Kathy Mesner has a word for the potential fallout from a property valuation dispute in Lancaster County. She’s not involved in the case, but she’s keeping close tabs on it, as is nearly every other affordable housing developer in Nebraska.
The word: Catastrophic.
“I don’t think it’s too much to say it may be catastrophic not only in terms of bankrupting projects … but displacing all these low-income households across the state,” said Mesner, an attorney and president of Central City-based Mesner Development Co.
The case in question has morphed in the past year from a narrow disagreement about how to value 21 Lincoln-area properties into a referendum on a state law meant to support development of affordable, or low-income, housing.
The case, currently before the Nebraska Court of Appeals, may ultimately end up before the Nebraska Supreme Court. State lawmakers may also tangle with the issue when the Legislature reconvenes in January.
If Lancaster County successfully argues the law is unconstitutional, it would lead to higher valuations – more than 300% higher in some cases. The resulting larger property tax bills could jeopardize many affordable housing projects at a time when the state faces a widening housing shortage.
County officials, for their part, say they are simply following the law and striving for fairness.
“No one on the county commission wants to be punitive and cause any harm to … that low-income and affordable housing that we know we so need in this community,” said Christa Yoakum, chair of the Lancaster County Board.
“What we really are seeking here is guidance, whether it comes through the courts now or whether it comes this next legislative session. We want to get this right.”
Guidance became necessary in January when multiple Section 42 properties – a type of low-income housing also referred to as LIHTC – ended up with $0 valuations.
That included a 28-unit development in Lincoln that had a value of $1.04 million the previous year. Others had negative valuations, meaning the property would be worth more as a vacant lot than with the existing building on it.
“We couldn’t ignore that,” said Phil Hughes, an appraiser with the Lancaster County Assessor’s Office.
State law requires assessors to use an income approach to calculate the value of Section 42 properties. It factors in actual income and actual expenses.
The thinking behind that law: Section 42 properties, unlike a normal rental, are restricted in how much they can charge. They’re often committed to providing services that carry additional costs. Developers agree to these and other restrictions in exchange for federal tax credits to help pay for construction. The restrictions typically last 30 to 45 years.
But the law states that if an assessor believes the income approach fails to calculate “actual value” then they “shall” present that to the local board of equalization, which can then petition the state to use a different method.
The Lancaster County Assessor’s Office did just that and warned that the county could face equalization protests if it didn’t act. The State Constitution allows taxpayers who believe they are disproportionately shouldering the property tax burden to protest their valuation and ask that it be brought in line with similar properties.
“We have to follow state statute … on these properties, just like on your home, just like on ag or commercial property,” said Lancaster County Assessor/Register of Deeds Dan Nolte, who was elected in 2022. “We don’t have the luxury of picking and choosing which statutes to follow.”
The Lancaster County Board of Equalization agreed and petitioned the state to use a different valuation method for 21 Section 42 developments.
After a two-day hearing in March, a state commission sided with the county and allowed it to use an alternative method for this year.
But it became clear during the hearing that property owners and developers of affordable housing believed the law entitled their properties to be assessed at below market level, said Hughes of the county’s assessor’s office.
The county’s posture evolved from wanting to use a different valuation method – which would only affect the 21 properties in question – to asserting that the statute itself violates the constitution.
“There was no initial intention to go down that road,” Hughes said, “but through some of the testimony of the developers … that’s where we, unfortunately, ended.”
When developers appealed the Tax Equalization and Review Commission’s ruling in court, the county responded with its new, more sweeping argument: The law is unconstitutional.
And it put that belief into practice by assessing all Section 42 properties just like any similar class of property, leading to sizable swings in valuations.
Reese Estates, a development consisting of 15 single-family homes in Waverly, went from a total valuation of $710,500 in 2022 to $3.76 million this year – a 429% increase.
The Lexington Assisted Living Center in Lincoln, which had a valuation of $4.5 million in 2022, is now valued at nearly $19.7 million – a 335% increase.
“We’re all pretty much in the same group – we don’t make enough money to pay the taxes we’re being asked to pay,” said Fred Hoppe with Hoppe Development, a Lincoln-based development company that specializes in affordable housing.
And that, in turn, jeopardizes the future of affordable housing, both in Lincoln and across the state, Hoppe and others believe.
If a development goes bankrupt it eventually sheds the Section 42 restrictions, allowing the new owner to charge any amount they want for rent.
And the state’s housing shortage is already especially acute for lower-income Nebraskans, according to a 2022 report from the Nebraska Investment Finance Authority. There is a statewide shortage of 32,230 rental units for extremely low-income households, as well as a lack of low- to middle-income workforce housing, the report says.
Mesner said her company has developed or built around 70 affordable housing projects in Nebraska and Kansas over the years. Nearly all of them have been rented out the moment construction is finished, she said.
In Grand Island, they routinely have a waiting list that stretches past more than 100 applicants. Hastings isn’t much different, she said.
There are various state and federal programs designed to help with housing affordability. None directs as much money nationally toward new and rehabilitated housing as Section 42.
“It’s a really important program … nationally speaking it’s the largest federal program there is,” said Andrew Aurand, senior vice president for research with the National Low Income Housing Coalition.
Lancaster County currently has 1,610 Section 42 units and another 774 in the pipeline, according to NIFA, which is responsible for awarding the federal tax credits in Nebraska. Statewide, there are 12,320 of these units and 2,851 in the pipeline.
The City of Lincoln’s affordable housing action plan acknowledges the importance of Section 42 housing. It calls for reducing barriers and taking other actions to incentivize more Section 42 projects in Lincoln.
T.J. McDowell Jr., chief of staff for Mayor Leirion Gaylor Baird, declined to comment on the Lancaster County case but said that the mayor’s office is monitoring it.
Others haven’t hesitated to share their concerns.
A group that includes the Lincoln Community Foundation, Lincoln Chamber of Commerce and the nonprofit Nebraska Housing Resource, among others, filed a court brief arguing the existing law is both constitutional and critical for ensuring access to safe, decent and affordable housing.
A ruling upholding the county’s position, they warned, “may also effectively ring a death knell on future LIHTC construction in Nebraska because … developers and investors will look to build LIHTC projects in the majority of other states that do use the income approach.”
Hoppe, who currently has multiple Section 42 projects in the pipeline in Lincoln, pointed to the most recent round of applications as an indicator for what could be in store.
Of the 17 applications submitted, only one was for a project in Lancaster County, according to NIFA. It was not among the seven Section 42 projects conditionally approved at NIFA’s Oct. 20 meeting.
Hoppe blamed the lack of proposals in Lancaster County on the uncertainty over valuations that has been brewing all year.
“If something’s not done so that there’s certainty in low-income housing projects for how to value them, then it is going to kill the business,” Hoppe said.
In court filings, the developers argue the county failed to follow multiple aspects of the law, and then the Tax Equalization Review Commission erred in its ruling. They say lawmakers understood that Section 42 properties were different from other properties, which is why they passed the law requiring the properties be valued based on the income approach.
Discussions on a potential legislative remedy are underway.
Yoakum said the county board has made the issue its top legislative priority for the year.
“I think the county board … where it seems now we are the obstacle, we really do want to work for a fair and equitable solution,” she said.
Yoakum didn’t have specific details about potential legislation. And State Sen. Eliot Bostar, one of the lawmakers involved in preliminary discussions, did not respond to a voicemail and text message.
Lawmakers will likely have to balance competing interests.
Former Sen. Burke Harr, who introduced the 2015 bill that is now being challenged by Lancaster County, said he consulted with assessors and an organization representing Nebraska counties when working on the legislation.
Some of those same groups now openly malign the law as being heavily influenced by developers.
“I don’t think anyone was ecstatic, but they realized it was a problem,” Harr said of the assessors and other government officials he consulted with.
Speaking for himself and not on behalf of the office, Hughes said the most clear-cut solution would be a voter-approved constitutional amendment creating a separate carve out for affordable housing valuations, similar to what was done for agricultural land.
“That would be the cleanest thing,” he said. “Now, I imagine that something different will happen.”
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