(8)        A nonprofit organization providing housing for individuals or families with low or moderate incomes shall be exempted from taxation if: (i) As to real property, it is actually and exclusively occupied and used, and as to personal property, it is entirely and completely used, by the owner for charitable purposes; and (ii) the owner is not organized or operated for profit.

(Emphasis added).  However, in 2011, the county tax assessor determined that Cane Creek Village should have not received a property tax exemption, arguing that NHE did not have sufficient ownership interest in Blue Ridge Housing to qualify Cane Creek Village for the exemption. NHE appealed the decision, and the North Carolina Tax Commission held that the property tax exemption should apply.

At issue in the North Carolina Court of Appeals decision was ownership. As the N.C. Court of Appeals notes, the property tax exemption statute, , G.S. 105-278.6(a)(8), does not define ownership. Keeping in mind two previous court decisions that held that (i) legal title is not determinative of ownership[iii] and (ii) property belongs to the entity possessing a sufficient interest in the property,[iv] the N.C. Court of Appeals established the following test to determine ownership for the purposes of the tax exemption:

When an otherwise-qualifying entity has an ownership interest in less than 100% of the property, we balance the actual ownership interest with other factors indicative of ownership. If other factors strongly suggest ownership, they can outweigh even a diminutive actual ownership interest. These factors may include, but are not limited to: (i) the entity’s control of the venture’s operations; (ii) the entity’s status as trustee of LLC property; (iii) the possibility of future increased actual ownership interest; and (iv) the intent of the participating parties.[v]

Using this balancing test, the Court found that NHE had a sufficient ownership interest in Blue Ridge Housing for the property tax exemption to apply, and therefore upheld the Commission’s ruling. Although NHE’s actual ownership interest in Blue Ridge is only 0.1%, there are other significant factors weighing in favor of ownership, including:

  • NHE’s control of Cane Creek Village’s operations;
  • NHE’s role as trustee of Blue Ridge Housing’s property;
  • NHE’s right of first refusal to purchase, and likely buy-out, of NCEFIII’s 99.9% ownership interest;
  • NCEFIII invested in Cane Creek Village not to obtain profits, but rather to utilize LIHTCs; and
  • The overall purpose of Cane Creek Village was not to gain profit, but rather to serve the charitable purpose of providing low-income housing.

In our view, the N.C. Court of Appeals decision is significant for two reasons: (i) it shows a continued movement toward a more favorable tax treatment for affordable rental properties financed with LIHTCs and (ii) it offers possible tax relief for owners of LIHTC properties that have ownership structures similar to Blue Ridge Housing.

In In re Appeal of Greens of Pine Glen,[vi] the Durham County’s tax assessor used the cost approach method of appraisal, which considers market rents, to appraise a 168-unit apartment complex where 100% of the units are LIHTC units. On appeal, the owner entity, structured similarly to Blue Ridge Housing, argued that the income approach should have been used for valuation purposes because the property was income and rent restricted. However, in 2003 the North Carolina Supreme Court ruled against the owner and upheld the County tax assessor’s right to establish a higher value using the cost approach and market rents.

In 2008, after a major lobbying effort by the affordable housing community, the North Carolina General Assembly enacted N.C. Gen. Stat. § 105-277.16, which requires that LIHTC developments must be assessed using the income approach of valuing property. The effect of requiring the income approach in assessing values of LIHTC projects is that the value of the property is often less when compared to the cost approach, because the income approach takes into account LIHTC restrictions which often reduce rents (and thereby reduces income received by the property).

In the 2008 case of In re Fayette Place LLC,[vii] the North Carolina Court of Appeals held that a for-profit owner, Fayette Place LLC, belonged to the Durham Housing Authority for the purposes of a property tax exemption under N.C. Gen. Stat. § 105-278.1(c)(d), where it states that “[r]eal and personal property belonging to the State, counties, and municipalities is exempt from taxation.”  Fayette Place LLC was created as a joint-venture between Development Ventures, Inc. (DVI) and Creative Housing Development Strategies, Inc. (CHD).  DVI owned 99% of Fayette Place LLC and CHD owned 1%.  CHD was a subsidiary of DVI, and DVI was owned by the Durham Housing Authority.

As noted by the court in Blue Ridge Housing, the issue in Fayette Place differed from that in Blue Ridge Housing because there was direct ownership attributable to the Durham Housing Authority; “Fayette Place is wholly controlled by subsidiary corporations of the Housing Authority.”[viii]  In Blue Ridge Housing, the non-profit NHE is affiliated with the housing authority, NRHA, only to assist NRHA in affordable housing efforts. NRHA, however, does not have an ownership interest in NHE.

The Court of Appeals decision is encouraging because more owners of LIHTC properties have an opportunity for tax relief. Those LIHTC projects utilizing an ownership structure that includes a non-profit managing member and that passes the court’s balancing test may be granted property tax exemption under G.S. 105-278.6(a)(8) in the county which the property resides.

The North Carolina Supreme Court granted discretionary review on August 27, 2013, and heard oral arguments on January 7, 2014. On January 24, 2014, the Supreme Court refused to further rule on the case, citing that discretionary review was improvidently granted. It is uncertain whether there will be further appeals of the case, but as of now, the Court of Appeals decision is the law of our state.

[i] 738 S.E.2d 802 (2013).

[ii] The court notes that Northwestern Regional Housing Authority created the Northwestern Housing Enterprises, Inc. as a 501(c)(3) non-profit corporation for the purpose of assisting the Authority. The Executive Director of NRHA is also the Vice President and CEO of NHE, as well as its sole employee. There are no members to NHE.

[iii] In re Appeal of Appalachian Student Housing Corp., 165 N.C.App. 379, 598 S.E.2d 701 (2004).

[iv] In re Fayette Place LLC, 193 N.C.App. 744, 668 S.E.2d 354 (2008).

[v] In re Blue Ridge Housing, 738 S.E.2d at 811.

[vi] 356 N.C. 642, 576 S.E.2d 316 (2003).

[vii] 193 N.C.App. 744, 668 S.E.2d 354 (2008).

[viii] Id. at 747–748, 668 S.E.2d at 357.

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