Valuation dispute could imperil thousands of affordable housing units

Kathy Mesner has a word for the potential fallout from a property valuation dispute in Lancaster County.

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.

In the past year, a narrow disagreement on how to value 21 Lincoln-area properties has morphed into a court fight over a state law meant to support the building of affordable housing for lower-income Nebraskans.

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 in their upcoming session.

If Lancaster County successfully argues the law is unconstitutional, it would result in higher valuations – more than 300% higher in some cases – and larger property tax bills, which could jeopardize affordable housing projects that are already in short supply.

County officials 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 – 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.

"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.

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 restrictions in exchange for federal tax credits to help pay for construction.

The Lancaster County assessor's office challenged those $0 valuations, arguing to the local board of equalization that they didn't capture the actual values. The assessor's office also 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 ... We don't have the luxury of picking and choosing which statutes to follow," said Lancaster County Assessor/Register of Deeds Dan Nolte.

The Lancaster County Board of Equalization agreed and petitioned the state to use a different valuation method for the 21 affordable housing developments.

After a hearing in March, a state commission sided with the county.

Following that hearing, 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, but ... that's where we, unfortunately, ended," Hughes said.

When developers appealed the Tax Equalization and Review Commission's ruling, 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 specializing in affordable housing.

And that, in turn, jeopardizes the future of affordable housing across Nebraska, 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 100 applicants.

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. 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 affordable housing 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 critical for ensuring access to affordable housing.

A ruling upholding the county's position, they warned, would steer the industry toward other states and effectively "ring a death knell" on future Section 42 construction in Nebraska.

In court filings, the developers argue that 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 also 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.

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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