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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Horan v. Kenai Peninsula Borough Board of Equalization (3/11/2011) sp-6544

Horan v. Kenai Peninsula Borough Board of Equalization (3/11/2011) sp-6544, 247 P3d 990

        Notice:   This opinion is subject to correction before publication in the PACIFIC REPORTER. 
        Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts, 303 
        K   Street,   Anchorage,   Alaska   99501,   phone   (907)   264-0608,   fax   (907)   264-0878,   email 
        corrections@appellate.courts.state.ak.us. 

                 THE SUPREME COURT OF THE STATE OF ALASKA 

SHANE HORAN, Kenai Peninsula                        ) 
Borough Assessor,                                   )    Supreme Court No. S-13333 
                                                    ) 
                        Appellant,                  )    Superior Court No. 3KN-07-00686 CI 
                                                    ) 
        v.                                          )    O P I N I O N 
                                                    ) 
KENAI PENINSULA BOROUGH                             )   No. 6544 - March 11, 2011 
BOARD OF EQUALIZATION, and                          ) 
PACIFIC PARK LIMITED                                ) 
PARTNERSHIP,                                        ) 
                                                    ) 
                         Co-Appellees.              ) 
                                                    ) 
                                                    ) 
PACIFIC PARK LIMITED                                ) 
PARTNERSHIP,                                        )   Supreme Court No. S-13493 
                                                    ) 
                         Cross-Appellant,           ) 
                                                    ) 
        v.                                          ) 
                                                    ) 
SHANE HORAN, Kenai Peninsula                        ) 
Borough Assessor,                                   ) 
                                                    ) 
                         Cross-Appellee.            ) 
                                                    ) 

                Appeal from the Superior Court of the State of Alaska, Third 
                Judicial District, Kenai, Anna M. Moran, Judge. 

                Appearances:        Scott Bloom, Soldotna, for Appellant/Cross 
                Appellee.      D.   Kevin   Williams   and   William   M.   Bankston, 

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                Bankston      Gronning     O'Hara,     P.C.,  Anchorage,      for  Co- 
                Appellee/Cross-Appellant. 

                Before:    Carpeneti, Chief Justice, Fabe, Winfree, Christen, 
                and Stowers, Justices. 

                WINFREE, Justice. 

I.      INTRODUCTION 

                A property owner and a borough property tax assessor each contend, for 

different   reasons,   that   the   superior   court   erred   in   affirming   the   borough   board   of 

equalization's final valuation for a low-income housing tax credit property.  We affirm 

a portion of the superior court's legal rulings upholding the board's interpretation of the 

relevant appraisal statute and we affirm the superior court's legal ruling affirming the 

board's choice of appraisal methodology.           But because we cannot discern (1) how the 

board   treated   relevant   federal   tax   credits  in   its   valuation   of   the   property,   (2)   the 

comparable properties for the board's finding that the assessor's valuation was "grossly 

disproportionate   as   compared   to   similar   properties,"   or   (3)   the   basis   for   the   40% 

economic obsolescence factor by which the board reduced that valuation, we remand for 

clarification by the board. 

II.     BACKGROUND 

        A.      LIHTC Program Properties 

                Congress created the low-income housing tax credit (LIHTC) program as 
part of the Tax Reform Act of 1986.1        The program is intended "to encourage the private 

sector to develop affordable rental housing."2           Each state receives and distributes an 

        1       Pub. L.   No. 99-514, 100 Stat. 2085 (1986) (codified at 26 U.S.C.  42). 

        2       Holly Ridge Ltd. P'ship v. Pritchett, 936 So. 2d 694, 695 (Fla. Dist. App.
 

                                                                                       (continued...)
 

                                                  -2-                                           6544
 

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annual allotment of low-income housing tax credits based on the state's population.3  A 

developer can apply for a ten-year allocation of federal income tax credits,4 but must 

commit to record a restrictive covenant to rent to low-income households at restricted 
rental rates for not less than 30 years,5                                  6 
                                           certify compliance annually,  and keep compliance 
records.7   The tax credits depend on continuing compliance and may be recaptured.8 

                Typically   a   developer   finances   a  LIHTC   project   by   attracting   limited 
liability partners to invest in return for use of the stream of tax credits.9  Tax credits can 

also be transferred through sale of the property, provided the new owner continues to 

        2       (...continued) 

2006); accord Cottonwood Affordable Hous. v. Yavapai Cnty., 72 P.3d 357, 358 (Ariz. 
T.C.    2003)   ("Congress     created   the   LIHTC     to  encourage    new    construction    and 
rehabilitation of existing rental housing for low-income households and to increase the 
amount of affordable rental housing for low-income households."). 

        3       26 U.S.C.  42(h)(3)(A), (C)(ii). 

        4      Id.  42(a), (f)(1). 

        5      Id.  42(g)(1)-(2), (h)(6), (i)(1). 

        6      Id.  42(l)(2); 26 C.F.R.  1.42-5(c). 

        7       26 U.S.C.  42(l)(1); 26 C.F.R.  1.42-5(b). 

        8       26 U.S.C.  42(a), (j). 

        9      E.g.,Holly Ridge Ltd. P'ship, 936 So. 2d at 695-96; Jeanne L. Peterson, The 

Low-Income Housing Tax Credit, 73 MICH.B.J. 1154, 1157 (1994) (explaining LIHTC 
property developers "generally use the vehicle of a limited partnership whereby limited 
partner investors . . . buy up [most] of [the] limited partner interests . . . in return for an 
allocation of [most] of the tax credit[s]" "because of limitations on the amount of credit 
that an individual can claim" and because some developers are nonprofits that "have no 
tax liability to offset"). 

                                                 -3-                                           6544
 

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comply with the LIHTC program.10 

        B.      Other Jurisdictions' Property Tax Treatment Of LIHTC Properties 

                Rental   restrictions   and   federal   tax   credits   pose   difficult   questions   in 

property   tax   assessments   of   LIHTC   properties,   and   courts   are   not   in   agreement   in 

resolving these questions. 

                Courts differ on whether and why rental restrictions must be considered. 

Arizona, Kansas, South Dakota, and Washington all assess property value based on 
standards similar to Alaska's statutory "full and true value" standard,11 and their courts 

have   held   that   rental   restrictions   on   LIHTC   properties   must   be  considered.12      The 

Supreme Courts of Idaho and Oregon, basing their decisions on statutes dissimilar to 
Alaska's,13 likewise have held LIHTC rental restrictions must be considered.14  The Ohio 

        10      26 U.S.C.  42(d)(7)(A). 

        11      AS 29.45.110(a) provides that property shall be assessed at its "full and true 

value," with some exceptions, and defines "full and true value" as "the estimated price 
that the property would bring in an open market and under the then prevailing market 
conditions in a sale between a willing seller and a willing buyer both conversant with the 
property and with prevailing general price levels." 

        12       Cottonwood       Affordable     Hous.,    72   P.3d    at  360   (determining      rental 

restrictions must be taken into account when assessing "full cash value or fair market 
value" in Arizona because they "have a significant impact on the value of the property"); 
In re Equalization Appeal of Ottawa Hous. Assoc., L.P., 10 P.3d 777, 778-80 (Kan. App. 
2000) (holding rental restrictions must be considered in appraising "fair market value" 
for   tax   purposes);  Town   Square   Ltd.   P'ship   v.   Clay   Cnty.   Bd.   of   Equalization,   704 
N.W.2d 896, 900, 903 (S.D. 2005) (holding rental restrictions must be considered in 
assessing "true and full value"); Cascade Court Ltd. P'ship v. Noble, 20 P.3d 997, 1000- 
02 (Wash. App. 2001) (holding rental restrictions must be taken into account in assessing 
"true and fair value in money"). 

        13       Greenfield Vill. Apartments, L.P. v. Ada Cnty., 938 P.2d 1245, 1247-48 

(Idaho 1997) (discussing IDAHO CODE ANN.  63-202 (repealed 1997), which provided 
                                                                                          (continued...) 

                                                   -4-                                                6544 

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Supreme Court has held that LIHTC rental restrictions must be considered because they 

are "police power" restrictions enacted under the General Welfare Clause of the Federal 
Constitution.15    Reaching the opposite conclusion, the North Carolina Supreme Court 

reasoned that because taxpayers choose to participate in the LIHTC program, the taxing 
authority does not need to consider the rental restrictions.16   That court noted that the 

unfavorable rental restrictions are balanced by the favorable federal tax credits.17 

                Courts also differ on whether LIHTC tax credits should be considered. The 

Arizona Tax Court, Washington and Missouri intermediate courts of appeal, and Ohio 

and    Oregon     Supreme     Courts    have   determined      that  regardless    of  whether    rental 

restrictions are taken into account in property tax assessments, the tax credits should not 
be  considered.18      The   Arizona   court   reasoned   that   the   tax   credits   (1)   are   intangible 

property in that they are "paid by the federal government as an incentive to invest in the 

        13      (...continued) 

that "actual and functional use shall be a major consideration" when assessing property 
value); Bayridge Assocs. Ltd. P'ship v. Dep't of Revenue, 892 P.2d 1002, 1003, 1005 (Or. 
1995) (discussing OR. REV. STAT.  308.205(2) (1989), which requires that properties 
subject to "governmental restriction as to use" not be assessed by reference to sales of 
unrestricted properties unless compensating adjustments are made). 

        14      Greenfield Vill. Apartments, L.P., 938 P.2d at 1248; Bayridge Assocs. Ltd. 

P'ship, 892 P.2d at 1005-07. 

        15       Woda Ivy Glen Ltd. P'ship v. Fayette Cnty. Bd. of Revision, 902 N.E.2d 

984, 986, 989-91 (Ohio 2009) (relying in part on U.S. CONST. art. I,  8). 

        16      In re Appeal of Greens of Pine Glen Ltd., 576 S.E.2d 316, 321 (N.C. 2003). 

        17      Id. at 322. 

        18       Woda Ivy Glen Ltd. P'ship, 902 N.E.2d at 991 n.2, 992 n.4; Cottonwood 

Affordable Hous., 72 P.3d at 359-60; Maryville Props., L.P. v. Nelson, 83 S.W.3d 608, 
617 (Mo. App. 2002); Cascade Court Ltd. P'ship, 20 P.3d at 1001-02;Bayridge Assocs. 
Ltd. P'ship, 892 P.2d at 1007. 

                                                   -5-                                            6544
 

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project and are not income flowing from the rental of the property" and (2) do "not 

significantly   affect   the   marketability"   of the   property   because   a   buyer   of   a   limited 

partner's   interest   receives   only   the   remainder   of   the   credits,   which   are   subject   to 
recapture.19    The Missouri, Ohio, and Washington courts focused on the tax credits' 

intangibility in concluding they must not be considered.20   The Oregon court reasoned 

that the tax credits would not affect the most probable price for the property because "the 

credits    would    be  recaptured     if  the  property   were   not   maintained     as  low-income 
housing."21 

                Reaching   the   opposite   conclusion,   courts   in   Georgia,   Idaho,   Illinois, 

Indiana, Michigan, Pennsylvania, South Dakota, and Tennessee have held that LIHTC 

tax   credits   cannot   be   ignored   when   rental   restrictions   are   taken   into   account   in   the 
absence of contrary statutory authority.22        The Georgia court rejected the argument that 

tax credits should be ignored as valueless because they are allocated to a limited partner 

        19      Cottonwood Affordable Hous., 72 P.3d at 359. 

        20      Maryville Props., L.P., 83 S.W.3d at 612-17; Woda Ivy Glen Ltd. P'ship, 

902 N.E.2d at 992 n.4; Cascade Court Ltd. P'ship, 20 P.3d at 1002. 

        21      Bayridge Assocs. Ltd. P'ship, 892 P.2d at 1007. 

        22      Pine Pointe Hous., L.P. v. Lowndes Cnty. Bd. of Tax Assessors, 561 S.E.2d 

860, 863, 865-66 (Ga. App. 2002); Brandon Bay, Ltd. P'ship v. Payette Cnty., 132 P.3d 
438, 441 (Idaho 2006); Rainbow Apartments v. Ill. Prop. Tax Appeal Bd., 762 N.E.2d 
534, 536-37 (Ill. App. 2001),superseded by statute, 35 ILL.COMP.STAT.ANN.200/1-130 
(1999); Pedcor Invs.-1990-XIII, L.P. v. State Bd. of Tax Comm'rs, 715 N.E.2d 432, 437- 
38 (Ind. T.C. 1999); Huron Ridge LP v. Ypsilanti Twp., 737 N.W.2d 187, 198 n.5, 199 
(Mich. App. 2007); Parkside Townhomes Assocs. v. Bd. of Assessment Appeals of York 
Cnty., 711 A.2d 607, 609-11 (Pa. Commw. 1998); Town Square Ltd. P'ship, 704 N.W.2d 
at 903; Spring Hill, L.P. v. Tenn. State Bd. of Equalization, No. M2001-02683-COA-R3- 
CV, 2003 WL 23099679, at *2, *14 (Tenn. App. Dec. 31, 2003). 

                                                  -6-                                             6544
 

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and   expire   before   the   rental   restriction   period   ends.23  Illinois   and   Michigan   courts 

rejected the argument that tax credits should be ignored as intangible.24 

        C.      Alaska Property Tax Framework For LIHTC Properties 

                Alaska Statute 29.45.110(a) requires that property be assessed at its "full 

and true value," defined there as "the estimated price that the property would bring in an 

open market and under the then prevailing market conditions in a sale between a willing 

seller and a willing buyer both conversant with the property and with prevailing general 

price levels." 
                In Dash v. State25 we recognized appraisers' three usual approaches to 

valuing real property: 

                They are the cost approach, the market data approach, and the 
                income approach.  The cost approach, which arrives at value 
                by determining the current cost of reproducing a property less 
                depreciation, is used only when the property is improved. 
                The market data approach measures value by comparison to 
                recent sales of similar property. The income approach, which 
                is concerned with the present worth of future benefits from 
                the   property,    arrives   at  present  value    by  discounting     or 
                'capitalizing' the future incomewhich could be derived from 
                the   property.    The   income   capitalization   method   involves 
                three steps: 

                        (1) an estimate of the income which the property is 
                        capable of producing, including both periodic income 
                        and the income to be derived from future sale of the 
                        property;     (2)   an   estimate    of  the   rate  of   return 
                        (capitalization rate) an investor would require in order 

        23      Pine Pointe Hous., L.P., 561 S.E.2d at 863-64. 

        24      Rainbow Apartments, 762 N.E.2d at 537; Huron Ridge LP, 737 N.W.2d at 

195, 198-99. 

        25      491 P.2d 1069 (Alaska 1971). 

                                                  -7-                                             6544
 

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                        to induce him to make an investment with the risk and 
                        lack of liquidity of an equity interest in the particular 
                        property; (3) an application of this capitalization rate 
                        to the estimated income to derive the present value of 
                        the estimated income.[26] 

                In 2000 the Alaska legislature added a new subsection to AS 29.45.110.27 

The bill's initial draft mandated valuing all LIHTC properties based on rental restrictions 
without adjustment for tax credits.28       The bill's proponents explained in committee that 

the bill was prompted by a change in the Municipality of Anchorage's interpretation of 
full and true value for LIHTC properties.29           Although the Municipality had for years 

valued   LIHTC   properties   based   on   rent-restricted   income,   it   had   stopped   doing   so, 
thereby imposing higher property tax burdens.30            But legislative committees also heard 

concerns that the proposed bill would give LIHTC properties an unfair competitive 
advantage over other housing31 and reduce tax revenue to municipalities.32 

        26      Id. at 1071 (internal citations omitted). 

        27      Ch. 79,  1, SLA 2000 (H.B. 272). 

        28      House Bill (H.B.) 272, 21st Leg., 2d Sess. (Jan. 10, 2000). 

        29      Municipal Tax: Low Income Housing: Hearing on H.B. 272 Before the H. 

Comm. on Cmty. & Reg'l Affairs, 21st Leg., 2d Sess. (Alaska Feb. 1, 2000) (statement 
of Jonathon Lack, Legislative Assistant to Rep. Andrew Halcro). 

        30      Id. 

        31      Id. (statements of Pat Carlson, Assessor, Kodiak Island Borough, and Wiley 

Brooks, Certified Prop. Manager and member of Alaska Chapter Real Estate Mgmt.). 

        32      Hearing on H.B. 272 Before the S. Fin. Comm., 21st Leg., 2d Sess. (Alaska 

Apr. 13, 2000) (statement of Eric Dyrud, Real Estate Broker, member of Anchorage Bd. 
of Realtors Legislative Comm. and Alaska Bd. of Realtors Legislative Comm.). 

                                                  -8-                                            6544
 

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                The final version of the bill created AS 29.45.110(d).33   Subsection (d)(1) 

provides that when calculating the full and true value of a property qualifying for the 

LIHTC program before January 1, 2001, an assessor "shall base assessment . . . on the 

actual income derived from the property and may not adjust it based on the amount of 
any federal income tax credit given for the property."34         For properties qualifying for the 

LIHTC program on or after January 1, 2001, subsection (d)(2) directs local governments 

to determine by ordinance whether to follow subsection (d)(1) or to generally exempt 

these properties from subsection (d)(1)'s mandatory income approach and determine 
parcel-by-parcel whether to require use of that appraisal method.35 

        D.      Kenai Peninsula Borough LIHTC Properties Tax Framework 

                The Kenai Peninsula Borough Assembly (Assembly) passed an ordinance 

exempting post-2000 LIHTC properties fromAS 29.45.110(d)(1)'s mandatory valuation 
based on actual income without consideration of tax credits.36            The Assembly therefore 

decides   on   a   parcel-by-parcel   basis   whether   to   direct   the   Kenai   Peninsula   Borough 

Assessor (Assessor) to use that valuation method. 

        E.      Pacific Park LIHTC Property And 2007 Assessment 

                Pacific Park Limited Partnership (Pacific Park) owns a 30-unit apartment 

complex (Apartments) in Seward, within the Kenai Peninsula Borough (Borough).                       In 

2003   Alaska   Housing   Finance   Corporation,  the   state   agency   tasked   with   allocating 

federal income tax credits to LIHTC program participants in Alaska, allocated to Pacific 

Park   $383,833   of   tax   credits   in   anticipation  that   the   Apartments   would   be   LIHTC 

        33      See note 27, above. 

        34      AS 29.45.110(d)(1); compare id. with AS 29.45.110(d)(2). 

        35      AS 29.45.110(d)(2). 

        36      KENAI PENINSULA BOROUGH CODE (KPB) 05.12.085 (2003). 

                                                  -9-                                           6544
 

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housing. Pacific Park used the tax credits to finance the Apartments' construction. After 

construction was completed in 2004, Pacific Park recorded a 30-year restrictive covenant 

under   which   the   Apartments'   units,   with   the   exception   of   one   unit   reserved   for   a 

manager, could be rented only to low-income tenants and only at restricted rates. 

                In 2005 Pacific Park applied to the Assembly for a resolution directing the 

Assessor to value the Apartments based on actual income derived from the property. The 

resolution failed. 

                In 2005, 2006, and 2007 the Assessor valued the Apartments at $2,930,700 

using the cost approach, which is based on the rationale that a willing buyer will not pay 
more for a building than it would cost to build one just like it.37  The Assessor described 

the steps of the cost approach as:  (1) calculating the current cost to reproduce or replace 

improvements such as buildings; (2) subtracting out physical, functional, or economic 

depreciation evident in the structures; and then (3) adding in the value of the land and 

entrepreneurial   profit.      The   Assessor   used  the   cost   approach   to   value   the   nearly   90 

apartment complexes in the Borough, including Pacific Park's Apartments.                      But three 

pre-2001 LIHTC projects were revalued under the income approach required by AS 

29.45.110(d)(1), based on actual restricted rents and without consideration of federal 

income tax credits. 

                In 2007 Pacific Park had the Apartments independently appraised using the 

income approach and the restricted rents.  As explained by the Assessor, the income 

approach measures property value by capitalizing income streams and potential future 

        37      Jonathan Penna, Fairness in Valuation of Low-Income Housing Tax Credit 

Properties:   An   Argument   for   Tax   Exemption,   11 FALL  J. AFFORDABLE  HOUSING  & 
COMMUNITY DEV. L. 53, 55 (2001); accord Cascade Court Ltd. P'ship, 20 P.3d at 999 
n.4 ("The cost approach estimates the cost of producing a new or substitute property and 
adjusts   this   estimated   cost   for   differences   in   age,   utility   and   condition   between   the 
subject property and a new property."). 

                                                  -10-                                             6544
 

----------------------- Page 11-----------------------

resale into a present, lump sum value.38   The independent appraisers, Brian Z. Bethard 

and   Michael   A.   Forsland,   used   this   approach   because   "[t]he   income   approach   best 

reflects the market value at restricted rents for the subject" and because Pacific Park had 

limited the appraisal to that approach.  Bethard and Forsland projected the stabilized net 

operating income at the restricted rents, excluding property tax, as $62,089 annually and 

valued the Apartments at $652,000. 

        F.      Board Of Equalization Appeal 

                Pacific Park appealed the Assessor's 2007 valuation of $2,930,700 to the 

Borough's Board of Equalization (Board).  Upon reinspection and reevaluation, the 

Assessor calculated a total value of $3,067,800. 

                The Board heard Pacific Park's appeal on June 11, 2007.                  Pacific Park 

argued that:   (1) the Assessor had used "a fundamentally wrong principle of valuation in 

that the Assessor did not consider [the] 30-year rent restriction"; and (2) even under the 

cost   approach,   rental   restrictions   needed   to   be   considered   in   the   form   of   economic 
obsolescence.39      Pacific   Park   also   argued   that   its   federal   tax   credits   should   not   be 

considered in the assessment valuation because they are intangible. 

                The Assessor argued that: (1) Pacific Park would have to show fraud or the 

clear adoption of a fundamentally wrong valuation methodology for the Board to alter 

the valuation; (2) using the cost approach was within the Assessor's discretion as a taxing 

        38      See Dash, 491 P.2d at 1071 (describing income approach); Cascade Court 

Ltd. P'ship, 20 P.3d at 999 n.6 ("The income approach analyzes a property's ability to 
generate income and reversion and converts these benefits into an indication of present 
value."); Penna, supra note 37, at 58-59 (explaining income approach calculates property 
value by applying expected return on investment to property's net operating income, 
which is gross rents received minus operating expenses, adjusted for vacancies). 

        39      "Economic   obsolescence"   is   "diminution   in   the   value   or   usefulness   of 

property" that "results from external factors, such as decreased demand or changed 
governmental regulations."  BLACK'S LAW DICTIONARY 1107 (8th ed. 2004). 

                                                  -11-                                            6544
 

----------------------- Page 12-----------------------

authority; and (3) the cost approach maintains a level playing field between Pacific Park 

and competing businesses not in the LIHTC program.                The Assessor also argued that 

rental   restrictions   should   not   be   allowed   to   affect   the   Apartments'   value   because 

participation in the LIHTC program should be  seen either as a voluntary contractual 

agreement to restrict rents in exchange for tax credits or as an abnormally favorable 

below-market rental agreement between the owner and renters. 

                The Board found that although using the cost approach was within the 

Assessor's      discretion,   application    of  that   approach     to  the  Apartments      without 

consideration of rental restrictions or economic obsolescence resulted in a valuation that 

was "overvalued [and] grossly disproportionate as compared to similar properties." The 

Board decided that the Apartments' improvement value should be reduced by a 40% 

economic obsolescence factor. 

        G.      Superior Court Appeal 

                The   Assessor   appealed   the   Board's  decision   to   the   superior   court,   and 

Pacific Park cross-appealed.  The superior court addressed four issues encompassing all 

points on appeal.   First, the superior court held the Board did not err by not adopting the 

income approach to value the Apartments.  Second, it held the Board did not violate state 

law, borough code, or legislative intent by adjusting the Assessor's valuation.  Third, it 

held the Board did not err by finding the Assessor's application of the cost approach 

resulted in an overvalued and grossly disproportionate valuation. Finally, it held the facts 

and law supported the Board's valuation of Pacific Park's property, including the 40% 

economic obsolescence factor. 

                The Assessor appeals and Pacific Park cross-appeals. 

III.    STANDARD OF REVIEW 

                "When the superior court acts as an intermediate court of appeal in an 

administrative matter, we independently review and directly scrutinize the merits of the 

                                                 -12-                                           6544
 

----------------------- Page 13-----------------------

board's decision."40    Questions of law and fact involving agency expertise are reviewed 

under the reasonable basis standard.41 

               Whether the Board's factual findings, particularly the findings that the 

Assessor's valuation was grossly disproportionate and excessive by 40%, are "sufficient 

to   permit   appellate  review   is  a  legal  question   that  we  decide   by  exercising   our 
independent judgment."42       In the absence of a specific standard provided by statute or 

ordinance, the test of the sufficiency of an agency's findings of fact is "a functional one: 

do the [agency's] findings facilitate this court's review, assist the parties and restrain the 
agency within proper bounds?"43       This court may look to the record to clarify the agency 

decision-maker's reasoning and conclusion.44 

               Whether the Board's assessment violated relevant law is a question of law 

not   involving   agency   expertise,   and   we   therefore  review   this  question   under  the 
substitution of judgment standard.45      In doing so, "[w]e will 'adopt the rule of law that 

       40      Alford v. State, Dep't of Admin., Div. of Ret. & Benefits, 195 P.3d 118, 122 

(Alaska 2008) (quoting Alyeska Pipeline Serv. Co. v. DeShong, 77 P.3d 1227, 1231 
(Alaska 2003)). 

       41      Black v. Municipality of Anchorage, Bd. of Equalization, 187 P.3d 1096, 

1099 (Alaska 2008). 

       42      Alvarez v. Ketchikan Gateway Borough, 28 P.3d 935, 938 (Alaska 2001) 

(citing Ayele v. Unisea, Inc., 980 P.2d 955, 957 n.2 (Alaska 1999)). 

       43      Faulk v. Bd. of Equalization, 934 P.2d 750, 751 (Alaska 1997) (quoting S. 

Anchorage Concerned Coal., Inc. v. Coffey, 862 P.2d 168, 175 (Alaska 1993)). 

       44      See id. (citing S. Anchorage Concerned Coal., Inc., 862 P.2d at 175 and 

Mobil Oil Corp. v. Local Boundary Comm'n, 518 P.2d 92, 97 (Alaska 1974)). 

       45      Handley v. State, Dep't of Revenue, 838 P.2d 1231, 1233 (Alaska 1992). 

                                               -13-                                           6544 

----------------------- Page 14-----------------------

is most persuasive in light of precedent, reason, and policy.' "46 

IV.     DISCUSSION 

        A.      Appraisal Methodology And Interpretation Of AS 29.45.110 

                1.     Methodology 

                Pacific Park appeals on the ground that the Board "erred when it failed to 

adopt [Pacific Park's] appraiser's valuation using the 'income' approach" because that 

approach is the preferred method for valuing LIHTC projects. 

                The Apartments are properly valued under AS 29.45.110 subsection (a)'s 

general full and true value provision rather than subsection (d)(1)'s mandatory income 

approach without adjustment for tax credits because they did not qualify for the LIHTC 

program prior to January  1, 2001, they are located in a municipality where post-2000 
LIHTC projects are exempt from mandatory use of the statutory income approach,47 and 

Pacific Park's application for an Assembly resolution directing the Assessor to use the 

statutory income approach failed. 

                A    taxing   authority   is  allowed    to  choose    a  reasonable    method     for 

determining the full and true value of a property "so long as there was no fraud or clear 
adoption of a fundamentally wrong principle of valuation."48            Provided that a method is 

not   fundamentally   wrong,   it   does   not   even   need   to   be   recognized   by   the   appraisal 

        46      Williams v. Abood, 53 P.3d 134, 139 (Alaska 2002) (quoting Guin v. Ha, 

591 P.2d 1281, 1284 n.6 (Alaska 1979)). 

        47      KPB 5.12.085. 

        48      Fairbanks N. Star Borough Assessor's Office v. Golden Heart Utils., Inc., 

13 P.3d 263, 267 (Alaska 2000) (quoting Hoblit v. Greater Anchorage Area Borough, 
473 P.2d 630, 632 (Alaska 1970)). 

                                                -14-                                            6544
 

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community.49     Here, Pacific Park's witness Bethard testified that the cost approach is "a 

fundamentally correct approach to use, it's normal appraisal methodology," and we have 
long recognized the cost approach as a usual appraisal method for improved property.50 

Accordingly, the Board could reasonably conclude "the cost approach is an acceptable 

method of valuation."  We therefore affirm the superior court's decision upholding the 

Board's use of the cost approach to value the Apartments. 

                2.      Consideration of restricted income and tax credits 

                The Assessor appeals on the ground that the Board "impermissibly focused 

on the restricted rental income of the property."         The Assessor argues that (1) after AS 

29.45.110(d) became effective, rental restrictions could not be considered in calculating 

full and true value under AS 29.45.110(a), and (2) the failure of Pacific Park's Assembly 

resolution precludes consideration of the rental restrictions.  We disagree.   Just because 

a taxing authority is not required under state or local law to use the statutory income 

approach does not necessarily mean that it is prohibited from considering restricted rental 

rates in another valuation method, if reasonable to do so.          The Board could reasonably 

conclude that it was appropriate to consider the rental restrictions when valuing the 

Apartments   under   the   cost   approach,   and   we   affirm   the   superior   court's   decision 

upholding the Board on this issue. 

                The Assessor also appeals on the ground that the Board's valuation "failed 

to account for the federal tax credits provided to the Property."            The Assessor argues 

there is a requirement that the taxing authority consider federal income tax credits if it 

considers rental restrictions in assessing the full and true value of a LIHTC property.  As 

noted above, courts from other jurisdictions differ on whether federal income tax credits 

        49      Id. at 268. 

        50      Dash, 491 P.2d at 1071. 

                                                 -15-                                             6544 

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must be considered when rental restrictions are considered in valuing a LIHTC property. 
Some conclude that tax credits should be ignored because they are intangible property51 

or because they are subject to recapture if the rental restrictions are violated.52             Others 

conclude that tax credits should be considered because they relate directly to the real 
property.53 

                Here the Board did not expressly address the tax credits associated with the 

Apartments, and we cannot discern whether or why the Board took the tax credits into 

account or ignored them in its adjustment of the Assessor's valuation. The superior court 

noted that the Board's decision did not address these questions, but nonetheless held that 

the Board "acted within its expertise to decide that tax credits are largely intangible and 

not   appropriate   for   tax   assessment."    We  are   unable   to   affirm   the   superior   court's 

decision   on   this   record.    As   discussed   below,   we   are   remanding   to   the   Board   for 

clarification of its use of the rental restrictions to adjust the Assessor's valuation, and the 

Board should clarify its treatment of the tax credits in its subsequent decision as well. 

        B.	     The   Board's   Findings   Regarding  Disproportionate   Valuation   And 
                Obsolescence 

                The Assessor and Pacific Park both contend the Board's valuation of the 

Apartments   must   be   set   aside.    The   Assessor   argues   the   Board   did   not   accord   his 

valuation proper deference and lacked sufficient grounds to find his valuation "excessive 

or grossly disproportionate compared to other similar projects."  Pacific Park argues the 

        51      Cottonwood Affordable Hous., 72 P.3d at 359; Maryville Props., L.P., 83 

S.W.3d at 617; Woda Ivy Glen Ltd. P'ship, 902 N.E.2d at 992 n.4; Cascade Court Ltd. 
P'ship, 20 P.3d at 1002. 

        52      Cottonwood   Affordable   Hous.,   72   P.3d   at   359; Bayridge   Assocs.   Ltd. 

P'ship, 892 P.2d at 1007. 

        53      Brandon Bay, Ltd. P'ship, 132 P.3d at 441; Huron Ridge LP, 737 N.W.2d 

at 198-99. 

                                                  -16-	                                           6544
 

----------------------- Page 17-----------------------

Board should have recognized "complete" economic obsolescence due to the rental 

restrictions and, even under the cost approach, should have reached the same valuation 

as Pacific Park's appraiser under the income approach. 

                "The   only   grounds   for   adjustment   of assessment   are   proof   of   unequal, 

excessive, improper, or under valuation based on facts that are stated in a valid written 
appeal   or   proven   at   the   appeal   hearing."54 In   reviewing   the   Board's   findings,   we 

understand the word "overvalued" to be synonymous with "excessive" and the phrase 

"grossly disproportionate as compared to similar properties" to be synonymous with 

"unequal."      Our "threshold question . . . is whether the record sufficiently reflects the 
basis for the [Board's] decision so as to enable meaningful judicial review."55 

                1.      "Overvalued" finding 

                The Board found the failure to factor in rental restrictions and economic 

obsolescence made the Assessor's valuation excessive.                The Assessor argues that his 

failure to incorporate rental restrictions in the form of economic obsolescence did not 

render the valuation excessive because economic obsolescence cannot measure internal 

conditions such as rental rates.        But although the deed restriction limiting a LIHTC 

property's rental rates is part of the property itself, the marketplace's reaction to the deed 
restriction is external.56    In this way, economic obsolescence can measure the external 

reaction   to   the   deed   restriction   on   the  Apartments.57   The   Board   could   reasonably 

        54      AS 29.45.210(b). 
 

        55      Faulk, 934 P.2d at 751 (quoting Fields v. Kodiak City Council, 628 P.2d
 

927, 932 (Alaska 1981)). 

        56      Pedcor Invs.-1990-XIII, L.P., 715 N.E.2d at 437. 

        57      See   Cascade   Court   Ltd.   P'ship,   20   P.3d   at   1002   n.32   (stating   "deed 

restrictions affect the income-producing ability of the projects and thus affect their value"
 
                                                                                       (continued...)
 

                                                 -17-                                            6544
 

----------------------- Page 18-----------------------

determine   the   Assessor's   valuation   was  excessive   because   it   failed   to   account   for 

economic   obsolescence,   and   to   this   extent   we   affirm   the   superior   court's   decision 

upholding the Board on this issue. 

                 Pacific Park argues the Board should have recognized "complete" economic 

obsolescence       instead    of  a   40%    factor.    In   applying     the  40%     factor,   the  Board 

acknowledged it heard testimony that "up to a 50% reduction" would be reasonable as 

an   economic   obsolescence   factor.         Pacific   Park   accurately   clarifies   that   Bethard's 

testimony suggested a 50% factor at the hearing to account for the depressed nature of 

the general housing market in Seward, and implies that its 30-year rental restrictions 

would make the Apartments even less desirable to a potential buyer.  Pacific Park never 

quantified the additional economic obsolescence due to rental restrictions except to assert 

that an appropriate economic obsolescence factor would render a cost-approach valuation 

similar to an income-approach valuation. 

                 The   Board's   oral   findings   do   not   specify   whether   its   40%   economic 

obsolescence   factor   accounts   for   the   general   housing   market   in   Seward,   the   rental 

restrictions,   or   both,   stating   simply   "the   cost   approach   should   include   a   factor   for 

economic   obsolescence."          The   Board's   written   findings   state   the   Apartments   were 

overvalued       because     "[t]he    assessment      did   not   include     a  factor    for   economic 

obsolescence, even though the property is burdened by rent restrictions that run with the 

land," indicating the 40% factor relates at least in part to the rental restrictions. 

                 At oral argument before us, counsel for Pacific Park stated that the 40% 

factor chosen by the Board lacked an evidentiary basis.                   The Assessor stated at oral 

argument that he understood the restricted rental income was the sole reason for the 

        57       (...continued) 

and an "[a]ssessor may conclude that the deed restrictions cause the projects to suffer 
economic obsolescence" (citing Pedcor Invs.-1900-XIII, L.P., 715 N.E.2d at 437)). 

                                                    -18-                                                 6544 

----------------------- Page 19-----------------------

Board's 40% obsolescence factor and the general Seward market was not taken into 

account by the Board.          It is not clear to us why the Board applied a 40% economic 

obsolescence factor when the only quantified factor presented to the Board was the 50% 

obsolescence factor accounting for the depressed Seward rental market in general.  We 

therefore remand to the Board for clarification and explanation of its decision on this 
issue and for further factual findings as it deems necessary.58 

                2.      "Grossly disproportionate" finding 

                The Board's oral and written findings do not state the comparison from 

which it determined the Assessor's valuation to be unequal. 

                Pacific Park argued to the Board that the Assessor's valuation was unequal 

to valuations of other LIHTC properties in Alaska.             But as the Assessor pointed out to 

the Board, the other LIHTC properties in Alaska are valued under AS 29.45.110(d) - 

which mandates they be assessed under the income approach based on actual income 

without adjustment for federal tax credits - because they either qualified as LIHTC 

properties before January 1, 2001, or are located in municipalities without an ordinance 
allowing for a different valuation method.59 

        58      We reiterate our earlier point that if the Board adjusts the Assessor's cost- 

approach valuation because of the rent restrictions, the Board must also clarify and 
explain its treatment of the federal tax credits in its analysis of the rent restrictions' 
impact on the Apartments' value.          It seems to us that if rent restrictions are relevant to 
the   cost-approach   valuation   analysis,   the     same   would   be   true   for   any   tax   credits 
providing some economic advantage to offset the effect of the rent restrictions.  But we 
leave the relevant considerations and determinations in the first instance to the Board. 

        59      Pacific   Park   also   compared   its  property   valuation   to   those   of   LIHTC 

properties   in   other   western   states   that   value   this   type   of   property   based   on   rental 
restrictions.     Pacific   Park   noted    that some     LIHTC     properties    are  valued    without 
consideration of rental restrictions by statute, but that courts and boards of equalization 
in other states have interpreted "full and true value" to allow for adjustment based on 
                                                                                         (continued...) 

                                                  -19-                                               6544 

----------------------- Page 20-----------------------

                The    Assessor    made    particular   mention    of  another    post-2000    LIHTC 

property in the Borough valued under the cost approach without adjustments for rental 

restrictions or federal tax credits.  But Pacific Park pointed out that the property was not 
appropriate for comparison because its owners participated in the Section 515 Program,60 

which Pacific Park explained provides for a flexible on-going federal subsidy to help the 

owners cope with high property taxes. 

                The Assessor asserted the valuation was not unequal given the appropriate 

comparison to the nearly 90 apartment complexes in the Borough appraised under the 

cost    approach.      The   Board's    finding   that  the   Assessor's    valuation    was   grossly 

disproportionate "because" of the failure to factor in recorded restrictions suggests that 

the Board compared the Apartments to the non-LIHTC apartment complexes, which are 

unencumbered by rental restrictions.  This would be consistent with the Board's finding 

that the Assessor's valuation was excessive for the same reason.                But given the cost- 

approach valuation of all the properties, the Board could not have found the valuation 

grossly   disproportionate   compared   to   other   Borough   apartment   complexes   unless   it 

considered those properties' actual rental or fair market rental rates as well.  There is no 

evidence in the record regarding those rental rates, except for Pacific Park's appraiser's 

testimony suggesting that the depressed housing market in Seward would make "up to 

[a] 50% reduction" in value reasonable due to economic obsolescence.                    The obvious 

implication from this testimony is that restricted rents at the Apartments might not be 

significantly   less   than   current   apartment  rental   rates   in   Seward,   contradicting   the 

argument   that   the   Apartments   were   over-valued   in   comparison   to   other   apartment 

        59      (...continued) 

rental restrictions.     The Board's oral and written findings do not mention how other 
western states value LIHTC properties. 

        60      Housing Act of 1949  515, 42 U.S.C.  1485. 

                                                 -20-                                              6544 

----------------------- Page 21-----------------------

complexes.61 

                Despite reviewing the parties' briefing and the record for clarification,62 we 

cannot   discern   with   any   reasonable   certainty   what   the   Board   used   as   comparison 

properties for its finding that the Assessor's valuation was "grossly disproportionate as 

compared to similar properties."  We therefore remand to the Board for clarification and 

explanation of its decision on this issue and for further factual findings as it deems 

necessary. 

V.      CONCLUSION 

                We    AFFIRM       the  superior   court's   decision   upholding     the  Board   of 

Equalization's state law and borough code interpretation allowing the cost approach and 

the   consideration    of  LIHTC      rental  restrictions  in  connection     with  that  appraisal 

methodology.  We VACATE the superior court's decision upholding the Board's final 

valuation and REMAND to the Board for findings that enable review of the basis for its 

decision. 

        61      Another     implication    from   this  testimony    is  that  a  reduction   in  the 

Apartment's value for economic obsolescence arising from the depressed housing market 
might render the valuations for all other apartment complexes excessive and unequal. 
But we leave the relevant considerations and determinations in the first instance to the 
Board. 

        62      See Faulk, 934 P.2d at 751 (noting court can look to record in reviewing 

sufficiency of agency's findings). 

                                                -21-                                             6544 
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