Monday, November 21, 2011

Tax exempt lih credit property

In the Matter of the Application of CHERRY CREEK TOWNHOMES, L.L.C. for Exemption from Ad Valorem Taxation in Cherokee County, Kansas.

Case Information:

Docket/Court: 103,273, Court of Appeals of Kansas

Date Issued: 10/28/2011

Tax Type(s): Property

Appeal from Court of Tax Appeals

Douglas C. Fincher and Luke P. Sinclair, of Gay, Riordan, Fincher, Munson & Sinclair, PA, of Topeka, for appellant.

No appearance by the appellee.


Before GREENE, C.J., GREEN, J., and LARSON, S.J.


NOT DESIGNATED FOR PUBLICATION (Pursuant to Kansas Supreme Court Rule 7.04(f), unpublished opinions are not precedential and are not favored for citation. They may be cited for persuasive authority on a material issue not addressed by a published Kansas appellate court opinion.)

Cherry Creek Townhomes, L.L.C. (Cherry Creek) appeals a decision of the Court of Tax Appeals (COTA) denying its application for exemption from ad valorem taxation on its 16—unit townhouse development in Columbus, Kansas, which is to be utilized exclusively for rentals to elderly persons of low to very low income.

Cherry Creek argues that COTA erred in basing its exemption denial on the allocations of tax credits to its investor members, which COTA characterized as a simultaneous use beyond the exclusive use requirements of K.S.A.2008 Supp. 79—201b Fifth.

We agree with Cherry Creek, reverse COTA, and remand with directions to grant the application for ad valorem tax exemption. In doing so, we rely on the rationale and result in In re Tax Exemption Application of Kouri Place, 44 Kan.App.2d 467 , 239 P.3d 96 (2010) , which differs from our case only in that Kouri Place involved an application for ad valorem tax exemption under K .S.A. 79—201b Sixth. However, for purposes of the exclusive use provisions at issue in both cases, K.S.A. 79 —201b Fifth and Sixth are indistinguishable.

We further follow another decision of the Court of Appeals involving substantially identical facts and issues, In re Tax Exemption Application of Richmond Place, L.L.C., No. 102,499, 2010 WL 3732017 (Kan.App.2010) (unpublished opinion). Finally, we point out that another panel of our court has before it a case with similar facts to ours, In re Tax Exemption Application of Friendship Place, No. 103,274 , which was heard on September 21, 2011.

The parties and COTA are familiar with the record and testimony which we will not set forth in great detail but shows the following:

Cherry Creek is a Kansas limited liability company with three members. Columbus Housing, Inc., a nonprofit corporation is the managing member with a .01% interest in Cherry Creek.

An investment group known as Kansas Equity Fund V, L.P. (Kansas Equity Fund) has a 99.99% interest in Cherry Creek. In exchange for its cash contributions, Kansas Equity Fund will receive federal income tax credits under 26 U.S.C. § 42 (2006).

Midwest Housing Assistance Corporation (Midwest Housing) is a special member. It provides support services and can temporarily succeed the managing member if Columbus Housing were removed or unable to continue its role.

The members in Cherry Creek entered into an extensive operating agreement in December 2005 which defines in great detail their duties and relationships to each other. The members have subsequently twice amended the agreement.

According to the operating agreement, Cherry Creek's purpose is as follows:

“The purposes of the Company are to acquire, finance, construct, own, maintain, improve, operate, and lease housing units consistent with the requirements of Section 42 of the [United States] Code for the benefit of elderly individuals of low and moderate income in a manner that addresses the needs for housing and for security that is unique to the elderly.”

To achieve its stated purpose, Cherry Creek agreed to and caused to be constructed a 5—building apartment complex consisting of 16 units at 1101 Merle Evans Drive in Columbus, Kansas. Construction began on April 13, 2007, and concluded on March 6, 2008. The apartments are rented exclusively to elderly persons with low incomes. Cherry Creek holds legal title to the apartment complex.

Under the operating agreement, none of the three members comprising Cherry Creek shall have any ownership interest in the complex during Cherry Creek's existence. Furthermore, Kansas Equity Fund and Midwest Housing (investor members) are each prohibited from taking part “in the management, control, conduct, or operation of [Cherry Creek] ... or have any right, power or authority to act for or bind the Company.” Similarly, neither member can bring “an action for partition or dissolution” so long as Cherry Creek is operated in accordance with Section 1.04 of the operating agreement, which specifies the purposes of Cherry Creek as above stated. The investor members are liable only for their capital contributions and are not liable for “any debts, liabilities, contracts, or obligations of the company.”

While the exact financing amounts are not ultimately significant to our decision, the great majority of the capital costs of the Cherry Creek apartment complex come from Kansas Equity Fund in the amount of $1,292,604; Columbus Housing contributes $47,745 and Midwest Housing $10. Horizon Bank provides a $458,000 permanent loan, and the Federal Home Loan Bank provided an interest-free loan of $72,000.

In exchange for its cash payment, Kansas Equity Fund receives $1,334,360 in Section 42 federal income tax credits. As Cherry Creek observes in testimony, the Section 42 tax credits are of no immediate value to nonprofits because nonprofits have no tax liability to offset. Hence, Cherry Creek's three-member structure enables it to transfer the Section 42 credits to Kansas Equity Fund which can reap a direct benefit from the tax liability offsets afforded by the credits. Fred Bentley, director of rental housing for the Kansas Housing Resources Corporation and administrator of the Low Income Housing Tax Credit Program, testified at the COTA hearing that the credits are attractive to for-profit investors because the credits can be purchased at a discount of varying amounts. Likely investors include financial institutions or insurance companies with a Chapter C corporate status.

Under § 9.05 of the operating agreement after the 15—year Section 42 compliance period has expired, Columbus Housing has a 1—year right of first refusal to purchase the apartment complex for the greater of $100 or the sum of various outstanding indebtedness or other liabilities. Testimony of Rick Staab at the hearing established (1) that without Section 42 financing, a not-for-profit could not acquire a similar property with conventional financing, (2) the amount of equity the low income housing tax credits (LIHTC) builds into the project inures solely to the benefit of the managing member (Columbus Housing), and (3) it is a foregone conclusion that the managing member in the exercise of good business judgment would ultimately exercise the option to purchase the subject property.

On June 27, 2008, Cherry Creek filed an application for an ad valorem tax exemption pursuant to K.S.A.2008 Supp. 79—201b Fifth for its subject property. The Cherokee County appraiser recommended the exemption be granted and continues to support Cherry Creek's position as it has filed no brief in this appeal.

Testimony and evidence at the hearings on Cherry Creek's application indicated that granting the property tax exemption would not create an economic benefit to any investor member and it was more likely that denial of the exemption would create a benefit to the investor member by creating a pass through operating loss deduction. There was also testimony that the investor members received nothing beyond the Section 42 credits and the use of the credits was analogous to a third-party financing arrangement.

On August 18, 2009, COTA issued its order denying Cherry Creek's application for an ad valorem tax exemption. COTA concluded that “the subject property is not actually and regularly used exclusively for housing of elderly persons as required by K.S.A.2008 Supp. 79—201b Fifth. The COTA order stated:

“The appellate courts have long recognized that property for lease, investment or profit is not exempt from taxation unless specifically provided by the legislature. [Citations omitted.]

“The term 'used exclusively' is not limited to solely the physical use of the property by the party in possession, but encompasses all uses of the property, including intangible investment purposes. [Citations omitted.] ...

“There are simultaneous uses of the subject property in this case. As stipulated, the subject property is physically used exclusively as housing for low-income elderly persons. However, the 'Investor Members,' including Kansas Equity Fund V, L.P., gain a financial advantage by receiving an annual allocation of tax credits in exchange for their investments. From the point of view of Kansas Equity Fund V, L.P., the subject property is a financial investment. There is no doubt that there exists a simultaneous, nonexempt, financial use of the subject property by the Investor Members of the applicant. Even if there were doubt regarding whether the investment use was a non-exempt simultaneous use of the property, the doubt would have to be resolved against the applicant. Kansas Avenue Properties, 246 Kan. at 166 .”

Cherry Creek filed a petition for reconsideration with COTA which was denied. Cherry Creek has timely filed a petition for judicial review of the COTA decision with our court.

We will not here set forth the rationale and language of In re Tax Exemption of Kouri Place which we have carefully considered. We fully adopt the Kouri Place decision and the result it requires. We specifically have considered all of the language of Kouri Place which distinguishes it from the decision of another panel of our court in In re Tax Exemption Application of CLASS Homes I, 44 Kan.App.2d 121 , 234 P.3d 35 (2010) . We adopt such reasoning and distinguishing language in its entirety.

Our result here is identical to that reached in the Richmond Place appeal which we have previously noted.

Reversed and remanded with directions to grant the requested ad valorem tax exemption.

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