| The purpose of this article is to analyze
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| | not been unusual for HUD to pay contract
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| valuation methodology for several
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| | rent of $0.70 to $0.80 per square foot
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| atypical types of apartments. Various
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| | per month for subsidized housing
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| circumstances and situations can cause an
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| | projects, even though the market rent for
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| apartment complex to have above-or
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| | competing projects might only be $0.45 to
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| below-market rental rates, occupancy
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| | $ 0.50 per square foot per month. The
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| rates and operating expenses. This
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| | rent and sales comparables used in this
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| analysis examines the following two
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| | analysis are located in a neighborhood
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| situations:
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| | characterized by income levels in the
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| low-income subsidized apartments, which
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| | bottom quartile of the Houston area,
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| receive above-market rental rates from
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| | minimal new construction of residential
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| HUD or another government agency, and
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| | or commercial buildings for 25 years and
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| projects that are part of the Low Income
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| | heterogeneous levels of quality and
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| Housing Tax Credit (LIHTC) program.The
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| | appeal. Some sections, such as Riverside,
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| LIHTC program was established by the U.S.
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| | have experienced gentrification, but
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| Congress to encourage development of
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| | other areas are marked by poorly
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| affordable housing in economically
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| | maintained properties. Both the market
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| disadvantaged areas. Project developers
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| | rent projects and the subsidized rent
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| receive a tax credit for following the
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| | projects are located in the area south of
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| guidelines established by the program.
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| | downtown Houston, bound by 288 to the
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| They typically sell these credits to
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| | west, Interstate-45 to the east, and
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| Fortune 500 corporations for 45 percent
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| | Almeda-Genoa to the south. Consider the
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| to 60 percent of the total project cost,
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| | following tables which list rental rates
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| excluding land.The first step in the
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| | for projects which do not participate in
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| valuation process is analyzing market
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| | a subsidy program (market rent projects)
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| value definitions. The following is the
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| | and projects which do participate in a
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| definition from the Texas Property Tax
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| | subsidized rent program:Sources at the
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| Code, Section 1.04 (7): market value
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| | Houston HUD office indicate that expiring
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| means the price at which a property would
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| | contracts for subsidized properties are
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| transfer for cash or its equivalent under
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| | being reviewed - if the owner so desires
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| prevailing market conditions if: exposed
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| | - for only one year. After that term, it
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| for sale in the open market with a
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| | is uncertain which course the plan will
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| reasonable time for the seller to find a
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| | take. Indications that are subsidized
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| purchaser, both the seller and the
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| | programs are changing from the current
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| purchaser know of all the uses and
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| | contract rent method to a resident
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| purposes to which the property is adapted
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| | voucher program. The voucher method would
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| and for which it is capable of being used
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| | involve issuing certificates to
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| and of the enforceable restrictions to
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| | individuals who may then use the voucher
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| its use, and both the seller and the
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| | at any participating property. The
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| purchaser seek to maximize their gains
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| | voucher amount would be based on
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| and neither is in a position to take
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| | individual's income. In addition to the
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| advantage of the exigencies of the
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| | plan to phase out above-market subsidized
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| other.Section (b) of the Texas Property
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| | rents, another reason not to use contract
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| Tax Code further requires: the market
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| | rent when valuing subsidized housing is
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| value of property shall be determined by
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| | it is inconsistent with national public
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| the application of generally accepted
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| | policy to penalize apartment operators
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| appraisal techniques, and the same or
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| | participating in this program since the
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| similar appraisal techniques shall be
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| | difference between market rent and
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| used in appraising the same or similar
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| | contract rent is compensation for
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| kinds of property. However, each property
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| | participating in the program and working
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| shall be appraised based upon the
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| | with the low-income residents. It would
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| individual characteristics that affect
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| | also be inconsistent with practice in
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| the property's market value.The
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| | Texas to use contract rent instead of
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| definition of market value, according to
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| | market rent when performing the income
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| the 10th edition of The Appraisal of Real
| |
| | approach to value.The three reasons
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| Estate published in 1992 by the Appraisal
| |
| | contract rent should not be used in
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| Institute, is: market value is the most
| |
| | valuation are: it may include
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| probable price, as of a specified date,
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| | compensation for participation in the
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| in cash, or in terms equivalent to cash,
| |
| | program and may not be equal to market
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| or in other precisely revealed terms for
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| | rent, current plans are to eliminate the
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| which the specified property rights
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| | program and, it is inconsistent with
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| should sell after reasonable exposure in
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| | national public policy Another factor to
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| a competitive market under all conditions
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| | consider when performing the income
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| requisite to a fair sale, with the buyer
| |
| | approach is the market occupancy. Since
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| and seller each acting prudently,
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| | tenants at the subsidized housing
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| knowledgeably, and for self-interest, and
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| | projects do not pay their rent or pay
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| assuming that neither is under undue
| |
| | very minimal rent, the occupancy tends to
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| duress.The term which requires further
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| | be at above-market level. Consider the
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| review in the above definition is
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| | following tables which list the occupancy
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| "knowledgeably." Is the purchaser
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| | rates for both market rent projects and
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| knowledgeable regarding the effort
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| | subsidized rent projects:Sales Comparison
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| required to comply with subsidized
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| | Approach:The sales comparison approach
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| housing program requirements and tenants?
| |
| | analysis further demonstrates the typical
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| Does he consider the effort to be rent
| |
| | market values in this submarket. We have
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| for real estate or compensation for
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| | utilized information on comparable sales
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| services? Does the purchaser of an LIHTC
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| | both from our internal database and from
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| project understand that maximum rents are
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| | the Harris County Appraisal District
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| now established for at least 15 years
| |
| | database. Most sales within the submarket
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| based on deed restrictions? (LIHTC deed
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| | are listed:Valuation of LIHTC ProjectsThe
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| restrictions are now required for 30
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| | key difference between Low Income Housing
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| years in Texas and most other states.)Fee
| |
| | Tax Credit project (LIHTC) and a market
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| simple estate is defined in the third
| |
| | rent project is that the LIHTC project
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| edition of the Dictionary of Real Estate
| |
| | has deed restrictions which limit the
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| Appraisal published by the Appraisal
| |
| | maximum rent that can be charged. The
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| Institute as: absolute ownership
| |
| | restrictions also limit the maximum
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| unencumbered by any other interest or
| |
| | income of the residents. The Oregon
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| estate, subject only to the limitations
| |
| | Supreme Court ruled that the assessed
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| imposed by the governmental powers of
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| | value for LIHTC projects should be less
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| taxation, eminent domain, police power
| |
| | than the assessed value for market rent
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| and escheat.The practice in Texas is to
| |
| | projects since the rent at LIHTC projects
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| base the assessed value on the value of
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| | is less than market rent, and the rents
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| the fee simple estate as opposed to the
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| | restrict the market. In Texas and most
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| leased fee estate. This analysis is based
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| | other states, the LIHTC project is
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| on valuation of the fee simple estate
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| | limited by a 30-year deed restriction
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| instead of the leased fee estate.The
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| | which runs with the land. In other words,
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| definition of leased fee estate in the
| |
| | it may not be revoked unilaterally by the
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| third edition of the Dictionary of Real
| |
| | property owner even if the property is
|
| Estate Appraisal is: an ownership
| |
| | sold or foreclosed. In exchange for these
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| interest held by a landlord with the
| |
| | onerous restrictions, the LIHTC property
|
| rights of use and occupancy conveyed by
| |
| | owner receives a generous tax credit
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| lease to others. The rights of the lessor
| |
| | allowance from the U.S. government.
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| (the leased fee owner) and the lessee are
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| | Developers typically sell the tax credits
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| specified by contract terms contained
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| | for approximately 45 percent to 60
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| within the lease.The primary difference
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| | percent of the project development
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| between the fee simple estate and the
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| | cost.The primary difference between LIHTC
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| leased fee estate is that the tenant and
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| | projects and market rent projects is the
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| landlord are each bound by commitments to
| |
| | rental rate. Operating expenses will be
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| pay rent and allow use of the property
| |
| | similar in either case, but the LIHTC
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| for a term. The contract rent agreed to
| |
| | project will likely have higher occupancy
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| between landlord and tenant may or may
| |
| | due to its below-market rents. Section
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| not be equal to market rent. For example,
| |
| | (b) of the definition of market rent in
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| if a landlord entered into a 30-year
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| | the Texas Property Tax Code is as
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| lease for rent of $5 per square foot 15
| |
| | follows: both the seller and the
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| years ago (when market rent was $5 per
| |
| | purchaser know of all the uses and
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| square foot) and the current market rent
| |
| | purposes to which the property is adapted
|
| is $10 per square foot, the tenant has a
| |
| | and for which it is capable of being used
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| substantial advantage. The tenant has a
| |
| | and of the enforceable restrictions on
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| leasehold estate which may or may not
| |
| | its use.The LIHTC projects are located in
|
| have value depending on the term of the
| |
| | targeted areas established by the federal
|
| lease, the contract rent and market
| |
| | government which have below-average
|
| rent.The Dictionary of Real Estate
| |
| | income levels.Income Approach:The
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| Appraisal defines leasehold estate as the
| |
| | following are three income analyses of
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| interest held by the lessee (the tenant
| |
| | hypothetical 200-unit apartment complexes
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| or renter) through a lease conveying the
| |
| | which each has 160,000 net rentable
|
| rights of use and occupancy for a stated
| |
| | square feet. Contract rent is estimated
|
| term under certain conditions.Conversely,
| |
| | to be $0.62 per square foot at the LIHTC
|
| if the tenant agreed to a rental rate of
| |
| | project based on what is typical in the
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| $15 per square foot in a strong market 10
| |
| | Houston area. (Our firm prepares
|
| years ago, and is committed to pay that
| |
| | approximately 20 market studies for LIHTC
|
| rent for another 10 years, there is a
| |
| | projects each year.) Market rent at new
|
| substantial advantage to the landlord,
| |
| | complexes in the Houston area is
|
| and the tenant has a leasehold estate
| |
| | typically $0.80 to $1.10 per square foot
|
| with a negative value. Practice in Texas
| |
| | per month. For the purposes of this
|
| is to establish the assessed value based
| |
| | analysis, market rent for new complexes
|
| on the fee simple estate instead of the
| |
| | is estimated to be $0.85 per square foot.
|
| leased fee estate. Therefore, the
| |
| | Market occupancy is estimated to be 96
|
| relevant criteria for determining market
| |
| | percent for the LIHTC project due to the
|
| value includes market rent, market
| |
| | below-market rents and 92 percent for the
|
| expenses, market occupancy and market
| |
| | market project. Operating expenses may be
|
| derived capitalization rates. If a
| |
| | slightly higher at the LIHTC project to
|
| taxpayer made a poor business decision 10
| |
| | account for accounting and communication
|
| years ago and has substantially
| |
| | with government agencies because of the
|
| below-market rent, it is inequitable for
| |
| | LIHTC requirements, but this amount is
|
| the taxing entities to reduce their ad
| |
| | expected to be offset by the lower ad
|
| valorem tax due to the bad business
| |
| | valorem taxes. The analysis shows three
|
| decision of the property owner.
| |
| | income approaches. In addition to the
|
| Conversely, if a property owner made a
| |
| | LIHTC and upscale market rent projects, a
|
| fortuitous or wise business decision and
| |
| | mid-range project with rental rates
|
| entered into an above-market lease, it is
| |
| | roughly between the others is included
|
| not appropriate to collect an
| |
| | for comparison purposes. A 10 percent
|
| above-average level of ad valorem tax
| |
| | capitalization rate for the LIHTC project
|
| from him because of his luck or
| |
| | has been included based on its
|
| prudence.Market rent is defined by the
| |
| | below-market rents, which appear to make
|
| third edition of the Dictionary of Real
| |
| | the income stream more stable. An 11
|
| Estate Appraisal as: the rental income
| |
| | percent capitalization rate is used for
|
| that a property would most probably
| |
| | the mid-range project since its rental
|
| command in the open market; indicated by
| |
| | rates would be far above market for the
|
| current rents paid and asked for
| |
| | area. The capitalization rate for the
|
| comparable space as of the date of
| |
| | upscale market rent project is 9.5
|
| appraisal.Market rent is the compensation
| |
| | percent based on data in our files.It
|
| paid for the use of the real estate. It
| |
| | appears clear that using market rent in
|
| should not include compensation paid for
| |
| | the valuation of an LIHTC project would
|
| factors other than the use of the real
| |
| | produce an appropriate result. Further,
|
| estate such as additional services which
| |
| | it appears the capitalization rate used
|
| are not typically provided.The next step
| |
| | in valuation of the LIHTC project using
|
| in this process is to analyze valuation
| |
| | contract rents would overstate the values
|
| of properties which participate in
| |
| | based on comparable sales. While
|
| subsidized programs which receive
| |
| | investors would appreciate the stable
|
| above-market rental rates. The final
| |
| | income stream due to the below-market
|
| section will address valuation of
| |
| | rents, few investors would want to pay
|
| projects in the LIHTC program.Valuation
| |
| | $25,000 per unit for an apartment complex
|
| of Subsidized HousingThis analysis will
| |
| | in an area where most complexes sell for
|
| consider both the income and the sales
| |
| | $5,000 to $15,000 per unit.Valuations of
|
| comparison approaches to value. The cost
| |
| | real property with above- and
|
| approach is not utilized since it would
| |
| | below-market rental rates offer
|
| provide similar results after calculating
| |
| | challenges to property owners and
|
| external obsolescence due to differences
| |
| | assessment officers. There will likely be
|
| in rental rates.Income Approach:Apartment
| |
| | legitimate differences of opinion for the
|
| owners who participate in subsidized
| |
| | foreseeable future. Using the sales
|
| housing programs may or may not receive
| |
| | comparison and income approaches to value
|
| above-market rental rates. For many
| |
| | indicates a wide range of value.
|
| years, HUD offered above-market rental
| |
| | Thoughtful consideration and negotiation
|
| rates as an inducement to property owners
| |
| | will be required to form a consensus on
|
| to participate in the program. There are
| |
| | these issues.Pat O'Connor, MAI is
|
| two reasons for HUD paying an
| |
| | president of O'Connor & Associates,
|
| above-market rental rate:
| |
| | 130-person firm in business since 1974.
|
| to compensate for the inconvenience of
| |
| | O'Connor & Associates is the largest tax
|
| dealing with a bureaucratic government
| |
| | consultant in Texas, handled more than
|
| program which mandates detailed
| |
| | 43,000 administrative appeals in 100
|
| inspections not typically required in the
| |
| | counties in 2005 and is currently
|
| private market; and
| |
| | coordinating over 2,000 judicial appeals.
|
| to compensate for working with residents
| |
| | O'Connor & Associates also provides real
|
| who tend to be at the lowest
| |
| | estate appraisal, cost segregation and
|
| socioeconomic level in our society.It has
| |
| | market research services.
|
