Indiana Board of Tax Review may not ignore Taxpayer’s legal arguments; Totality of Evidence supported 100% charitable purpose exemption for apartment complex

Indiana Board of Tax Review may not ignore Taxpayer’s legal arguments; Totality of Evidence supported 100% charitable purpose exemption for apartment complex

Apartment complex was 100% exempt, where Owner voluntarily charged below market rents, minimized evictions, and provided certain services and facilitated access to other services for tenants. 

Name: Hebron-Vision, LLC v. Porter County Assessor

Date Issued: October 28, 2019

Property Type: 80-unit apartment complex

Assessment Years: 2012-2015

Point of Interest: Reversing the Indiana Board of Tax Review, the Tax Court held that, based on a reasonable review of the totality of record evidence, an apartment complex was owned, occupied and predominantly used for charitable purposes — and should have received a 100% property tax exemption. Taxpayer voluntarily charged tenants below market rents and minimized evictions, as well as provided tenants with access to and facilitated the provision of social services and activities.

Synopsis: Vision Communities, Inc., a non-profit corporation, was the sole member of Hebron-Vision, LLC, which in 2017 purchased the subject property, a Section 42 80-unit apartment complex in Porter County. Despite receiving no tax credits upon acquiring the complex, Owner continued to operate the facility as a Section 42 complex for the benefit of low-income individuals and families. During the tax years at issue, 95% of the residents’ annual incomes were at or below 60% of the area median income. The complex was deemed exempt from property tax for the 2008 to 2011 tax years. However, the County Board later denied the exemption for the 2012 to 2015 tax years.  On appeal, the Indiana Board of Tax Review ruled that Owner failed to prove application of the exemption was warranted.  The Tax Court reversed.

1. Indiana Board may not ignore a taxpayer’s legal argument. Owner argued that the federal government and State of Indiana had assumed the burden of providing affordable low-income housing. The Assessor did not contradict this argument; rather, he claimed Owner did not alleviate any public burden because it received subsidies from the government. The Indiana Board’s final determination only recited these arguments. It was erroneous, the Court held, not to issue specific findings regarding the validity of Owner’s argument. The Court explained that the Indiana Board “may not simply refuse to consider probative evidence but must deal with it in some meaningful manner” and “must address the validity of a party’s legal argument, not simply ignore it.” Here, the statutes cited by Owner “established that the federal government as well as the State of Indiana assumed the burden of providing affordable housing to certain individuals and families.”

2. Indiana Board’s findings regarding key matters were not supported by substantial evidence. The Indiana Board’s findings must be supported by substantial evidence or “evidence that reasonable minds might accept as adequate to support” its conclusion. Reviewing the record evidence as a whole, the Court held that the Board missed the mark on several factual items.

a. Management fees. The unrebutted evidence demonstrated that the management expenses were legitimate, not excessive, and that the manager (and its owners) did not profit from the operation of the complex. The Board erroneously, and inexplicably, capitalized Owner’s management expenses – an analysis that “has no basis” and “was flawed” to the extent the Board was attempting to apply the income approach. The Board’s “methodology failed to produce a reliable estimate of value and thus lacks probative value.”

b. Rental rates. Owner presented fair market rent information developed by HUD, which is used to establish rental amounts for its rental assistance programs. Rental rates for the subject complex were lower than HUD’s fair market determinations – “and thus, below market.” Further, the Assessor’s market rent analysis lacked probative value, because it was based on seven properties that the Assessor failed to show were truly comparable. The Board, moreover, acted arbitrarily and capriciously in rejecting Owner’s rent analysis, where its ruling “does not reveal why it questioned the comparability” of the comparable rent properties to the subject complex. Finally, the Board incorrectly concluded that testimony by Owner’s appraiser was conclusory, where the record shows the basis for the appraiser’s market rent observations.

c. Residents’ income levels and screen process. The Indiana Board wrongly rejected the exemption claims, in part, because Owner was not selecting tenants “most in need of charitable hoursing.” The record evidence proved that the tenants were, in fact, needy. “Indisputably” the evidence shows that some residents required additional financial assistance “to make ends meet” despite Owner’s below market rental rates. And it is a “faulty legal premise,” the Court held, that charity must be provided to the “neediest.” The Court summarized: “When the evidence is considered in light of the relevant statutory provisions, it indicates that [the subject complex’s] residents were proper subjects of charity.”

d. Additional services. The three-prong test to establish a charitable purpose exemption does not require that the same entity own, occupy and use the property in question. When that unity is lacking, the Court must ensure that the “particular arrangement is not driven by a profit motive.” (citation omitted.) When revenues exceeded expenses, they were reinvested into the complex or used to further other charitable purposes. In addition, Owner provided tenants access to several services – e.g. free tax preparation and blood pressure screenings, as well as on-site educational programs. Moreover, Owner worked to prevent evictions, which were minimal during the contested years. Based on the totality of the evidence, the Indiana Board erred in finding that Owner’s provision of additional services did not relieve human want or provide a public benefit.

3. Owner was not required to completely alleviate the government of obligations. A charitable purpose relieves “some part” of the government’s burden. A taxpayer must provide evidence that a government burden exists, and that the burden is relieved “beyond the extent” of governmental grants. The federal and state governments clearly assumed a burden to provide affordable housing. Owner helped to alleviate that burden. In this case, neither Owner (including its single member non-profit) nor its manager received tax credits for the subject complex. And Owner voluntarily charged below market rents, kept evictions to a minimum, and provided services or facilitated provision of those services. There was “absolutely no evidence” that the subject complex was used to generate a profit for the manager or any other private organization or person.

In conclusion, “[g]iven the totality of the evidence, . . . the Indiana Board erred when it concluded that [Owner] failed to establish that it owned, occupied and used its property for charitable purposes, and thus, [the subject complex] qualified for a charitable purpose exemption during the years at issue.”

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