HB 360 Brings Welcome Changes to Affordable Housing Tax Law in Kentucky

Legislation signed into law on March 24 by Kentucky Gov. Andy Beshear offers some good news to owners and developers of affordable apartment buildings. Because the bill is effective immediately, we wanted to let you know the new provisions could apply to this year’s annual real property open inspection period, which starts on May 1, 2023.

House Bill 360 is a fiscal, omnibus bill that establishes, among many other provisions, a new property tax valuation method for multi-unit rental housing that is designed to help stabilize the affordable housing market across the Commonwealth, and better position it for future growth. The new process brings Kentucky in line with many other states that determine low-income housing tax rates independently from nongovernment-regulated commercial properties.

Prior to this legislation, property tax on most affordable multifamily housing in Kentucky was assessed using the same calculations as market-rate apartment housing.

Market-rate assessments use an income approach, which divides a property’s net operating income by its capitalization rate to determine the overall value. The problem with applying this traditional method is that affordable multifamily housing generally has higher capitalization rates than market-rate commercial properties. Plus, regulations in the affordable housing market restrict income-earning potential. This means that many low-income housing projects are overvalued — leading to unfairly high property tax bills.

We applaud the many advocacy groups that worked so hard to take this much-need legislation across the finish line.

The New Method, and How It Works

H.B. 360 amends KRS 132.191. The newly created method for evaluating the property tax on low-income housing with “government restriction on use” applies to affordable housing projects with four or more units, where at least half of the units are set aside for residents at or below 80% of Area Median Income, as defined by the U.S. Department of Housing and Urban Development (HUD). The properties must be utilizing low-income housing tax credits (LIHTC), low-interest HUD loans, tax-exempt bond financing, rent subsidies, guaranteed loans or grants.

Owners of eligible affordable housing projects may use one of KRS 132.191’s two new formulas for valuing their properties — the income or comparison approaches.

The income formula calculates the difference between the property’s actual income and operating expenses, divided by a capitalization rate that is specific to affordable housing. The capitalization rate is unique because it considers factors that are dependent on federal low-income housing regulations such as reduced income potential, in addition to the usual market factors like the condition of the property, size and location. The affordable housing cap rate will be set as equal to or greater than that of market-rate multifamily housing. The Kentucky Department of Revenue (DOR) will calculate and publish this unique rate on an annual basis.

The comparison approach uses a traditional formula to calculate the value of a rental property, but adjusts the total value based on a ratio of the average annual income-restricted rents against the rents from comparable, market-rate properties.

It’s important to note that, in using either of these formulas, low-income housing tax credits will not be included in assessing the value of these projects.

Over the coming months, the DOR will be working to implement these changes. As owner of multifamily housing, you will be responsible for notifying your local property valuation administrator if your project qualifies for the new affordable housing tax assessment method.

Your DMLO tax professional is here to help. We look forward to helping you reap the benefits of this new legislation, which goes a long way toward leveling the playing field for affordable housing in Kentucky.

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