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Volume 10 - Opinions of Counsel SBRPS No. 34

Opinions of Counsel index

Assessments, generally (value) (restrictions on resale price); Exemptions - generally (subsidies for low and moderate income buyers of single family residences) - Real Property Tax Law, §§ 300, 305; 42 U.S.C., § 12895:

In determining the assessed value of a single family residence, an assessor is not bound by an impermanent restriction on resale price voluntarily agreed to by a recipient of a federal subsidy paid to a low or moderate income buyer of such a residence.

Our opinion has been requested concerning the assessments of single family residences purchased by low and moderate income buyers through the auspices of an incorporated “Housing Action Coalition” [hereafter HAC], a not-for-profit agency that develops affordable housing for such buyers. According to correspondence from HAC, Federal Housing and Urban Development grant subsidies of up to $60,000 have been given to qualified buyers, thereby enabling them to purchase homes costing $145,000 for about $85,000.

It is our understanding that HAC has recorded a Declaration of Conditions and Restrictions with the county clerk which provides that it “will run with the land and affect title for the next twenty-five (25) years.” Among these restrictions are required HAC-consent to capital expenditures, mortgages and resales. With respect to resale, the price cannot exceed what the owner paid for the home plus a factor reflecting any increase in the average cost of a home in the county plus the cost of (previously HAC-approved) capital expenditures. Based on these restrictions, HAC has requested that the assessment on each of these homes be limited to the buyer’s out-of-pocket purchase price, and we are asked if there is any exemption statute or valuation theory that would permit the assessor to do so.

We have been advised that there are two funding sources - both federal - for the subsidies in question, one being Community Development Block Grants (Chapter 69 of Title 42 of the United States Code; 42 U.S.C., § 5301 et seq.), the other being the First Time Home Buyers program (Chapter 130 of Title 42; 42 U.S.C., § 12701 et seq., the “National Affordable Housing Act”).

We have reviewed both Chapter 69 and Chapter 130 of Title 42 to ascertain whether either or both impose any restriction on the real property assessment or taxation of property which is financed thereby and we find no such restriction. {1}  Although Chapter 130 includes authority for a home ownership program to “establish restrictions on the resale of units under the program” (42 U.S.C., § 12895[c][1]), such as those in the present case, it makes no provision regarding the application of such restrictions on local assessed value.

There being no federal exemption, we turn to State law which is replete with real property tax exemptions available for various housing programs (see, e.g., Public Housing Law, § 52; Private Housing Finance Law [PHFL], §§ 33, 577; Real Property Tax Law, § 421-e), although none that pertains in this situation. In fact, the State’s version of an affordable housing program, which predates the federal program in question, makes no provision for tax exemption (see, PHFL, §§ 45-b, 1100-03). In the absence of an exemption, the property is subject to taxation (RPTL, § 300).

In terms of valuation, this property, like all other property, is subject to the general statutory requirement: it must be assessed at a uniform percentage of “value” (RPTL, § 305(2)). The issue, then, is how to value this property.

The basic rule of law is that “[t]he ‘market value of real property is the amount which one desiring but not compelled to purchase will pay under ordinary conditions to a seller who desires but is not compelled to sell’ [citations omitted]” (W.T. Grant Co. v. Srogi, 52 N.Y.2d 496, 510, 420 N.E.2d 953, 438 N.Y.S.2d 761, 767 (1981); see also, Parklin Operating Corp. v. Miller, 287 N.Y. 126, 38 N.E.2d 465 (1941)).

In general, the determination of the assessable value of real property, for real property tax purposes, is made without regard to divisions of interest in the property such as mortgagor and mortgagee or landlord and tenant. Instead, the system applies a unitary approach. “Yet, even the property tax stops short of totally disregarding the partial legal interests” (1 Bonbright, Valuation of Property, p.495 (emphasis in original)). Bonbright cites easements which affect the valuation of the dominant and servient estates, {2} and then states, “What is true of easements is true also of covenants binding the land” (supra). Similarly, it has been stated, “Tax certiorari valuation is made subject to the presence of easements and governmental restrictions which run with the land, such as zoning, rent control and rent stabilization” (5A Warren’s Weed, New York Real Property, “Tax Certiorari Valuation,” § 4.01, p.23 [4th Ed. 1997]).

We have found no New York State judicial decisions directly on point. However, in what we believe is an analogous case, it was held that an assessor was not bound in his or her determination of assessable value by restrictions on the amount of rent a property owner could impose, where those restrictions were accepted voluntarily by the owner in exchange for a Federal subsidy. In John P. Burke Apartments, Inc. v. Howe, 98 A.D.2d 595, 471 N.Y.S.2d 405 (3d Dept., 1984), the property owner “voluntarily agreed to limit the rents in return for the [Federal] mortgage subsidy” (471 N.Y.S.2d at 408), and the court rejected the owner’s assertion that the controlled (contract) rents should be used, in lieu of “market” rents, in valuing the property by means of the income approach. Rather, the court held that market rents should be used, thus imputing a much greater value to the property. Since the property owners in the instant situation have voluntarily accepted the restriction on resale in exchange for a subsidy, it seems to us that the Burke case would have a direct bearing on the question presented.

We should point out, however, that the New Jersey courts reached a different conclusion in construing a similar program in that state. In Prowitz v. Ridgefield Park Village, 237 N.J.Super. 435, 568 A.2d 114 (App.Div., 1989), aff’d, 122 N.J. 199, 584 A.2d 782 (1991), the New Jersey court held that assessments of single-family residential units that constituted part of the municipality’s “official” affordable housing stock had to take into account restrictions on resale prices:

It is obvious that full and fair value of these units, as so defined, is substantially affected by their maximum resale price under the deed restriction. *** We are aware that there are categories of circumstances that reduce the actual value of property without affecting its assessable value. But these are ordinarily circumstances implicating the character, quality and extent of the owner’s title and not permanently or indefinitely {3} burdening the land itself (237 N.J.Super., at 439, 568 A.2d, at 116-17).

The court went on to state, “a restrictive covenant burdening land for the benefit of the public is, like an easement in gross, a value-reducing circumstance for assessment purposes” (237 N.J.Super., at 441, 568 A.2d, at 117). The court noted the public benefit of maintaining New Jersey’s limited inventory of affordable housing, and then said:

It is not a potential benefit to any specific affordable-housing unit owner with which the resale restriction is concerned, but rather the benefit to the public that is vouchsafed by indefinitely maintaining the unit in affordable housing stock. And it is that public benefit which is the quid pro quo of the concomitant value-depreciating burden of the restriction (237 N.J.Super., at 443, 568 A.2d, at 118).

A New York court has discussed Prowitz and has noted an important distinction which bears on the question presented. In 78 South First Street Housing Development Fund Corporation v. Commissioner of Finance of City of New York, 202 A.D.2d 115, 616 N.Y.S.2d 405 (2d Dept., 1994), the court held that temporary restrictions on the sale and use of a building did not lessen its value for assessment purposes as the restrictions were personal to the owner and its shareholder tenants. The court noted that Prowitz concerned restrictions which “limited in perpetuity the maximum price an individual condominium owner could obtain upon the resale of that individual’s condominium unit” (616 N.Y.S.2d at 408; emphasis added). In South First Street, the court said there was no such limitation on sale price of the building or the individual shares. Because of the factual difference, the New York court declined to follow Prowitz.

In fact, in Prowitz, the New Jersey Appellate Division specifically noted that there is a distinct difference between an encumbrance on title, such as a mortgage or other “cloud” of a temporary nature, personal to the owner, and an encumbrance on the land of a permanent nature. The New Jersey court then held that because the restriction in that case was of a permanent nature, it was an encumbrance on the land and had to be considered as an element affecting the assessed value of the property. This is readily distinguishable from the 25-year encumbrance on title (in the instant situation) which is of temporary duration and was voluntarily accepted in exchange for a significant subsidy.

Accordingly, in the absence of some statutory amendment, providing either a partial exemption from taxation for property financed in the manner described, or a restriction on the determination of taxable assessed value (comparable, for example, to the methods of assessment applicable to condominiums and cooperatives, as provided in § 339-y of the Real Property Law and § 581 of the RPTL), it is our opinion that an assessor should determine the assessed value of the property in question without regard to the restriction on resale price agreed to by the home buyer in return for the federal subsidy. {4}  A decision to do otherwise, we think, is a matter for the State Legislature.

April 25, 1997

{1}  Such a restriction would, if existent, pose a constitutional question as to the authority of Congress to enact a provision granting an exemption from local taxation for privately owned property; however, we need not address that issue at this time.

{2}  For a discussion of easements and their effect on valuation, see 5 Op.Counsel SBEA Nos. 51, 62.

{3}  Note that the New Jersey resale restriction was perpetual, and not limited to 25 years as is true of HAC.

{4}  Of course, as is true in any real property assessment matter, a taxpayer claiming a grievance based upon his or her resale restriction, may seek assessment review on that basis.