In my capacity as editor of Florida Workforce Housing Network, I interviewed senior Tallahassee lobbyist and affordable housing expert Dr. Jeffry Sharkey, CEO of Capitol Alliance Group in Tallahassee. The topic: why is property tax reform so important to affordable housing? His answer wasn't the obvious one:
12 QUESTIONS: Tallahassee lobbyist Dr. Jeff Sharkey on Tax Reform, Affordable Housing
TALLAHASSEE, Fla. --- Yesterday Florida House and Senate leaders decided their special session 'tax reform' differences are so complex they need another weekend to think them over. While legislative observers debate whether the special session (and tax reform in Florida) has broken down completely, we asked a senior Tallahassee lobbyist about tax reform and affordable housing.
Dr. Jeffrey Sharkey heads the Capitol Alliance Group, a lobbying firm headquartered in Tallahassee. Dr. Sharkey worked closely with the late Rep. Mike Davis, R-Naples, to craft most of Florida's recent affordable housing legislation. He is a longtime advocate of affordable housing in Florida.
1. Why is property tax relief for affordable housing any more important than property tax reform per se?
Dr. Sharkey: Many property appraisers determine the value of affordable rental properties using a "market rate evaluation" approach. In effect, this methodology over-assesses the property's value. Since these properties operate on restricted rent levels set by HUD---indexed on the income of the resident---the real assessed value of the property should be based on a rental income approach.
The pro forma for affordable rental properties is established prior to the construction of the property. It uses an estimated NOI [Net Operating Income, or rent revenues minus vacancy and operating expenses] based on the restricted rent levels. Property taxes are estimated and budgeted based on those income-restricted rents, as if that were the true valuation of the property.
Oftentimes, assessors make no distinction between affordable and market rate properties. So when property appraisers over-assess those properties, there isn't sufficient cash flow from the rent to pay the inflated valuation. This creates serious financial pressure on the property. As property values and property taxes have skyrocketed over the past two years, this problem has only become worse. There is a history of law suits between housing developers and property appraisers over this very issue and we have been working on educating property appraisers and changing Florida law to help them assess these properties properly.
2. You're saying that methodologies used by local tax assessors create another roadblock for affordable housing developers?
Dr. Sharkey: Property taxes are a significant portion of the annual expense for affordable rental housing. If the assessment is not done on a rental income approach, it increases ad valorem costs. Those increased ad valorem costs will quickly deplete any operating reserves a property has available. Since the rent cannot be increased beyond the levels set HUD, there is no revenue to pay for this increased cost.
If affordable housing developers can not expect predictability with respect to the assessment of affordable properties, the added risk may keep them from deciding to develop on affordable housing in that community.
3. Is this over-assessment problem statewide or is it more prevalent in certain areas?
Dr. Sharkey: Ten years ago, the problem was fairly widespread statewide, principally because many local property appraisers were not familiar with the financial structure and the rent restrictions involved in financing affordable rental properties. Over the years, thanks to continued dialog, education, and frankly, some law suits, most of the property appraisers began to understand that over-assessing these properties would lead to a financial disaster for the property. Thus many of them adopted the rental income assessment approach. There are still a few counties where the problem exists, but we feel the property tax relief legislation will dissolve those.
4. Does it affect both rental and home ownership housing?
Dr. Sharkey: Most of the problem with affordable housing property assessment has focused on clarifying assessment of rental properties. However, as more and more non-profit organizations have developed home ownership property with layered financing and public/private partnerships, there has been some confusion about assessment of non-profit owned properties. The property tax relief package addresses both rental and home ownership property taxes.
5. The legislature has addressed this issue before, has it not?
Dr. Sharkey: Yes. We've attempted to fix the assessment of affordable rental income property four or five times since 1996 by fine-tuning the statutory language. Part of the problem has been that despite our legislative efforts, some property appraisers argued that changes needed to be made to the constitution rather than the statutes in order for the changes in state law to be considered constitutional. Because of that, the legislature has included changes to the Florida constitution in addition to statutory changes in the property tax relief legislative package under consideration during the special session.
6. How do property appraisers and local governments feel about the recommended changes to the assessment of affordable housing?
Dr. Sharkey: For the most part, I think they feel very positive. Almost all local government officials finally realize that affordable workforce housing to essential to the health and sustainability of their community, therefore they want this housing to be financially solved and the appropriate ad valorem assessment is the key to making that a reality.
7. Realizing this is still up in the air, what does the current affordable housing portion of the property tax relief legislative proposal attempt to do?
Dr. Sharkey: It has five components.
1) It clarifies how community land trust properties should be assessed; 2) It clarifies that property owned by non-profit organizations should be exempt from taxation; 3) It directs property appraisers to utilize a rental income assessment approach on any and all state, federal, and locally funded rent restricted properties; 4) It sets up an annual affordable housing certification process to be classified as affordable housing properties for assessment purposes; and 5) It adds a classification of affordable housing into Florida's constitution to ensure that property appraisers utilize the approach set forth and the proposed statue.
8. What property, and what income levels would the proposal affect?
Dr. Sharkey: The income levels defined in the statue that we covered under the property tax relief proposal would include very low, low, and moderate incomes.
9. Are there any particular legislators championing the effort in the legislature? Who, in your opinion, are the affordable housing heroes?
Dr. Sharkey: Of course, Representative Mike Davis, who recently passed away, provided the majority of the leadership last session on this property tax relief issue. There are many others in both the House and Senate that have taken up this initiative including Representative Dean Cannon, Representative Frank Attkisson, Representative Mike Grant, Senator Mike Haridopolos, Senator Mike Bennett, Senate President Ken Pruitt, and Senator Ted Deutch. Almost everyone in both the House and Senate has been supportive.
10. Are Democrats or Republicans leading the affordable housing tax relief effort?
Dr. Sharkey: Both parties are involved in solving the problem, very much so. Most Democratic and Republican members of the legislature understand the value of affordable workforce housing. They believe that property tax relief is important to keep affordable housing properties in their communities financially liable. The fact that affordable housing is included in this special session legislation on property tax reform is an indication of how important it has become to the economic and social well being of the state.
11. What will the affect of the proposed legislation be on affordable rental and ownership property?
Dr. Sharkey: I believe that finally it will stop any law suits between developers and property appraisers over misguided property assessments on rental income and ownership properties which will help ensure financial stability for these properties
12. Who has been most responsible for these legislative initiatives, and what can we do to help further those efforts?
Dr. Sharkey: I think the bipartisan support in this year's legislature for property tax relief and funding for affordable housing is a testament to all of the great education provided by affordable housing advocates and stakeholders around state. Florida has a huge affordable housing problem, but Florida also has an increasingly influential affordable housing advocacy movement. We need to continue to educate and thank our local legislators for their support for affordable workforce housing. We e we have a lot more to do in this arena and we will need their help as we move forward.
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