BEFORE ROY NOBLE LEE, C.J.; ROBERTSON AND ANDERSON, JJ.
ROBERTSON, JUSTICE, FOR THE COURT:
This is a dispute over the assessed value placed upon a federally subsidized low-income housing complex. Our question is whether the public assessor, when making such an assessment for purposes of ad valorem taxation, may consider enhancements to value flowing from benefits enjoyed by the property in the form of various federal subsidies. Because our law mandates that property be valued and assessed according to its true value, we answer in the affirmative.
This appeal concerns protests filed by Rebelwood, Ltd., a Mississippi limited partnership (hereinafter "Taxpayer" *fn1). Taxpayer's managing general partner is Das A. Borden and Company, an Alabama corporation. Taxpayer is the owner of a 161-unit, multi-family complex of apartments known as Rebelwood and located in Jackson. Taxpayer makes complaint against the City of Jackson and Hinds County, Mississippi, regarding the true value and assessed value assigned Taxpayer's property for two consecutive years: 1984 and 1985. Rebelwood is Class II real property *fn2 which by law is assessed at fifteen percent of true value. Miss. Const. Art. 4, 112 (1890, as amended); Miss. Code Ann. 27-35-4 (2) (Supp. 1988). Both the County and the City have for those years assigned Rebelwood a true value of $4,044,950.00 and an assessed value of $606,740.00. The two protests were consolidated for trial in the Circuit Court of Hinds County. *fn3
The bottom line is taxes. If, as the public assessors maintain, the value of federal benefits enjoyed by Rebelwood are included in the estimate of Rebelwood's true value, Taxpayer for 1984 owes taxes as follows:
City of Jackson $45,202.00
If, as Taxpayer maintains, Rebelwood is assessed as a free market apartment complex and the federal subsidy program ignored, Taxpayer's 1984 tax bills are
City of Jackson $30,371.00
The record does not reflect the 1985 tax differentials, although we assume they are similarly proportioned.
Rebelwood was completed in 1981. As a result of federal participation under the National Housing Act, 12 U.S.C. 1715 (d)(4), Taxpayer was able to finance the cost of construction at a 7 1/2 % mortgage rate. In addition to this mortgage subsidy, Taxpayer operates Rebelwood under a housing assistance program authorized by Section 8 of the Housing Act of 1937. 42 U.S.C. 1437f. This program is managed by the U.S. Department of Housing and Urban Development (HUD) and provides housing for elderly and low-income people.
The federal assistance program begins when a private developer files an application with HUD in which the developer forecasts the replacement costs of the building, proposed "contract rent" , and projected expenses necessary for operation and maintenance. "Contract rent" is defined under HUD regulations as the total amount of rent specified in the developer's contract with HUD and is comprised of (a) the actual rent paid by the tenant and (b) the housing assistance subsidy paid by the government. 24 C.F.R. 880.201 (1988). The amount of the contract rent varies depending on the cost of construction, projected operation expenses, and mortgage expenses. 24 C.F.R. 880.308 (a)(8) (1988). The contract rent may exceed what HUD has determined to be the neighborhood's "fair market rent" by as much as twenty percent. 24 C.F.R. 880.203 and 880.204 (b)(1)(ii)(B) (1988).
The tenants who occupy such subsidized housing pay as rent a percentage of their income, not to exceed thirty percent. 24 C.F.R. 813.107 (1988). The difference between the rent actually paid by the tenant and the "contract rent"
as contained in the developer's application is subsidized by the federal government. In most instances, the contract rent exceeds rents paid by similarly situated tenants in the vicinity of the development. One motivation for investing in apartments participating in this subsidized housing program is the rather favorable tax treatment generated by the depreciation schedules permitted under federal tax law.
These benefits are of considerable value. In exchange therefor, owners and developers must build the units to HUD specifications and accept tenants based upon HUD guidelines. In addition, the developer's revenues are limited by various HUD regulations. 24 C.F.R. 880.205 (1988).
Testimony regarding the operation of Rebelwood showed an annual gross income of approximately $670,000.00. Of this figure, $110,000.00 represented rents actually paid by the tenants while $560,000.00 was received in the form of a federal rental subsidy. As with most subsidized housing, Rebelwood is an attractive place to live for those with marginal incomes and has a waiting list for prospective tenants. The average occupancy rate for Rebelwood is 98%. As such, the operating statement for 1983 may be considered representative of the income-generating capacity for Rebelwood for the life of the federally-subsidized mortgage - 40 years. Since the subsidy benefits conferred by the participation in the federal program are transferable, any future purchasers of the Rebelwood complex would also acquire them.
At trial, appraisers for each party studied Rebelwood under the three statutorily-authorized approaches to value: the cost approach, the income capitalization approach and the market data or comparative sales approach. Miss. Code Ann. 27-35-50 (2) (Supp. 1988). These approaches do not, considered singly, establish value. Each rather is one approach to value, with the appraiser's estimate of value being, in the end, an opinion which is the product of a reconciliation of the indications yielded by the three approaches. *fn4 That opinion is and must be of the value of the property, not its owners or management, for it is the property that is being valued, assessed and taxed.
We will consider separately each approach to value and the evidence adduced at trial.
The cost approach *fn5 is a method by which the value of the
property is derived by estimating the replacement cost of the improvements and deducting from that figure the estimated physical depreciation and any form of obsolescence, if appropriate. This figure is then added to the market value of the land to yield an overall valuation of the realty.
Taxpayer's appraisers suggest that the cost approach indicates a value of the Rebelwood complex at $2,042,000.00. Hinds County's appraisers offered an opinion that the cost approach indicates a value of $4,044,900.00.
The disparity between these two figures can be attributed primarily to the inclusion by Taxpayer's appraisers of some $1,535,000.00 in "functional economic obsolescence" . The appraisers reasoned that, because Rebelwood was built pursuant to HUD specifications, including various non-competitive floor plans (e.g., five-bedroom apartments), and the amenities provided are minimal (e.g., no air-conditioning), the complex would not be an attractive investment if placed on the open market.
The appraisers for the County testified that functional depreciation has no application to the use to which the property was put for the tax years in question, 1984 and 1985, a use, we might add, which will presumably continue for the next 35 years. Further, as one of the County's appraisers testified: "This property was operating at better than 95% occupancy - 97% occupancy - and there was no way to measure functional or economic depreciation when you have that situation." The thrust of the testimony of the County's appraisers was that the functional obsolescence of the complex was hypothetical (at best) because Rebelwood exists as a subsidized housing complex, not as one operating in a free market environment.
Market Data or Comparative Sales Approach
Market data or comparative sales approach *fn6 is, as its alternative names imply, an approach to value in which the value estimate is predicated upon prices actually paid in open market transactions for various properties similar to the one at issue in the appraisal. The price paid for a similar apartment complex would then be evaluated with reference to the yearly gross income that such a property could expect to earn. The multiplier resulting from such an evaluation is used to account for variations existing between the properties recently sold regarding size (number of units), age and location.
The appraiser for Hinds County analyzed the recent sales
of similar subsidized housing, compared them against their respective gross incomes and arrived at a multiplier in the range of 5.5 to 7.0. The appraiser chose to employ a multiplier in the lower end of this range - 6.0. The gross income, as reflected in the operating statement for Rebelwood, was then multiplied by 6.0 and yielded a value indication of $4,039,998.00.
Taxpayer's appraisers also employed the market data approach, but began their analysis with a somewhat different assumption. The comparative sales analyzed by Taxpayer's appraisers included no subsidized housing. The appraisers also disregarded the rental subsidy income received by Rebelwood as well as the cash-flow advantages of Rebelwood's 7-1/2 % mortgage. The rationale behind this exclusion was explained by Taxpayer's appraiser:
The sale of a HUD . . . for a practical matter, if any had sold they would have almost surely sold with the low interest rate mortgage going, with all the subsidies going and the real estate. Now if I were appraising a HUD for sale of all three together, yes, but I'm not. I'm appraising it for the real estate only. Had I had a sale of a HUD property, I can think of no practical ways to separate the three items so that I could back it into the real estate only. And since I am appraising for real estate only, I found ...