OPINION
I. INTRODUCTION
A рroperty owner and a borough property tax assessor each contend, for different reasons, that the superior court erred in affirming the borough board of equalization's final valuation for a low-income housing tax credit property. We affirm a portion of the superi- or court's legal rulings upholding the board's interpretation of the relevant appraisal statute and we affirm the superior court's legal ruling affirming the board's choice of appraisal methodology. But because we cannot discern (1) how the board treated relevant federal tax credits in its valuation of the property, (2) the comparable properties for the board's finding that the assessor's valuation was "grossly disproportionate as compared to similar properties," or (8) the basis for the 40% economic obsolescence factor by which the board reduced that valuation, we remand for clarification by the board.
II. BACKGROUND
A. LIHTC Program Properties
Congress created the low-income housing tax credit (LIHTC) program as part of the Tax Reform Act of 1986.
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The program is intended "to encourage the private sector to develop affordable rental housing.
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Each state receives and distributes an annual allot, ment of low-income housing tax credits based on the state's population.
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A developer can apply for a ten-year allocation of federаl income tax credits,
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but must commit to ree-
Typically a developer finances a LIHTC project by attracting limited liability partners to invest in return for use of the stream of tax credits. 9 Tax credits can also be transferred through sale of the property, provided the new owner continues to comply with the LIHTC program. 10
B. Other Jurisdictions' Property Tax Treatment Of LIHTC Properties
Rental restrictions and federal tax credits pose difficult questions in property tax assessments of LIHTC properties, and cоurts are not in agreement in resolving these questions.
Courts differ on whether and why rental restrictions must be considered. Arizona, Kansas, South Dakota, and Washington all assess property value based on standards similar to Alaska's statutory "full and true value" standard,
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and their courts have held that rental restrictions on LIHTC properties must be considered.
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The Supreme Courts of Idaho and Oregon, basing their decisions on statutes dissimilar to Alaska's,
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likewise have held LIHTC rental restrictions must be considered.
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The Ohio Supreme Court has held that LIHTC rental restrictions must be considered because they are "police power" restrictions enacted under the General Welfare Clause of the Federal Constitution.
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Reaсhing the opposite conclusion, the North Carolina Supreme Court reasoned that because taxpayers choose to participate in the LIHTC program, the taxing authority does not need to consider the rental restrictions.
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Courts also differ on whether LIHTC tax credits should be considered. The Arizona Tax Court, Washington and Missouri intermediate courts of appeal, and Ohio and Oregon Supreme Courts have determined that regardless of whether rental restrictions are taken into account in property tax assessments, the tax credits should not be cоnsidered. 18 The Arizona court reasoned that the tax credits (1) are intangible property in that they are "paid by the federal government as an incentive to invest in the project and are not income flowing from the rental of the property" and (2) do "not significantly affect the marketability" of the property because a buyer of a limited partner's interest receives only the remainder of the credits, which are subject to recapture. 19 The Missouri, Ohio, and Washington courts focused on the tax credits' intangibility in concluding they must not be considered. 20 The Oregon court reasoned that the tax credits would not affect the most probable price for the property becausе "the credits would be recaptured if the property were not maintained as low-income housing. 21
Reaching the opposite conclusion, courts in Georgia, Idaho, Illinois, Indiana, Michigan, Pennsylvania, South Dakota, and Tennessee have held that LIHTC tax credits cannot be ignored when rental restrictions are taken into account in the absence of contrary statutory authority. 22 The Georgia court rejected the argument that tax credits should be ignored as valueless because they are allocated to a limited partner and expire before the rental restriction period ends. 23 Illinois and Michigan courts rejected the argument that tax credits should be ignored as intangible. 24
C. Alaska Property Tax Framework For LIHTC Properties
Alaska Statute 29.45.110(a) requires that property be assessed at its "full and true value," defined there as "the estimated price that the property would bring in an open market and under the then prevailing market conditions in a sale between a willing seller and a willing buyer both conversant with the property and with prevailing general price levels."
In Dash v. State 25 we recognized appraisers' three usual approaches to valuing real property:
They are the cost approach, the market data approach, and the income approach. The cost approach, which arrives at value by determining the current cost of reproducing a property lеss depreciation, is used only when the property is improved. The market data approach measures value by comparison to recent sales of similar property. The income approach, which is concerned with the present worth of futurebenefits from the property, arrives at present value by discounting or 'capitalizing' the future income which could be derived from the property. The income capitalization method involves three steps:
(1) an estimate of the income which the property is capable of producing, including both periodic income and the income to be derived from future sale of the property; (2) an estimate of the rate of return (capitalization rate) an investor would require in order to induce him to make an investment with the risk and lack of liquidity of an equity interest in the particular property; (8) an application of this capitalization rate to the estimated income to derive the present value of the estimated income.[ 26 ]
In 2000 the Alaska legislature added a new subsection to AS 29.45.110. 27 The bill's initial draft mandated valuing all LIHTC properties based on rental restrictions without adjustment for tax credits. 28 The bill's proponents explained in committee that the bill was prompted by a change in the Municipality of Anchorage's interpretation of full and true value for LIHTC properties 29 Al though the Municipality hаd for years valued LIHTC properties based on rent-restricted income, it had stopped doing so, thereby imposing higher property tax burdens. 30 But legislative committees also heard concerns that the proposed bill would give LIHTC properties an unfair competitive advantage over other housing 31 and reduce tax revenue to municipalities. 32
The final version of the bill created AS 29.45.110(d) 33 Subsection (d)(1) provides that when calculating the full and true value of a property qualifying for the LIHTC program before January 1, 2001, an assessor "shall base assessment ... on the actual income derived from the property and may not adjust it based on the amount of any federal income tax credit given for the property." 34 For properties qualifying for the LIHTC program on or after Jаnuary 1, 2001, subsection (d)(2) directs local governments to determine by ordinance whether to follow subsection (d)(1) or to generally exempt these properties from subsection (d)(1)'s mandatory income approach and determine parcel-by-parcel whether to require use of that appraisal method. 35
D. Kenai Peninsula Borough LIHTC Properties Tax Framework
The Kenai Peninsula Borough Assembly (Assembly) passed an ordinance exempting post-2000 LIHTC properties from AS 29.45.110(d)(1)'s mandatory valuation based on actual income without consideration of tax credits. 36 The Assembly therefore decides on a parcel-by-parcel basis whether to direct the Kenai Peninsula Borough Assessor (Assessor) to use that valuation method.
E. Pacific Park LIHTC Property And 2007 Assessment
Pacific Park Limitеd Partnership (Pacific Park) owns a 830-unit apartment complex (Apartments) in Seward, within the Kenai Peninsula Borough (Borough). In 2008 Alas
In 2005 Pacific Park applied to the Assembly for a resolution directing the Assessor to value the Apartments based on actual income derived from the property. The resolution failed.
In 2005, 2006, and 2007 the Assessor valued the Apartments at $2,930,700 using the cost approach, which is based on the rationale that a willing buyer will not pay more for a building than it would cost to build one just like it. 37 The Assessor described the steps of the cost approach as: (1) calculating the current cost to reproduce or replace improvements such as buildings; (2) subtracting out physical, functional, or economic depreciation evident in the structures; and then (8) adding in the value of the land аnd entrepreneurial profit. The Assessor used the cost approach to value the nearly 90 apartment complexes in the Borough, including Pacific Park's Apartments. But three pre-2001 LIHTC projects were revalued under the income approach required by AS 29.45.110(d)(1), based on actual restricted rents and without consideration of federal income tax credits.
In 2007 Pacific Park had the Apartments independently appraised using the income approach and the restricted rents. As explained by the Assessor, the income approach measures property value by capitalizing income streams and potential future resale into a present, lump sum value. 38 The independent appraisers, Brian Z. Bethard and Michael A. Forsland, used this approach because "[tlhe income approach best reflects the market value at restricted rents for the subject" and because Pacific Park had limited the appraisal to that approach. Bethard and Forsland projected the stabilized net operating income at the restricted rents, excluding property tax, as $62,089 annually and valued the Apartments at $652,000.
F. Board Of Equalization Appeal
Pacific Park appealed the Assessor's 2007 valuation of $2,930,700 to the Borough's Board of Equalization (Board). Upon rein-spection and reevaluation, the Assessor calculated a total value of $3,067,800.
The Board heard Pаcific Park's appeal on June 11, 2007. Pacific Park argued that: (1) the Assessor had used "a fundamentally wrong principle of valuation in that the Assessor did not consider [the] 30-year rent restriction"; and (2) even under the cost approach, rental restrictions needed to be considered in the form of economic obsolescence. 39 Pacific Park also argued that its federal tax credits should not be considered in the assessment valuation because they are intangible.
The Assessor argued that: (1) Pacific Park would have to show fraud or the clear adoption of a fundamentally wrong valuation
The Board found that although using the cost approach was within the Assessor's discretion, application of that approach to the Apartments without consideration of rental restrictions or economic obsolescence resulted in a valuation that was "overvalued [and] grossly disproportionate as compared to similar properties." The Board decided that the Apartments' improvement value should be reduced by a 40% economic obsolescence factor.
G. Superior Court Appeal
The Assessor appealed the Board's decision to the superior court, and Pacific Park cross-appealed. The superior court addressed four issues encompassing all points on appeal. First, the superior court held the Board did not err by not adopting the income approаch to value the Apartments. Second, it held the Board did not violate state law, borough code, or legislative intent by adjusting the Assessor's valuation. Third, it held the Board did not err by finding the Assessor's application of the cost approach resulted in an overvalued and grossly disproportionate valuation. Finally, it held the facts and law supported the Board's valuation of Pacific Park's property, including the 40% economic obsolescence factor.
The Assessor appeals and Pacific Park cross-appeals.
III. STANDARD OF REVIEW
"When the superior court acts as an intermediate court of appeal in an administrative matter, we independently review and directly scrutinize the merits of the board's decision." 40 Questions of law and fact involving agency expertise are reviewed under the reasonable basis standard. 41
Whether the Board's factual findings, particularly the findings that the Assessor's valuation was grossly disproportionate and excessive by 40%, are "sufficient to permit appellate review is a legal question that we decide by exercising our independent judgment. 42 In the absence of a specific standard provided by statute or ordinance, the test of the sufficiency of an agency's findings of fact is "a functional one: do the [agency's] findings facilitate this court's review, assist the parties and restrain the agency within proper bounds 43 This court may look to the record to clarify the agency decision-maker's reasoning and cоnclusion. 44
Whether the Board's assessment violated relevant law is a question of law not involving agency expertise, and we therefore review this question under the substitution of judgment standard. 45 In doing so, "[wle will 'adopt the rule of law that is most persuasive in light of precedent, reason, and policy. 46
A. Appraisal Methodology And Interpretation Of AS 29.45.110
1. Methodology
Pacific Park appeals on the ground that the Board "erred when it failed to adopt [Pacific Park's] appraiser's valuation using the 'income' approach" because that approach is the preferred method for valuing LIHTC projects.
The Apartments are properly valued under AS 29.45.110 subsection (a)'s general full and true value provision rather than subsection (d)(1)'s mandatory income approach without adjustment for tax credits because they did not qualify for the LIHTC program prior to January 1, 2001, they are located in a municipality where post-2000 LIHTC projects are exempt from mandatory use of the statutory income approach, 47 and Pacific Park's application for an Assembly resolution directing the Assessor to use the statutory income approach failed.
A taxing authority is allowed to choose a reasonable method for determining the full and true value of a property "so long as there was no fraud or clear adoption of a fundamentally wrong principle of valuation." 48 Provided that a method is not fundamentally wrong, it does not evеn need to be recognized by the appraisal community. 49 Here, Pacific Park's witness Bethard testified that the cost approach is "a fundamentally correct approach to use, it's normal appraisal methodology, 50 and we have long recognized the cost approach as a usual appraisal method for improved property." Accordingly, the Board could reasonably conclude "the cost approach is an acceptable method of valuation." We therefore affirm the superior court's decision upholding the Board's use of the cost approach to value the Apartments.
2. Consideration of restricted income and tax credits
The Assessor appeals on the ground that the Board "impermissibly focused on the restricted rental income of the property." The Assessor argues that (1) after AS 29.45.110(d) became effective, rental restrictions could not be considered in calculating full and true value under AS 29.45.110(a), and (2) the failure of Pacific Park's Assembly resolution precludes consideration of the rental restrictions. We disagree. Just because a taxing authority is not required under state or local law to use the statutory income approach does not necessarily mean that it is prohibited from considering restricted rental rates in another valuation method, if reasonable to do so. The Board could reasonably conclude that it was appropriate to consider the rental restrictions when valuing the Apartments under the cost approach, and we affirm the superior court's decision upholding the Board on this issue.
The Assessor also appeals on the ground that the Board's valuation "failed to account for the federal tax credits provided to the Property." The Assessor argues there is a requirement that the taxing authority consider federal income tax credits if it considers rental restrictions in assessing the full and true value of a LIHTC property. As noted above, courts from other jurisdictions differ on whether federal income tax credits must be considered when rental restrictions are considered in valuing a LIHTC proрerty. Some conclude that tax credits should be ignored because they are intangible property
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or because they are subject to recapture if the rental restrictions are violated.
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Others conclude that tax credits should be considered because they relate directly to the
Here the Board did not expressly address the tax credits associated with the Apartments, and we cannot discern whether or why the Board took the tax credits into account or ignored them in its adjustment of the Assessor's valuation. The superior court noted that the Board's decision did not address these questions, but nonetheless held that the Board "acted within its expertise to decide that tax сredits are largely intangible and not appropriate for tax assessment." We are unable to affirm the superior court's decision on this record. As discussed below, we are remanding to the Board for clarification of its use of the rental restrictions to adjust the Assessor's valuation, and the Board should clarify its treatment of the tax credits in its subsequent decision as well.
B. The Board's Findings Regarding Disproportionate - Valuation - And Obsolescence
The Assessor and Pacific Park both contend the Board's valuation of the Apartments must be set aside. The Assessor argues the Board did not accord his valuation proper deference and lacked sufficient grounds to find his valuation "excessive оr grossly disproportionate compared to other similar projects." Pacific Park argues the Board should have recognized "complete" economic obsolescence due to the rental restrictions and, even under the cost approach, should have reached the same valuation as Pacific Park's appraiser under the income approach.
"The only grounds for adjustment of assessment are proof of unequal, excessive, improper, or under valuation based on facts that are stated in a valid written appeal or proven at the appeal hearing." 54 In reviewing the Board's findings, we understand the word "overvalued" to be synоnymous with "excessive" and the phrase "grossly disproportionate as compared to similar properties" to be synonymous with "urequal." - Our "threshold question ... is whether the record sufficiently reflects the basis for the [Board's] decision so as to enable meaningful judicial review." 55
1. "Overvalued" finding
The Board found the failure to factor in rental restrictions and economic obsolescence made the Assessor's valuation excessive. The Assessor argues that his failure to incorporate rental restrictions in the form of economic obsolescence did not render the valuation excessive because economic obsolescence cannot measure internal conditions suсh as rental rates. But although the deed restriction limiting a LIHTC property's rental rates is part of the property itself, the marketplace's reaction to the deed restriction is external. 56 In this way, economic obsolescence can measure the external reaction to the deed restriction on the Apartments. 57 The Board could reasonably determine the Assessor's valuation was excessive because it failed to account for economic obsolescence, and to this extent we affirm the superior court's decision upholding the Board on this issue.
Pacific Park argues the Board should have recognized "complete" economic obsolescence instead of a 40% factor. In applying the 40% factor, the Board acknowledged it heard testimony that "up to a 50% reduction" would be reasonable as an economic obsolescence factor. Pacific Park accurately clarifies that Bethard's testimony suggested a 50% factor at the hearing to account for the depressed nature of the general housing market in Seward, and implies that its 30-year rental restrictions would
The Board's oral findings do not specify whether its 40% economic obsolescence factor accounts for the general housing market in Seward, the rental restrictions, or both, stating simply "the cost approach should include a factor for economic obsolescence." The Board's written findings state the Apartments were overvalued because "[the assessment did not include a factor for economic obsolescenée, even though the property is burdened by rent restrictions that run with the land," indicating the 40% factor relates at least in part to the rental restrictions.
At oral argument before us, counsel for Pacific Park stated that the 40% factor chosen by the Board lacked an evidentiary basis. The Assessor stated at oral argument that he understood the restricted rental income was the sole reason for the Board's 40% obsolescence factor and the general Seward market was not taken into account by the Board. It is not clear to us why the Board applied a 40% economic obsolescence factor when the only quantified factor presented to the Board was the 50% obsolescence factor accounting for the depressed Sеward rental market in general. We therefore remand to the Board for clarification and explanation of its decision on this issue and for further factual findings as it deems necessary. 58
2. "Grossly disproportionate" finding
The Board's oral and written findings do not state the comparison from which it determined the Assessor's valuation to be unequal.
Pacific Park argued to the Board that the Assessor's valuation was unequal to valuations of other LIHTC properties in Alaska. But as the Assessor pointed out to the Board, the other LIHTC properties in Alaska are valued under AS 29.45.110(d)-which mandates they be assessed under the income approach based on actual income without adjustment for federal tax credits-because they еither qualified as LIHTC properties before January 1, 2001, or are located in municipalities without an ordinance allowing for a different valuation method. 59
The Assessor made particular mention of another post-2000 LIHTC property in the Borough valued under the cost approach without adjustments for rental restrictions or federal tax credits. But Pacific Park pointed out that the property was not appropriate for comparison because its owners participated in the Section 515 Program, 60 which Pacific Park explained provides for a flexible ongoing federal subsidy to help the owners cope with high property taxes.
The Assessor asserted the valuatiоn was not unequal given the appropriate comparison to the nearly 90 apartment complexes in the Borough appraised under the cost approach. The Board's finding that the Assessor's valuation was grossly disproportionate "because" of the failure to factor in recorded restrictions suggests that the Board compared the Apartments to the non-LIHTC apartment complexes, which are uneneum-bered by rental restrictions. This would be consistent with the Board's finding that the
Despite reviewing the parties' briefing and the record for clarification, 62 we cannot discern with any reasonable certainty what the Board used as comparison properties for its finding that the Assessor's valuation was "grossly disproportionate as compared to similar properties." We therefore remand to the Board for clarification and explanation of its decision on this issue and for further factual findings as it deems necessary.
v. CONCLUSION
We AFFIRM the superior court's decision upholding the Board of Equalization's state law and borough code interpretation allowing the cost approach and the consideration of LIHTC rental restrictions in connection with that appraisal methodology. We VACATE the superior court's decision upholding the Board's final valuation and REMAND to the Board for findings that enable review of the basis for its decision.
Notes
. Pub.L. No. 99-514, 100 Stat. 2085 (1986) (codified at 26 U.S.C. § 42).
. Holly Ridge Ltd. P'ship v. Pritchett,
. 26 U.S.C. § (CG).
. Id. § 42(a), (f)(1).
. Id. § 42(g)(1)-(2), (b)(6), ®(1).
. Id. § 42(10)(2); 26 C.F.R. § 1.42-5(0).
. 26 U.S.C. § 26 C.R.R. § 1.42-5(b).
. 26 U.S.C. § 42(2), ().
. E.g., Holly Ridge Ltd. P'ship,
. 26 U.S.C. § 42(d)(7)(8).
. AS 29.45.110(a) provides that property shall be assessed at its "full and true value," with some exceptions, and defines "full and true value" as "the estimated price that the property would bring in an open market and under the then prevailing market conditions in a sale between a willing seller and a willing buyer both conversant with the property and with prevailing general price levels."
. Cottonwood Affordable Hous.,
. Greenfield Vill. Apartments, L.P. v. Ada Cnty.,
. Greenfield Vill. Apartments, L.P.,
. - Woda Ivy Glen Ltd. P'ship v. Fayette Cnty. Bd. of Revision,
. In re Appeal of Greens of Pine Glen Ltd.,
. Id. at 322.
. - Woda Ivy Glen Ltd. P'ship,
. Cottonwood Affordable Hous.,
. Maryville Props., L.P.,
. Bayridge Assocs. Ltd. P'ship,
. Pine Pointe Hous., L.P. v. Lowndes Cnty. Bd. of Tax Assessors,
. Pine Pointe Hous., L.P.,
. Rainbow Apartments,
.
. Id. at 1071 (internal citations omitted).
. Ch. 79, § 1, SLA 2000 (.B. 272).
. House Bill (H.B.) 272, 21st Leg., 2d Sess. (Jan. 10, 2000).
. Municipal Tax: Low Income Housing: Hearing on H.B. 272 Before the H. Comm. on Cmty. & Reg'l Affairs, 21st Leg., 2d Sess. (Alaska Feb. 1, 2000) (statement of Jonathon Lack, Legislative Assistant to Rep. Andrew Halcro).
. Id.
. Id. (statements of Pat Carlson, Assessor, Kodiak Island Borough, and Wiley Brooks, Certified Prop. Manager and member of Alaska Chapter Real Estate Mgmt.).
. Hearing on H.B. 272 Before the S. Fin. Comm., 21st Leg., 2d Sess. (Alaska Apr. 13, 2000) (statement of Eric Dyrud, Real Estate Broker, member of Anchorage Bd. of Realtors Legislative Comm. and Alaska Bd. of Realtors Legislative Comm.).
. See note 27, above.
. AS 29.45.110(d)(1); 29.45.110(d)(2). compare id. with AS
. AS 29.45.110(d)(2).
. - Kenat Pexinsura Borover Cope (KPB) 05.12.085 (2003).
. Jonathan Penna, Fairness in Valuation of Low-Income Housing Tax Credit Properties: An Argument for Tax Exemption, 11 Fall J. Affordable Housing & Community Dev. L. 53, 55 (2001); accord. Cascade Court Ltd. P'ship,
. See Dash,
. "Economic obsolescence" is "diminution in the value or usefulness of property" that "results from external factоrs, such as decreased demand or changed governmental regulations." Buack's Law Dictionary 1107 (8th ed. 2004).
. Alford v. State, Dep't of Admin., Div. of Ret. & Benefits,
. Black v. Municipality of Anchorage, Bd. of Equalization,
. Alvarez v. Ketchikan Gateway Borough,
. Faulk v. Bd. of Equalization,
. See id. (citing S. Anchorage Concerned Coal., Inc.,
. Handley v. State, Dep't of Revenue,
. Williams v. Abood,
. KPB 5.12.085.
. Fairbanks N. Star Borough Assessor's Office v. Golden Heart Utils., Inc.,
. Id. at 268.
. Dash,
. Cottonwood Affordable Hous.,
. Cottonwood Affordable Hous.,
. Brandon Bay, Ltd. P'ship,
. AS 29.45.210(b).
. Faulk,
. Pedcor Invs.-1990-XIII, L.P.,
. - See Cascade Court Ltd. P'ship,
. We reiterate our earlier point that if the Board adjusts the Assessor's cost-approach valuation because of the rent restrictions, the Board must also clarify and explain its treatment of the federal tax credits in its analysis of the rent restrictions' impact on the Apartments' value. It seems to us that if rent restrictions are relevant to the cost-approach valuation analysis, the same would be true for any tax credits providing some economic advantage to offset the effect of the rent restrictions. But we leave the relevant considerations and determinations in the first instance to the Board.
. - Pacific Park also compared its property valuation to those of LIHTC properties in other western states that value this type of property based on rentаl restrictions. Pacific Park noted that some LIHTC properties are valued without consideration of rental restrictions by statute, but that courts and boards of equalization in other states have interpreted "full and true value" to allow for adjustment based on rental restrictions. The Board's oral and written findings do not mention how other western states value LIHTC properties.
. Housing Act of 1949 § 515, 42 U.S.C. § 1485.
. Another implication from this testimony is that a reduction in the Apartment's value for economic obsolescence arising from the depressed housing market might render the valuations for all other apartment complexes excessive and unequal. But we leave the relevant considerations and determinations in the first instance to the Board.
. See Faulk,