ARGUMENT: September 9, 2016
of Source Circuit Court Racine County Gerald P. Ptacek Judge
of a decision of the Court of Appeals. Reversed and remanded.
the plaintiff-appellant-petitioner, there was a brief by
Maureen A. McGinnity and Foley and Lardner LLP, Milwaukee,
and oral argument by Maureen A. McGinnity
the defendant-respondent, there was a brief by Robert E.
Hankel, and Robert E. Hankel, S.C., Mount Pleasant., John M.
Bjelajac, and Bjelajac and Kallenbach, LLC, Racine and oral
argument by Robert E. Hankel.
PATIENCE DRAKE ROGGENSACK, C.J.
Regency West Apartments, LLC brought actions against the City
of Racine in circuit court pursuant to Wis.Stat. §
74.37(3)(d) (2011-12) to recover refunds from claimed excessive
taxation for 2012 and 2013. We review a per curiam,
unpublished decision of the court of appeals,  affirming an
order of the Racine County Circuit Court that dismissed
Regency West's claims of excessive
The City of Racine's appraisers valued Regency West's
property at $4, 425, 000 as of January 1, 2012 and at $4,
169, 000 as of January 1, 2013 for purposes of tax
assessment. Regency West claims both appraisals fail to
comply with appraisal principles required by Wisconsin law,
and that those appraisals resulted in excessive taxation.
Our discussion centers on whether Racine's appraisals of
Regency West's property comply with Wisconsin law.
Specifically, we review whether Racine employed the
methodology required by Wis.Stat. § 70.32(1) for valuing
federally subsidized property that is subject to I.R.C.
§ 42 restrictions;whether Regency West has overcome the
presumption of correctness set out in Wis.Stat. § 70.49;
and whether Regency West proved the tax assessments for 2012
and 2013 were excessive.
We conclude that the valuation methodologies Racine used for
the 2012 and 2013 assessments did not comply with Wisconsin
law. Accordingly, we also conclude that Regency West has
overcome the presumption of correctness for the 2012 and 2013
tax assessments, and that the circuit court and the court of
appeals erred in concluding otherwise. And, finally, we
conclude that Regency West has proved that Racine's tax
assessments for 2012 and 2013 were excessive. Accordingly, we
reverse and remand to the circuit court to calculate the
amount of Regency West's refund.
Regency West is the owner and developer of a property located
in Racine, Wisconsin. Regency West constructed the property
in 2010-11, with the first units placed in service September
of 2011, and the project being fully leased in February of
The property has 9 two-story buildings consisting of 72
residential units, all of which are family units. All units
are federally regulated housing pursuant to I.R.C. § 42.
These federal regulations include income and rent
restrictions. As part of the restrictions, the property is
subject to a Land Use Restriction Agreement (LURA) that
provides that for 30 years, 51 of the 72 units are restricted
to tenants earning up to 50 percent of the median income in
Racine County and 21 are restricted to tenants earning up to
60 percent of the median income in Racine County. The maximum
rents that Regency West may charge are set by Wisconsin
Housing and Economic Development Authority (WHEDA).
For purposes of assessing real estate taxes, Racine's
appraisers valued Regency West's property at $4, 425, 000
as of January 1, 2012 and at $4, 169, 000 as of January 1,
2013. Regency West contested both tax assessments, claiming
that the appraisals that underlie the tax assessments did not
comply with Wisconsin law. Regency West did not challenge the
2012 assessment before the board of review because Racine did
not timely deliver the assessment to Regency West. However,
Regency West did challenge the 2013 assessment before the
board of review. The board upheld that tax assessment.
The matter now before us is Regency West's refund action
brought in circuit court pursuant to Wis.Stat. §
74.37(3)(d). Therefore, we review the record made in the
circuit court and the circuit court's determination, not
the determination of the assessor or the board of review. See
Nankin v. Vill. of Shorewood, 2001 WI 92,
¶¶24-25, 245 Wis.2d 86, 630 N.W.2d 141.
Trial testimony turned on various methods of real estate
appraisal by which the value of Regency West could be
determined. The City presented testimony from its assessor,
Janet Scites, as well as the Chief Assessor for the City of
Racine, Ray Anderson. Scites testified that for 2012 she
applied a direct capitalization of income approach, using
"mass appraisal techniques." With a direct
capitalization of income approach to valuation, an appraiser
computes the property's net operating income (income less
expenses or NOI) and divides it by the applicable
capitalization rate (ratio between NOI of comparable
properties and their sale prices).
One of Regency West's construction lenders provided
estimates of potential gross income and expenses to Racine
for use in the 2012 valuation. However, Racine's assessor
said that the expense projections in that report were too
high. Accordingly, Scites applied a 40 percent estimated
expense ratio that she believed was reflective of other
Section 42 properties. She testified that she did so "to
Racine's assessor used a 6 percent capitalization rate
derived from market-rate properties, not from the market for
Section 42 properties. To this, Scites added the 2.5 percent
property tax rate, for a loaded capitalization rate of 8.5
percent. Racine's appraisers divided the NOI
they calculated based on "stabilized expenses" by
an 8.5 percent capitalization rate thereby yielding a value
of $4, 425, 000 for 2012.
With respect to the 2013 assessment, Racine valued Regency
West's property at $4, 169, 000 as of January 1, 2013.
The City's assessors used the comparable sales approach,
rather than the income approach, to appraise the property.
They relied on the sales of three properties, which they
claimed were reasonably comparable properties.
One of the properties, Lake Oakes, had few Section 42 housing
units; most were market-rate units. The other two properties
the City's assessors relied on, Woodside Village/Albert
House and McMynn Tower, had no Section 42 units. Each of
those developments was either entirely HUD § 8 housing
or HUD § 8 housing with a small number of commercial
units.The assessor did not adjust for
differences in government restrictions on the different types
of federally regulated housing when appraising Regency
West's property. Instead, Scites testified that she
considered the restrictions for Section 8 and Section 42
properties to be sufficiently similar.
Racine also presented the testimony of two outside
appraisers, Peter Weissenfluh and Dan Furdek. The outside
appraisers used four appraisal methods for both their 2012
and 2013 assessments. First, Weissenfluh and Furdek used the
comparable sales approach. The appraisers relied on a
combination of Section 42 and Section 8 properties, and
Furdek testified that he believed the restrictions on the
properties were irrelevant as long as the rental income from
the properties was the same. Next, they used two variations
of the income approach: the direct capitalization method and
the discounted cash flow method. Finally, they used the cost
approach. Each of Furdek and Weissenfluh's valuations
resulted in higher valuations than Racine's.
In contrast, Regency West argued that it had overcome the
presumption of correctness afforded the City's tax
assessment for two reasons. First, the City had failed to
comply with the Wisconsin Property Assessment Manual
(WPAM) in its appraisals of Regency West's
property as Wis.Stat. § 70.32(1) requires. Second,
Regency West presented sufficient contrary evidence that
Racine's appraisals were excessive. In that regard,
Regency West presented testimony from Michael Lerner and, its
appraiser, Scott McLaughlin. Michael Lerner has vast
experience working with Section 42 housing whereas Scott
McLaughlin specializes in appraising subsidized housing.
Relying solely on the income approach, which he explained was
consistent with WPAM, McLaughlin appraised the property at
$2, 700, 000 for 2012 and $2, 730, 000 for 2013.
At the conclusion of the trial, the circuit court dismissed
Regency West's excessive tax claims for both years. The
circuit court concluded that Regency West had failed to
overcome Wis.Stat. § 70.49's presumption of
correctness given to the 2012 and 2013 tax assessments.
The circuit court found that Racine did not do an individual
valuation of Regency West's property for 2012, but
instead, it "applied mass appraisal techniques."
The court found that Scites "estimated expenses based
upon her experience and used a capitalization rate of
8.5%." The court then concluded that "[d]ue to the
number of assessments needed to be done (7, 500), the City
used mass appraisal techniques, [which was] an appraisal
method approved by the Property Assessment Manual for
commercial property" in arriving at $4, 425, 000 as the
property's value in 2012.
The court of appeals affirmed the circuit court's
dismissal of Regency West's complaint. With respect to
the 2013 assessment, the court rejected Regency West's
argument that Section 42 and Section 8 properties are not
reasonably comparable for purposes of the comparative sales
approach. The court reasoned that both types of subsidized
housing are found within the same section of the WPAM, and
Racine's assessors had opined that the rents from all the
properties were essentially the same. With respect to the
2013 assessment, the court concluded that reliance on
market-rate properties for the NOI was immaterial because
Racine used the comparative sales approach for that
valuation; and for 2012, reliance on a market-rate NOI was
reasonable because Regency West was newly constructed and did
not have actual expenses to consider.
Consequently, the court of appeals concluded that Regency
West had not overcome the presumption of correctness accorded
to tax assessments by Wis.Stat. § 70.49 and, therefore,
Regency West was unable to show that its 2012 and 2013 tax
assessments were excessive.
We granted Regency West's petition for review and now
Standard of Review
This is a refund action commenced under Wis.Stat. §
74.37(3)(d). It permits "an aggrieved person to recover
that amount of general property tax imposed because the
assessment of property was excessive." Wis.Stat. §
74.37(1). A claim for excessive assessment is a "new
trial, not a certiorari action." Trailwood Ventures,
LLC v. Vill. of Kronenwetter, 2009 WI.App. 18, ¶6,
315 Wis.2d 791, 762 N.W.2d 841');">762 N.W.2d 841. Therefore, "we review
the record made before the circuit court, not the board of
review." Adams Outdoor Advert., Ltd. v. City of
Madison, 2006 WI 104, ¶24, 294 Wis.2d 441, 717
N.W.2d 803 (citing Nankin, 245 Wis.2d 86, ¶25).
As we review the record made in the circuit court, we
interpret and apply Wis.Stat. § 70.32 to determine
whether Racine's appraisals for 2012 and 2013 followed
the statute's directives. We also interpret Wis.Stat.
§ 70.49(2) to determine whether Regency West has
overcome the presumption of correctness that attached to
Racine's tax assessments. Statutory interpretation and
application present questions of law that we independently
review, while benefitting from the analyses of the court of
appeals and the circuit court. Oneida Cty. Dep't of
Soc. Servs. v. Nicole W., 2007 WI 30, ¶9, 299
Wis.2d 637, 728 N.W.2d 652; see also Soo Line R.R. Co. v.
DOR, 97 Wis.2d 56, 59-60, 292 N.W.2d 869 (1980).
General Appraisal Principles
"The power to determine the appropriate methodology for
valuing property for taxation purposes lies with the
legislature." Walgreen Co. v. City of Madison,
2008 WI 80, ¶19, 311 Wis.2d 158, 752 N.W.2d 687.
Wisconsin Stat. § 70.32(1) provides that "property
shall be valued by the assessor in the manner specified in
the Wisconsin property assessment manual." "The
Manual, in turn, provides that '[t]he goal of the
assessor is to estimate the market value of a full interest
in the property, subject only to governmental restrictions.
All the rights, privileges, and benefits of the real estate
are included in this value. This is also called the market
value of a fee simple interest in the property.'"
Walgreen, 311 Wis.2d 158, ¶20 (quoting 1 Wisconsin
Property Assessment Manual (2007) at 7- 4).
The objective of an appraisal is to determine "the full
value" that an owner would receive at a "private
sale." Wis.Stat. § 70.32(1). For purposes of
determining full value, property is separated into seven
classifications based on use. Wis.Stat. § 70.32(2).
Regency West is residential property. § 70.32(2)(a)1.
Wisconsin Stat. § 70.32(1) provides the methodological
framework that appraisers must follow when appraising
property. It delineates a three-tier approach:
In determining the value, the assessor shall consider recent
arm's-length sales of the property to be assessed if
according to professionally acceptable appraisal practices
those sales conform to recent arm's-length sales of
reasonably comparable property; recent arm's-length sales
of reasonably comparable property; and all factors that,
according to professionally acceptable appraisal practices,
affect the value of the property to be assessed.
Wis. Stat. § 70.32(1); see also State ex rel.
Markarian v. City of Cudahy, 45 Wis.2d 683, 686, 173
N.W.2d 627 (1970).
"An assessor has an obligation to follow the three tier
assessment analysis." Adams, 294 Wis.2d 441, ¶47.
Nevertheless, this hierarchy of appraisal methods does not
permit an assessor to use an appraisal method when
insufficient data exist to perform an accurate valuation
under that method. To the contrary, an assessor must not
appraise a property using unreliable data. Metro. Holding
Co. v. Bd. of Review of City of Milwaukee, 173 Wis.2d
626, 631-32, 495 N.W.2d 314 (1993).
Under the first tier of appraisal methods set out in
Wis.Stat. § 70.32(1), an appraiser should rely on recent
arm's-length sales of the subject property to determine
the property's value. This approach is universally
considered the most reliable method of appraising property.
Markarian, 45 Wis.2d at 686. However, both parties
agree that this method is not at issue in the present case
because there were no sales of the subject property to
Under the second tier of appraisal methods, an appraiser
values a property by considering recent, arm's-length
sales of "reasonably comparable" properties.
Id.; 1 Wisconsin Property Assessment Manual at 9-45.
The WPAM defines "reasonably comparable" properties
as those properties that represent the "subject property
in age, condition, use, type of construction, location,
design, physical features and economic characteristics."
1 Wisconsin Property Assessment Manual at 7-22.
Moreover, "if there has been no arms-length sale and
there are no reasonably comparable sales  an assessor [may]
use any of the third-tier assessment methodologies."
Adams, 294 Wis.2d 441, ¶34. "The income approach,
which seeks to capture the amount of income the property will
generate over its useful life, and the cost approach, which
seeks to measure the cost to replace the property, both fit
into this analytic framework." Id., ¶35.
However, when valuing subsidized housing, the WPAM suggests
that the "Cost Approach is the least reliable valuation
method" because of "the difficulty in estimating
external obsolescence." 1 Wisconsin Property Assessment
Manual at 9-45. Accordingly, an assessor should apply the
cost approach when evaluating subsidized housing only when
other approaches are not available.
Because an appraiser must consider all aspects of the subject
property that may affect its value, appraisers must consider
whether a property's value is affected by its
classification as residential property subject to Section 42
subsidized housing restrictions. See Metro. Holding,
173 Wis.2d at 631-32.
The income approach is often the most reliable method for
assessing subsidized housing. 1 Wisconsin Property Assessment
Manual at 9-45 ("The income approach may be the most
useful method for valuing subsidized housing . . . .").
The income approach is superior when applied to subsidized
housing "due to the conditions of the agreement and the
limited availability of data." Id.
The WPAM recognizes dissimilarities between subsidized
properties and market-rate properties. It instructs that
federally regulated properties are to be treated "as a
separate market and distinct from conventional (market level)
projects." 1 Wisconsin Property Assessment Manual at
9-42. Specifically, federally regulated properties have
"operational constraints (regulations) and risk factors
that are different from a market rate property."
Id. As such, appraisals that fail to account for
differences between those properties and market-rate
properties contravene the WPAM and Wis.Stat. § 70.32.
Metro. Holding, 173 Wis.2d at 630-32.
The WPAM provides that to be "reasonably comparable,
" other properties must have "similar
restrictions" to the subject property. 1 Wisconsin
Property Assessment Manual at 9-45 ("To be considered
[reasonably] comparable, the recent arm's-length sales
should have restrictions similar to the subject
property."). With these foundational principles in mind,
we turn to the 2012 and 2013 appraisals that underlie the tax
assessments for Regency West's property. C. Regency
West's Property 1. 2012 tax assessment
Regency West placed its first units in service September of
2011, and the project was fully leased in February of 2012.
Both Racine and Regency West valued the subject property as
of January 1, 2012, using the income approach. However, they
did not apply it in the same way. First, Racine did not do an
individualized appraisal of Regency West's property, but
instead, employed "mass appraisal techniques"
because its appraisers had 7, 500 properties to value in
2012. Regency West's appraisal was based on the subject
property. Second, Racine did not consider the projected
expenses and income for the subject property when calculating
its NOI. Regency West used projected expenses and income for
the subject property. Third, Racine employed a capitalization
rate based on market-rate properties; Regency West applied a
capitalization rate derived from a Section 42 housing market.
In calculating Regency West's NOI for 2012 under its mass
appraisal technique, the City's appraiser used
market-rate vacancy and market-rate expenses instead of the
vacancy and expense projections that were specific to the
subject property. This approach fails to account for the vast
differences in federally regulated housing discussed above
and distorts the actual value of Regency West's property.
An appraiser must not value federally regulated housing as if
it were market-rate property. Doing so causes the assessor to
"pretend" that the subject property is not hindered
by federal restrictions. Metro. Holding, 173 Wis.2d at 631;
see also 1 Wisconsin Property Assessment Manual at 9-45
("Any income approach used must consider all the impacts
of the subsidy program."). The restrictions and
underlying agreements implicit in federally regulated housing
will affect the property's value. See Bloomer Hous.
Ltd. P'ship v. City of Bloomer, 2002 WI.App. 252,
¶31, 257 Wis.2d 883, 653 N.W.2d 309 ("An assessor
must consider the effects of the restrictions on subsidized
housing."); Walworth Affordable Hous., LLC v. Vill.
of Walworth, 229 Wis.2d 797, 802-03, 601 N.W.2d 325 (Ct.
App. 1999) (reasoning that because the subject "property
is encumbered with income and rental restrictions resulting
from the [Federal Housing Tax Credits], these restrictions
must be considered in the property's valuation.").
As discussed above, the WPAM recognizes these differences and
directs that assessors are not to treat federally regulated
housing as if it were market-rate housing for purposes of
determining property values. 1 Wisconsin Property Assessment
Manual at 9-42 ("Subsidized housing properties operate
differently than conventional (market-rate)
Our decision in Metropolitan Holding unambiguously requires
assessors to use income and expenses for the subject property
when valuing subsidized housing under the income approach.
Metro. Holding, 173 Wis.2d at 634 (remanding the
"case with instructions that [t]he Board order the city
assessor to assess Layton Garden using the capitalization of
income approach based on actual income and expenses").
In Metropolitan Holding, the plaintiff, Layton Garden, argued
that its property was valued artificially high because the
City of Milwaukee had relied on market-rate expenses when
determining the property's NOI. Id. at 630. We
agreed with Layton Garden and overturned the City of
Milwaukee's tax assessment based on that valuation.
Id. We reasoned that by employing market-rate rents
and market-rate expenses, the city assessor "pretended
that Layton Garden was not hindered by the HUD restrictions
and valued the property at the amount the property would
bring in an arm's-length transaction if Metropolitan were
able to charge market rents." Id. at 631; see
also Mineral Point Valley Ltd. P'ship v. City of
Mineral Point Bd. of Review, 2004 WI.App. 158, ¶11,
275 Wis.2d 784, 686 N.W.2d 697 (concluding that the assessor
must value properties individually, not based on hypothetical
income and expenses (citing Metro. Holding, 173
Wis.2d at 629)).
Wisconsin Stat. § 70.32(1) requires assessors to value
property based on "the best information that the
assessor can practicably obtain." Here, there was
available to Racine's assessor projected expenses and
income for this newly opened property. However, Racine chose
not employ that information and chose instead to calculate
the NOI for its income-based valuation through mass appraisal
techniques that were not particularized to Regency West's
property. We conclude that in that regard, Racine did not
comply with the directive of § 70.32(1) because it did
not use the "best information" that was available
to its assessor.
In contrast to the City's approach, Regency West used
income and expenses specifically projected for the subject
property when it calculated the NOI for its income-based
valuation. These projected expenses are the best information
that could practicably be obtained. We conclude that for this
newly opened property, the use of projected expenses complies
with the mandate of Wis.Stat. § 70.32(1).
In addition to calculating a NOI for the subject property, an
income-based valuation requires determining the applicable
capitalization rate. Therefore, we consider whether
appraisers, when valuing federally regulated properties, may
derive the capitalization rate from market-rate properties.
We conclude that they may not.
The capitalization rate expresses the rate of return an
investor would expect to receive from an investment in the
subject property. 1 Wisconsin Property Assessment Manual at
9-21. The determination of the applicable capitalization rate
is a critical element in determining the value of a property
because a small change in capitalization rate will create a
significant change in a property's value. This is so
because the value of a subject property is determined by
dividing its NOI by the applicable capitalization rate, which
rate is expressed as a percentage. Id. Therefore, a
larger percentage will yield a smaller total value for the
When determining the applicable capitalization rate,
assessors must consider factors that appreciably alter the
value of the property. Otherwise, the capitalization rate
will not truly represent the risk an investor is undertaking
when investing in the property.
"Capitalization rates from the marketplace are usually
derived from the sale of market-rate projects."
Id. at 9-45. Such capitalization rates "do not
reflect the unique characteristics of subsidized housing. In
some cases there can be more risk in subsidized housing, in
other cases there is less." Id. The WPAM
further explains, "Rent levels are often regulated and
annual increases may be difficult to obtain. In many cases
the proportion of debt to equity is different in subsidized
projects than in market rate projects. With some types of
projects the amount of annual equity return is limited
(called a limited dividend)." Id. Additionally,
for some types of federally regulated housing, "equity
investors primarily look to other sources beyond the cash
flow of the property for their required return on
Appraisers who fail to consider property classified as
federally regulated housing and the restrictions attendant
thereto when deriving capitalization rates are overlooking
major characteristics of such property. After all, a
property's classification as federally regulated housing
may substantially ...