Supportive-Living Facilities for Seniors Must be Valued Based on Their Income-Earning Capacity

In Manteno Community Unit School District No. 5 v. PTAB, an Illinois appellate court ruled that the PTAB used an incorrect method to value Heritage Woods, a supportive-living facility, for property tax purposes. A supportive-living facility provides both housing and health services to senior residents. Medicaid-eligible residents of a supportive-living facility pay fees for the services they use and a below-market rent set by the IDPH to live at the facility. The facility also houses private-pay residents whose rent is not subject to any restrictions. Under the Illinois Property Tax Code, a supportive-living facility is valued using the income capitalization approach (i.e., the present value of the facility’s annual income) and the income attributable to the facility’s real estate rather than its service income.

The court ruled that the PTAB used an incorrect method to value the supportive-living facility because it used only the facility’s actual rental income. The court emphasized that the income capitalization approach required by the Property Tax Code for a supportive-living facility must reflect its income-earning capacity. Actual rental income may not necessarily reflect income-earning capacity, and when that is the case, the PTAB may instead look to market rent.

Here, Heritage Woods’ actual income did not reflect its income-earning capacity. Heritage Woods housed 50-55% Medicaid-eligible residents (whose rent was fixed by IDPH) and 45-50% private-pay residents (whose rent was not subject to any restrictions). Measuring Heritage Woods’ income-earning capacity based on the purported amount of actual rent charged on-the-books at Heritage Woods failed to reflect all the income that Heritage Woods generates. If the PTAB’s decision had stood, Heritage Woods could have further reduce its assessed value by collecting the same amount of income but reducing the portion of the income that it arbitrarily labels as rent. That would have the absurd result of allowing bookkeeping decisions to affect assessed value. Moreover, that would frustrate the intent of the Property Tax Code to utilize the income capitalization approach to value Heritage Woods according to its actual income-earning capacity. The court, therefore, reversed the PTAB’s decision.

This case clarifies the method for valuing supportive-living facilities in Illinois. The income capitalization approach applied to the facility must be based on the facility’s income-earning capacity rather than the actual, possibly below-market rents charged to some residents. This case provides a basis for Illinois school districts to contest property tax appeals filed by the owners of supportive-living facilities seeking assessed value reductions based on their actual income.

Source: Manteno Cmty. Unit Sch. Dist. No. 5 v. Illinois Prop. Tax Appeal Bd., 2020 IL App (3d) 180384

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