Colony Plaza Assoc. LP v. Cathy Rinehart, Assessor Clay County

March 14th, 2017

State Tax Commission of Missouri

 

 

COLONY PLAZA ASSOC. LP., )
)
Complainant(s), )
)
v. ) Appeal #15-32015
)
CATHY RINEHART, ASSESSOR, )
CLAY CO., MISSOURI, )
)
Respondent. )

 

DECISION AND ORDER

HOLDING

Decision of the Clay County Board of Equalization sustaining the assessment made by the Assessor is AFFIRMED.  Complainant failed to present substantial and persuasive evidence establishing the property is exempt under Article X, Section 6 of the Missouri Constitution.

ISSUE

Complainant initially appealed on the grounds of overvaluation, misclassification and exemption.  On February 22, 2016, Complainant withdrew the claims of overvaluation and misclassification.

The issue remaining is whether the subject property is exempt from taxation.

EVIDENCE

            Complainant filed the following exhibits, which were admitted into the record:

EXHIBIT DESCRIPTION
1 Portions of Missouri State Tax Commission Assessor’s Manual
2 Application
3 First Amend. to the Third Amended and Restated Limited Partnership Agreement
4 2013 and 2014 Form 990’s
5 Cost Certificate Report
6 Transfer Agreement
7 Redemption Agreement
8 Portions of Corporate Policies & Operating Procedures Manual
9 Colony Plaza Apartments Unit Characteristics and Demographics Report
10 Second Amended and Restated Limited Partnership Agreement
11 Written Direct Testimony of Kevin Baptista
12 Rebuttal Written Direct Testimony of Kevin Baptista
13 Surrebuttal Written Direct Testimony of Kevin Baptista
14 Selected Pages from 2014 Form 990 for Miden Housing Corporation
15 Selected Pages from 2014 Form 990 for Affordable Housing Access, Inc.
16 State Tax Commission Decision
17 Missouri Supreme Court Decision
18 Documents Regarding Tenant Evictions

 

Respondent filed the following exhibits which were admitted into the record:

EXHIBIT DESCRIPTION
1 Written Direct Testimony of John Cardwell
2 137.100 RSMo.
3 Deed
4 LURA
5 Auditors Report
6 Preservation of Affordable Housing (POAH) Acquisitions
8 Notification of Section 8 Contract
9 Rent Roll
10 Income and Expense Statement
11 Audit Report
12 Marketing Produced By Complainant
13 Internet Information on POAH
14 Internet POAH Background
15 Colony Plaza Internet Information
16 Low and Modest Income Definitions
18 2014 POAH, Inc. Form 990 Income Tax Return
19 2015 POAH, Inc. Form 990 Income Tax Return
20 Rebuttal Written Direct Testimony of John Cardwell
21 List of Colony Plaza Evictions from Case.net
22 Colony Plaza Web Site Excerpts
23 Red Cross Web Site Excerpts
24 Salvation Army Web Site Excerpts
25 Good Samaritan Center Web Site Excerpts
26 September 2015 Ad for Colony Plaza
27 Deposition of Corporate Representative of Colony Plaza, Terri Powell-Rands

 

Respondent withdrew Respondent’s exhibits 7 and 17 and therefore Exhibits 7 and 17 were not admitted into the evidentiary record.

FINDINGS OF FACT

  1. Jurisdiction. Jurisdiction over this appeal is proper.  Complainant timely appealed to the State Tax Commission from the decision of the County Board of Equalization.  The appeal was submitted on the record by agreement of the parties.
  2. Identification of Subject Property. The subject property is located at 404 East St. Louis Avenue, Excelsior Springs, Clay County, MO.  The property is identified by map parcel number 12311004200300. (Respondent’s Exhibit 15)

Subject Property. The subject property is a 111 unit, eleven story apartment building located at 404 St. Louis Avenue, Excelsior Springs, Clay County, Missouri. All of the apartments are one bedroom. The building was built in 1980. The building has an office, a meeting room, a laundry area, and vending area, a library, and an entry area. Lot improvements include a 324 square foot patio area, and asphalt parking area.  In the year 2000, the building was purchased by NEF Properties, Inc., an Illinois non-profit corporation and predecessor (name change) to Preservation of Affordable Housing, Inc., hereinafter referred to as “POAH”.   On June 29th, 2000, a deed was filed transferring the property from POAH to Complainant, Colony Plaza Associates, L.P., hereinafter “Complainant”.  Complainant was formed under the Missouri Limited Partnership Law as LP0010662, July 14, 1999 by NEF Properties, Inc. [now POAH], as General Partner. (Ex 22 and Testimony of Baptista)

A.Property Restrictions and Ownership.

Complainant is owned by a Limited Partnership with POAH, Inc, a 501(c) (3) organization, as the ultimate owner of 100% of Complainant.  Complainant has a 50% Limited Partnership interest in itself and POAH, LLC has a 50% Limited Partnership interest in Complainant.  On May 21, 2001, Complainant entered into a 30 year Declaration of Land Use Restriction Agreement, hereinafter the “LURA”, with the Missouri Housing Development Commission, hereinafter “MHDC”, Exhibit 4.  At that time, US Bank had become a partner of Complainant with a 99.99% ownership interest.  Under the terms of the LURA, 107 of the 111 units had rent restricted to $478 per month [which could be increased with approval of MHDC], and was required to be occupied by individuals whose income was 60% or less of Area Median Income. In exchange for limiting rent, and renting to low income individuals, Colony Plaza’s partner, US Bank, received $3,024,720 in Low Income Tax Credits, half from the Federal Government, and half from the State of Missouri. The LURA restrictions expire in May 2030, but the tax credits were paid out over a 10 year period, ending in 2011.  After receiving all the $3 million in tax credits, US Bank, transferred, and POAH accepted US Bank’s partnership interest in the property. US Bank received no cash payment, but in the transfer, Complainant assumed the obligation to pay mortgages in the amount of over $6 million, and the obligation to continue to operate the property under the terms that POAH would indemnify US Bank against any losses associated with the transfer, including potential recapture of the tax credits.  No deed or other public record documents the transfer of the partnership interest, but following the transfer, all of the partners of Complainant were, and are as of the 2015 tax date, entities owned and controlled by POAH.  POAH is, and has been since 1999, a 501(c) (3) corporation and considered a charity by the IRS.  In POAH’s 2014 990 income tax return, Complainant is shown as a “disregarded entity” with income or loss flowing through to POAH.  In POAH’s 2011 tax return, when US Bank had a 99% interest in Complainant it was not a “disregarded entity.” Nothing in the organizational documents prohibit the transferring of interests to for-profit entities.  In 2000 – 2001, POAH transferred 99.9% ownership to US Bank. (Exhibits 4, 5, 18, 19 and Testimony of Baptista)

B. Tenants and Marketing

Currently, Complainant markets its apartments as “Senior Citizen Housing.”   Its marketing materials do not state that the income of the tenant is a factor in eligibility for tenancy.  Nearly all of the tenants in the one bedroom apartments are single persons.  According to Mr. Baptista, POAH’s Asset Management Director, tenants are required to be over the age of 62 or disabled  They are required to be “low income” within the HUD guidelines.  None of the marketing material in evidence provides substantial and persuasive evidence that Complainant markets itself in such a manner as to apprise the community of the services available to potential tenants or the reduced rent possibilities.  (Exhibit 12, 16, 26, 27 and Testimony of Baptista)

C. Market Rent

As of May 1, 2015,   Complainant charged and received over $641 per month rent from tenants and Section 8 housing vouchers.   That rent is full market rent, according to studies done of area housing by HUD.  (Exhibit 9 and Testimony of Baptista)

D. Section 8

POAH has a contract with HUD through MHDC, to administer a Section 8 voucher program.  The Section 8 vouchers issued on behalf of POAH are redeemable only with  Complainant.  (Testimony of Baptista)

E. Benefits to Tenants

Tenants benefit by receiving housing and certain community services from Complainant.  The services include budgeting, working out payment plans for those who get behind on rent, arranging for a local pharmacy to come to the building to give flu shots, letting tenants know they can get Meals-On-Wheels, etc.  There is no budget line item for tenant services.  Services like Meals-On-Wheels and transportation are provided and paid for by other entities.   Complainant pays one staff person, who works 12 hours per week, to coordinate all the services available for tenants.  The budget for her salary is included in operating expenses.  Complainant has laundry and vending machines available for tenants, but the machines are operated by an outside vendor, and Complainant receives a portion of the profit, which was $8,813 in 2014 and $9,106 in 2013.

F. Profits and losses of Colony Plaza

 Complainant charges full market rent of $641 per month for the apartments.    Rent is paid by tenant with or without government vouchers.  For the year ending 12/31/14, Complainant had total revenue of $853,615. Complainant’s operating expenses totaled $589,927.  Mortgage interest paid along with miscellaneous financial expenses totaled $190,225.  After paying the mortgages and financing costs, the operation of the subject property showed a profit of $73,463 in 2014 and $99,924 in 2013. Depreciation and amortization “expenses” totaled $230,222 in 2014.  Complainant also paid a partnership fee to POAH of $25,529 in 2015, and other miscellaneous expenses of $2,582.   (Exhibit 9, 10, 11 and Testimony of Baptista)

G. Profits of POAH

Mr. Baptista testified that POAH is in the business of owning and operating low income housing, and that they wanted to make a profit and expected to make a profit, although it does not always happen.  POAH has net assets $136,927,543 as of end of 2014. Exhibit 27 explained that POAH acquires Low Income Housing Tax Credit properties when the tax credits are paid but the restrictions remain.  The testimony was that the bank or general partner who receives the tax credits wants “out of the deal” after they receive the tax credits because the depreciation deductions on the property make their annual earnings look low.  POAH buys the properties and guarantees the prior owner that they will operate the property in accordance with the restrictions therefore the prior owner does not have to be concerned about losing their tax credits.  The amount of mortgage liability assumed in the purchase of the subject property was over six million dollars. POAH’s operation of low income properties generates substantial profit to POAH.  POAH’s portfolio shows it has 49 properties, 15 of which are in Missouri.  POAH’s 2014 990 income tax form shows it held net assets of $130,442,033 at the end of 2013, and $136,927,543 at the end of 2014, an increase of over $6 million in one year.  POAH paid five person’s compensation of over $300,000 and a sixth person over $500,000 in 2014.  POAH net assets grew by over $6,400,000 in 2014. (Exhibit 18, 26, 27 and Testimony of Baptista)

H. U.S. Bank

U.S. Bank received over $3 million in tax credits.  Money has diverted from the subject property.  The mortgages on the subject property exceed $6,000,000. Further, Complainant must continue to indemnify US Bank for any losses that it would suffer if it does not follow the terms of the LURA and pay the mortgages.  If Complainant did not pay the mortgages, U.S. Bank could potentially be required to pay back its $3,000,000 in tax credits.   (Testimony of Baptista)

  1. Rent Never Waived. Complainant will work with tenants when they are behind on their rent payments; however, Complainant will not waive rent payments that are due when tenants are unable to pay.  (Testimony of Baptista)
  2. Credit Checks On Potential Tenants. Complainant performs credit checks on potential tenants.  Some potential tenants are rejected due to bad credit.  (Testimony of Baptista)
  3. Credit Checks Versus Services. Complainant spends more time performing credit checks on potential tenants than providing services to tenants.  (Testimony of Baptista)
  4. POAH, LLC May Transfer Its Partnership Interest. POAH, LLC may transfer its interest in the subject property to a for-profit entity with approval of POAH, Inc.  (Exhibit 22 and Testimony of Baptista).
  5. Taxation of the Property.   The evidence was not substantial and persuasive to establish the property qualifies as exempt under Article X, Section 6 of the Missouri Constitution.

CONCLUSIONS OF LAW AND DECISION

Jurisdiction

The Commission has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious.  The Hearing Officer shall issue a decision and order affirming, modifying or reversing the determination of the Board of Equalization, and correcting any assessment which is unlawful, unfair, improper, arbitrary, or capricious.  Article X, Section 14, Mo. Const. of 1945; Sections 138.430, 138.431, 138.431.4, RSMo

Presumption In Appeal

There is a presumption of validity, good faith and correctness of assessment by the County Board of Equalization.  Hermel, Inc. v. STC, 564 S.W.2d 888, 895 (Mo. banc 1978); Chicago, Burlington & Quincy Railroad Co. v. STC, 436 S.W.2d 650, 656 (Mo. 1968); May Department Stores Co. v. STC, 308 S.W.2d 748, 759 (Mo. 1958).   This presumption is a rebuttable rather than a conclusive presumption.   The presumption of correct assessment is rebutted when the taxpayer presents substantial and persuasive evidence to establish that the Board’s valuation is erroneous and what the fair market value should have been placed on the property. Hermel, supra; Cupples-Hesse Corporation v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959).

Exemptions

Tax exemptions are not favored in the law and statutes granting exemptions are to be strictly, yet reasonably, construed against the one claiming the exemption. Missouri Church of Scientology v. State Tax Commission, 560 S.W.2d 837, 844 (Mo. Banc 1987), State ex rel. Union Electric Co. v. Goldberg, 578 SW2d 921,923 (Mo. Banc 1979).

Charitable Exemption

The legal test for a charitable exemption is whether:

(1)        The property is dedicated unconditionally to the charitable activity;

(2)        The property is owned and operated on a not for profit basis; and

(3)        The dominant use of the property is for the benefit of an indefinite number of people and directly or indirectly benefits society generally. Franciscan Tertiary Province of Missouri v. State Tax Commission, 566 S.W.2d 213, 224 (Mo Banc 1978); Twitty v. State Tax Commission, 896 S.W.2d 680, 684 (Mo. App. S.D. 1995).

I. Owned and Operated on a Not-for-Profit basis

The property must be owned and operated on a not-for-profit basis. The property “must be dedicated unconditionally to the charitable activity in such a way that there will be no profit, presently or prospectively, to individuals or corporations. Any gain achieved in use of the building must be devoted to achievement of the charitable objectives of the project.” Franciscan Tertiary Province v. State Tax Commission, 566 S.W.2d 213, at 224 (Mo. banc 1978).  This does not mean that the property or charity cannot operate “in the black.”

Section 137.100 (5) states:  “All property, real and personal, actually and regularly used exclusively for religious worship, for schools and colleges, or for purposes purely charitable and not held for private or corporate profit, except that the exemption herein granted does not include real property not actually used or occupied for the purpose of the organization but held or used as investment even though the income or rentals received therefrom is used wholly for religious, educational or charitable purpose.”

In the present appeal the Hearing Officer is not persuaded that the subject property is not being used as an investment. Furthermore, there was no evidence to establish that the subject property cannot be transferred to a for-profit entity.

II. Actual and Regular Use for Charitable Purpose

In order for a property to be exempt from taxation for state, county or local purposes, the property must be actually and regularly used exclusively for a charitable purpose, as “charity” is defined by Salvation Army v. Hoehn, 188 S.W.2d 826, 830 (Mo. banc 1945): “. . . a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their hearts under the influence of education or religion, by relieving their bodies of disease, suffering or constraint, by assisting them to establish themselves for life, or by erecting or maintaining the public buildings or works or otherwise lessening the burdens of government.”  Exemption rests on the use of the property, not merely the charitable character of the owner.  The phrase “regularly used exclusively” has been interpreted to mean the primary inherent or dominate use of the property as opposed to a mere secondary and incidental use.  See, Bethesda Barclay House v. Ciarleglio, 88 S.W.3d 85 (Mo. App. E.D. 2002); Home Builders Ass’n of Greater St. Louis v. St. Louis Co. BOE, 803 S.W.2d 636 (Mo. App. E.D. 1991); Pentecostal Church of God of America v. Hughlett, 601 S.W.2d 666 (Mo. App.S. D. 1980); Barnes Hospital v. Leggett, 589 S.W.2d 241 (Mo. 1979); Missouri United Methodist Retirement Homes v. State Tax Commission, 522 S.W.2d 745 (Mo. 1975).

Complainant did not offer substantial and persuasive evidence to meet this element of its burden of proof. Complainant provides services to its tenants such as coordination of community based services.  The fact that Complainant does not have to pay for such services does not diminish one’s charitable purpose by coordination of the provision of such services to one’s tenants.  Nevertheless, the Hearing Officer was not persuaded that the property is owned purely for a charitable purpose.

Complainant may be providing housing to low income tenants and providing certain rudimentary services; however, no tenant has been provided free rent and all other tenants pay a portion of market rent with the government subsidizing the entire remainder of such market rent.  Complainant contributes nothing to lower a tenants rent from its own income, or will provide housing for those unable to pay.  Complainant merely competes with other apartment complexes in Excelsior Springs, MO and the surrounding area.  Complainant does nothing to lessen the burden of government nor do they provide a gift for the benefit of an indefinite number of persons.

III. Dedicated Unconditionally to the Charitable Activity

The property must be used such that it is available to an indefinite group of people, rendered at cost or less, which brings their hearts under the influence of education or lessens the burden of government.  “The public nature of a charity is diminished when it is systematically denied to those who need and can least afford the service.”  Evangelical Retirement Homes of Greater St. Louis, Inc. v. State Tax Commission, 669 S.W.2d 548, 554 (Mo. banc 1984).  Complainant did not offer substantial and persuasive evidence to meet this element of its burden of proof.   The evidence did not induce belief in the Hearing Officer that it is unconditionally dedicated to charitable activity.  Complainant may evict tenants for non-payment of rent. Complainant rejects tenants based upon bad credit.  Complainant does not offer free rent and Complainant does not offer reduced cost housing by making any monetary contribution to anytenant’s portion of the market rent charged by Complainant.  Therefore the property is not available to an indefinite number of people.  Complainant additionally spends more time checking potential tenants’ credit than time providing services to the tenants.

Benefit to Society

To fulfill the Franciscan test, the subject property must benefit society.   Although Respondent put forth evidence that the subject property operates under Low Income Housing Tax Credit restrictions, Complainant put forth no evidence of how the subject property benefits society in general.  Based upon the evidence presented, Complainant simply operates a subsidized housing complex. Providing subsidized housing alone is not charitable in nature.  In fact, many for profit entities do the same.   The government pays a large portion of the rent and finances the construction of the property through credits.

Complainant’s services are largely based upon coordination of other community based services.  Although such coordination may benefit Complainant’s tenants, such coordination does not appear to relieve any burden on society in general.  Complainant simply failed to present substantial and persuasive evidence that it somehow provides something that helps to limit the burdens on the Excelsior Springs, MO community, the Clay County community or the State of Missouri community.  The fact that Complainant simply appears to be a subsidized housing complex that provides some services to its tenants also does not lend itself to a finding of exemption.  In fact, a Missouri statute specifically provides for how subsidized housing projects are to be valued and taxed.  Section 137.076 provides:

  1. In establishing the value of a parcel of real property the county assessor shall consider current market conditions and previous decisions of the county board of equalization, the state tax commission or a court of competent jurisdiction that affected the value of such parcel. For purposes of this section, the term “current market conditions”, shall include the impact upon the housing market of foreclosures and bank sales.
  2. In establishing the value of a parcel of real property, the county assessor shall use an income-based approach for assessment of parcels of real property with federal or state imposed restrictions in regard to rent limitations, operations requirements, or any other restrictions imposed upon the property in connection with:

(1) The property being eligible for any income tax credits under Section 42 of the Internal Revenue Code of 1986, as amended;

(2) Property constructed with the use of the United States Department of Housing and Urban Development HOME investment partnerships program;

(3) Property constructed with the use of incentives provided by the United States Department of Agriculture Rural Development; or

(4) Property receiving any other state or federal subsidies provided with respect to use of the property for housing purposes.

For the purposes of this subsection, the term “income-based approach” shall include the use of direct capitalization methodology and computed by dividing the net operating income of the parcel of property by an appropriate capitalization rate not to exceed the average of the current market data available in the county of said parcel of property. Federal and state tax credits or other subsidies shall not be used when calculating the capitalization rate. Upon expiration of a land use restriction agreement, such parcel of property shall no longer be subject to this subsection.

Conclusion

Complainant failed to meet its burden of proof to present substantial and persuasive evidence to qualify for exemption.  Complainant’s failure to prove any single element is sufficient for denial of exemption.  See, Westwood Partnership v. Gogarty, 103 S.W.3d 152 (Mo. App. E.D. 2003); Daly v. P. D. George Co., 77 S.W.3d 645 (Mo. App. E.D. 2002); Reeves v. Snider, 115 S.W.3d 375 (Mo. App. S.D. 2003); Industrial Development Authority of Kansas City v. State Tax Commission of Missouri, 804 S.W.2d 387, 392 (Mo. App. 1991).  Consequently, Complainant is denied exempt status for ad valorem tax purposes.

ORDER

The assessed valuation for the subject property as determined by the Board of Equalization for Clay County for the subject tax day is AFFIRMED.

Application for Review

A party may file with the Commission an application for review of this decision within thirty days of the mailing date set forth in the Certificate of Service for this Decision.  The application shall contain specific facts or law as grounds upon which it is claimed the decision is erroneous.  Said application must be in writing addressed to the State Tax Commission of Missouri, P.O. Box 146, Jefferson City, MO 65102-0146, and a copy of said application must be sent to each person at the address listed below in the certificate of service.

            Failure to state specific facts or law upon which the application for review is based will result in summary denial. Section 138.432, RSMo

Disputed Taxes

The Collector of Clay County, as well as the collectors of all affected political subdivisions therein, shall continue to hold the disputed taxes pending the possible filing of an Application for Review, unless said taxes have been disbursed pursuant to a court order under the provisions of Section 139.031.8, RSMo.

Any Finding of Fact which is a Conclusion of Law or Decision shall be so deemed.  Any Decision which is a Finding of Fact or Conclusion of Law shall be so deemed.

SO ORDERED this 14th day of March, 2017.

STATE TAX COMMISSION OF MISSOURI

 

John Treu

Senior Hearing Officer

 

Certificate of Service

I hereby certify that a copy of the foregoing has been sent electronically or mailed postage prepaid this 14th day of March, 2017, to: Complainants(s) counsel and/or Complainant, the County Assessor and/or Counsel for Respondent and County Collector.

 

sclancy@rgsz.com; trish.hughes@libertylawoffices.com; crinehart@claycountymo.gov; lmcevoy@claycogov.com

 

 

Jacklyn Wood

Legal Coordinator