Can Tennessee give landlords a property tax break for renting at below-market rates to low-income tenants without violating equal protection or uniform taxation rules?

Plain-English summary

Rep. Brenda Gilmore asked AG Slatery whether the proposed Affordable Rental Property Act (HB 1987) would survive a constitutional challenge. The bill set up an opt-in property tax program: a landlord who voluntarily restricts a property to affordable rents for qualifying low-income tenants gets the property assessed at its "current use" value rather than at its highest-and-best use value. The Tennessee Housing Development Agency would identify counties with affordable housing shortages, set income limits, and set allowable rent caps. The State Board of Equalization plus county assessors would administer the application process. If a property owner stops complying, the property gets reclassified at full market value.

AG Slatery said the bill is constitutional.

Two constitutional doctrines apply. Equal protection under Tenn. Const. art. I, § 8 and the special-legislation rule under art. XI, § 8 require any tax classification to have a rational basis. The bill provides one: the preamble points to Tennessee's documented affordable housing shortage, citing a THDA report and a Housing Nashville projection that the affordable housing gap will rise from 18,000 units in 2015 to 31,000 by 2025 if nothing changes. That is a legitimate state interest, and treating affordable rental housing differently from market-rate housing is rationally connected to it.

Uniform taxation under Tenn. Const. art. II, § 28 requires the assessment ratio within a class to be equal and uniform. The bill keeps the program statewide and uses uniform standards. The Tennessee Supreme Court has recognized that the Legislature has "very broad discretion" in setting "the value and definition of property in each of the authorized classifications." Sherwood Co. v. Clary, 734 S.W.2d 318, 321 (Tenn. 1987).

The big question is whether assessing a property at use value rather than market value violates the requirement that property "be taxed according to its value." Tenn. Const. art. II, § 29. The Court of Appeals answered this for the Greenbelt Law in Marion County v. State Board of Equalization, 710 S.W.2d 521 (Tenn. Ct. App. 1986). That decision upheld the Greenbelt program because, when a landowner voluntarily restricts the use of property to agricultural or open-space, "[o]nce assumed, that restriction affects the property's value." The same logic carries over to affordable rental housing: a property the owner has voluntarily restricted to affordable rents is genuinely worth less than a comparable property without that restriction. Assessing it at its restricted use is not undervaluing it.

Currency note

This opinion was issued in 2018. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The Affordable Rental Property Act was a proposal in 2018. Whether it was enacted in this form, or in modified form, and whether subsequent litigation has tested its boundaries should be confirmed by checking the current Tennessee Code.

Common questions

Q: How is this different from a property tax abatement?
A: A traditional abatement reduces or forgives tax that would otherwise be owed at full assessed value. This bill assesses the property at a lower value to begin with, because the owner has voluntarily encumbered the property with a use restriction that limits its market price. The owner still pays full tax on the lower assessed value.

Q: Why does the Greenbelt Law analogy matter?
A: The Greenbelt Law uses the same legal mechanism: a landowner agrees to restrict property to agricultural, forest, or open-space use, the assessor values the property at its restricted-use value, and rollback taxes apply if the owner stops complying. The Court of Appeals upheld that scheme in Marion County, which gives the Affordable Rental Property Act a clear precedent.

Q: What happens if a landlord stops renting at affordable rates?
A: Under HB 1987, § 9(c), the property gets reclassified and assessed at its current market value. This functions like the Greenbelt Law's rollback provision and protects against gaming the program.

Q: Does the bill apply to subsidized HUD or Section 8 housing?
A: No. HB 1987, § 3(b)(1) excludes properties operated under federal or state subsidized housing programs. The bill targets landlords who voluntarily commit to affordable rents without already receiving subsidy.

Q: Could the bill be challenged on the ground that not every county participates equally?
A: The statewide eligibility test is "any county where THDA determines an affordable housing shortage exists," and THDA conducts that determination annually. Because the eligibility criterion is uniform and applies to every county, the program survives the equal protection / uniform taxation analysis.

Background and statutory framework

Tennessee's property tax structure rests on Tenn. Const. art. II, § 28, which classifies real property into four categories (public utility, industrial and commercial, residential, and farm) and requires uniform assessment ratios within each class. Section 29 requires property to be "taxed according to its value." The Greenbelt Law, Tenn. Code Ann. §§ 67-5-1001 to -1054, has long operated within these constraints by using a use-value assessment for landowners who voluntarily commit to keeping land in agricultural, forest, or open-space use.

Marion County v. State Board of Equalization upheld the Greenbelt Law against equal protection, uniform taxation, and value-based taxation challenges. The court reasoned that voluntary use restrictions accepted by the landowner change the property's actual value, so a use-value assessment is not arbitrary undervaluation.

The Affordable Rental Property Act adapts this template. THDA, an agency with statewide affordable-housing expertise, identifies counties in shortage and sets income and rent benchmarks. Property owners apply through their county assessor. Once approved, the assessor uses the property's use value as an affordable rental, not its market value as unrestricted rental property. If the owner stops complying, the property reverts to market valuation.

Citations

• Tenn. Const. art. I, § 8; art. II, §§ 28, 29; art. XI, § 8
• Tenn. Code Ann. §§ 67-5-1002, -1003, -1005, -1008(a), -1008(d) (Greenbelt Law)
• H.B. 1987, 110th Tenn. Gen. Assem., 2d Reg. Sess. (2018) (Affordable Rental Property Act)
• Marion County v. State Board of Equalization, 710 S.W.2d 521 (Tenn. Ct. App. 1986)
• Castlewood, Inc. v. Anderson County, 969 S.W.2d 908 (Tenn. 1975)
• Sherwood Co. v. Clary, 734 S.W.2d 318 (Tenn. 1987)
• In re All Assessments, 58 S.W.3d 95 (Tenn. 2000)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2018/op18-16.pdf

Original opinion text

Constitutionality of the Affordable Rental Property Act

Question
Is the proposed Affordable Rental Property Act, H.B. 1987, 110th Gen. Assem., 2d Reg. Sess. (Tenn. 2018), constitutional?

Opinion
Yes, H.B. 1987 is constitutional. It articulates a rational basis for creating a property tax classification for affordable rental housing and, thus, satisfies equal protection principles. Moreover, it complies with uniform taxation and valuation principles under the rationale stated in Marion County v. State Board of Equalization, 710 S.W.2d 521 (Tenn. Ct. App. 1986).

ANALYSIS

The proposed Affordable Rental Property Act is designed to encourage rental housing owners to provide affordable rental housing for the benefit of low-income persons. H.B. 1987, 110th Gen. Assem., 2d Reg. Sess. (Tenn. 2018). As written, the bill requires the Tennessee Housing Development Agency ("THDA") to "annually research the availability of affordable rental housing in each county of the state and determine which counties have a shortage of affordable rental housing." H.B. 1987, § 5(a). THDA also is required to set the annual income limits for qualifying renters and allowable monthly rental rates to be charged by rental housing owners. H.B. 1987, § 5(b). The State Board of Equalization, in consultation with THDA, is required to create an application process for owners seeking to classify rental housing as "affordable rental property." H.B. 1987, § 6. Applications are filed with the assessor of property in the county in which the rental housing is located. H.B. 1987, § 7(c). If the assessor approves the application, then the assessor considers the property's "current use as affordable rental property to be its immediate most suitable economic use." H.B. 1987, § 8. The assessment is based on the property's "value in its current use, rather than on its value for some other use." Id. This assessment method applies for as long as the property owner rents to low income persons at "affordable rental rates" and maintains the property in a habitable condition. H.B. 1987, § 9(b). If the property owner fails to do so, the property is reclassified and assessed at its current market value. H.B. 1987, § 9(c). The bill does not apply to properties operated under subsidized federal or state housing programs. H.B. 1987, § 3(b)(1).

Tax classification statutes generally implicate principles of equal protection, Tenn. Const. art. I, § 8, & art. XI, § 8, and uniform taxation, Tenn. Const. art. II, § 28. In order to withstand an equal protection challenge, a tax classification need only have a rational basis. Castlewood, Inc. v. Anderson County, 969 S.W.2d 908, 909 (Tenn. 1975). On its face, H.B. 1987 provides a rational basis for the Legislature's decision to value affordable rental property differently than other rental property in those counties in which THDA has determined that an affordable housing shortage exists. The preamble to H.B. 1987 observes that "all areas of the state, but especially Davidson County and its greater metropolitan area, are struggling with a shortage of affordable housing." The preamble cites a THDA report stating that "[c]ities in the south where population growth has been high in recent years are facing a particular shortage of affordable options at differing income levels, and the shortage is likely to worsen." The preamble also cites a Housing Nashville report that estimates Nashville's affordable housing shortage will rise from 18,000 units in 2015 to 31,000 by 2025 if no new units are added. Accordingly, H.B. 1987 does not violate equal protection principles.

House Bill 1987 likewise does not appear to violate uniform taxation principles. The Tennessee Constitution provides that "[t]he ratio of assessment to value of property in each class or subclass shall be equal and uniform throughout the State, the value and definition of property in each class or subclass to be ascertained in such manner as the Legislature shall direct." Tenn. Const. art. II, § 28. As the Supreme Court has observed, this provision gives the Legislature "very broad discretion" to determine "the value and definition of property in each of the authorized classifications or subclassifications." Sherwood Co. v. Clary, 734 S.W.2d 318, 321 (Tenn. 1987); accord In re All Assessments, 58 S.W.3d 95, 99 (Tenn. 2000). Under H.B. 1987, the classification is available in all counties and would be implemented by THDA using uniform standards on a statewide basis.

In Marion County v. State Board of Equalization, 710 S.W.2d 521 (Tenn. Ct. App. 1986), the Court of Appeals considered the constitutionality of the Greenbelt Law, which encourages the preservation of open space near urban and suburban areas. Tenn. Code Ann. § 67-5-1002(2) & -1003(2). The law allows landowners to apply to the assessor of property to classify their property as agricultural, forest, or open space land. Tenn. Code Ann. § 67-5-1005. Once so classified, the property is valued for assessment purposes as if "its immediate most suitable economic use" is the approved agricultural, forest, or open space use. Tenn. Code Ann. § 67-5-1008(a). If the land ceases to qualify as agricultural, forest, or open space land, the landowner is liable for rollback taxes for a set period preceding the change in use or ownership. Tenn. Code Ann. § 67-5-1008(d).

The court upheld the Greenbelt Law, which was challenged on equal protection and uniform taxation principles, as well as the Constitutional requirement that all property "be taxed according to its value." See Tenn. Const. art. II, § 29. The court reasoned that "in enacting this legislation, the legislature has issued an invitation to property owners to voluntarily restrict the use of their property" and that, "[o]nce assumed, that restriction affects the property's value." Marion County, 710 S.W.2d at 523. In that event, the property's value is "free from any artificial value attributed to its possible use for development." Id.

A similar rationale applies to H.B. 1987. If enacted, H.B. 1987 issues an invitation to property owners to voluntarily restrict the use of their property to affordable rental property. Once that restricted use is assumed, the restriction affects the property's value. If it can be used only as affordable rental property, then the property does not have the same value as nearby rental properties that are not similarly restricted. Accordingly, H.B. 1987 complies with equal protection and uniform taxation principles, as well as the requirement that all property be taxed according to its value.

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

MARY ELLEN KNACK
Senior Counsel

Requested by:
The Honorable Brenda Gilmore
State Representative
420 Cordell Hull Building
Nashville, Tennessee 37243