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Valuation Of Subsidized Housing
he purpose of this article these credits to Fortune 500
is to analyze valuation corporations for 45 percent to 60
methodology for several percent of the total project
atypical types of apartments. cost, excluding land.
Various circumstances and
situations can cause an apartment The first step in the valuation
complex to have above-or process is analyzing market value
below-market rental rates, definitions. The following is the
occupancy rates and operating definition from the Texas
expenses. This analysis examines Property Tax Code, Section 1.04
the following two situations: (7): market value means the price
at which a property would
1. low-income subsidized transfer for cash or its
apartments, which receive equivalent under prevailing
above-market rental rates from market conditions if:
HUD or another government agency,
and a. exposed for sale in the open
market with a reasonable time for
2. projects that are part of the the seller to find a purchaser,
Low Income Housing Tax Credit
(LIHTC) program. b. both the seller and the
purchaser know of all the uses
The LIHTC program was established and purposes to which the
by the U.S. Congress to encourage property is adapted and for which
development of affordable housing it is capable of being used and
in economically disadvantaged of the enforceable restrictions
areas. Project developers receive to its use, and
a tax credit for following the
guidelines established by the c. both the seller and the
program. They typically sell purchaser seek to maximize their
gains and neither is in a reasonable exposure in a
position to take advantage of the competitive market under all
exigencies of the other. conditions requisite to a fair
sale, with the buyer and seller
Section (b) of the Texas Property each acting prudently,
Tax Code further requires: the knowledgeably, and for
market value of property shall be self-interest, and assuming that
determined by the application of neither is under undue duress.
generally accepted appraisal
techniques, and the same or The term which requires further
similar appraisal techniques review in the above definition is
shall be used in appraising the "knowledgeably." Is the purchaser
same or similar kinds of knowledgeable regarding the
property. However, each property effort required to comply with
shall be appraised based upon the subsidized housing program
individual characteristics that requirements and tenants? Does he
affect the property's market consider the effort to be rent
value. for real estate or compensation
for services? Does the purchaser
The definition of market value, of an LIHTC project understand
according to the 10th edition of that maximum rents are now
The Appraisal of Real Estate established for at least 15 years
published in 1992 by the based on deed restrictions?
Appraisal Institute, is: market (LIHTC deed restrictions are now
value is the most probable price, required for 30 years in Texas
as of a specified date, in cash, and most other states.)
or in terms equivalent to cash,
or in other precisely revealed Fee simple estate is defined in
terms for which the specified the third edition of the
property rights should sell after Dictionary of Real Estate
Appraisal published by the The primary difference between
Appraisal Institute as: absolute the fee simple estate and the
ownership unencumbered by any leased fee estate is that the
other interest or estate, subject tenant and landlord are each
only to the limitations imposed bound by commitments to pay rent
by the governmental powers of and allow use of the property for
taxation, eminent domain, police a term. The contract rent agreed
power and escheat. to between landlord and tenant
may or may not be equal to market
The practice in Texas is to base rent. For example, if a landlord
the assessed value on the value entered into a 30-year lease for
of the fee simple estate as rent of $5 per square foot 15
opposed to the leased fee estate. years ago (when market rent was
This analysis is based on $5 per square foot) and the
valuation of the fee simple current market rent is $10 per
estate instead of the leased fee square foot, the tenant has a
estate. substantial advantage. The tenant
has a leasehold estate which may
The definition of leased fee or may not have value depending
estate in the third edition of on the term of the lease, the
the Dictionary of Real Estate contract rent and market rent.
Appraisal is: an ownership
interest held by a landlord with The Dictionary of Real Estate
the rights of use and occupancy Appraisal defines leasehold
conveyed by lease to others. The estate as the interest held by
rights of the lessor (the leased the lessee (the tenant or renter)
fee owner) and the lessee are through a lease conveying the
specified by contract terms rights of use and occupancy for a
contained within the lease. stated term under certain
conditions.
not appropriate to collect an
Conversely, if the tenant agreed above-average level of ad valorem
to a rental rate of $15 per tax from him because of his luck
square foot in a strong market 10 or prudence.
years ago, and is committed to
pay that rent for another 10 Market rent is defined by the
years, there is a substantial third edition of the Dictionary
advantage to the landlord, and of Real Estate Appraisal as: the
the tenant has a leasehold estate rental income that a property
with a negative value. Practice would most probably command in
in Texas is to establish the the open market; indicated by
assessed value based on the fee current rents paid and asked for
simple estate instead of the comparable space as of the date
leased fee estate. Therefore, the of appraisal.
relevant criteria for determining
market value includes market Market rent is the compensation
rent, market expenses, market paid for the use of the real
occupancy and market derived estate. It should not include
capitalization rates. If a compensation paid for factors
taxpayer made a poor business other than the use of the real
decision 10 years ago and has estate such as additional
substantially below-market rent, services which are not typically
it is inequitable for the taxing provided.
entities to reduce their ad
valorem tax due to the bad The next step in this process is
business decision of the property to analyze valuation of
owner. Conversely, if a property properties which participate in
owner made a fortuitous or wise subsidized programs which receive
business decision and entered above-market rental rates. The
into an above-market lease, it is final section will address
valuation of projects in the which mandates detailed
LIHTC program. inspections not typically
required in the private market;
Valuation of Subsidized Housing and
This analysis will consider both 2. to compensate for working with
the income and the sales residents who tend to be at the
comparison approaches to value. lowest socioeconomic level in our
The cost approach is not utilized society.
since it would provide similar
results after calculating It has not been unusual for HUD
external obsolescence due to to pay contract rent of $0.70 to
differences in rental rates. $0.80 per square foot per month
for subsidized housing projects,
Income Approach: even though the market rent for
competing projects might only be
Apartment owners who participate $0.45 to $ 0.50 per square foot
in subsidized housing programs per month. The rent and sales
may or may not receive comparables used in this analysis
above-market rental rates. For are located in a neighborhood
many years, HUD offered characterized by income levels in
above-market rental rates as an the bottom quartile of the
inducement to property owners to Houston area, minimal new
participate in the program. There construction of residential or
are two reasons for HUD paying an commercial buildings for 25 years
above-market rental rate: and heterogeneous levels of
quality and appeal. Some
1. to compensate for the sections, such as Riverside, have
inconvenience of dealing with a experienced gentrification, but
bureaucratic government program other areas are marked by poorly
maintained properties. Both the tables which list rental rates
market rent projects and the for projects which do not
subsidized rent projects are participate in a subsidy program
located in the area south of (market rent projects) and
downtown Houston, bound by 288 to projects which do participate in
the west, Interstate-45 to the a subsidized rent program:
east, and Almeda-Genoa to the
south. Consider the following
About the Author:
Patrick O’Connor, a designated member of the Appraisal Institute, is president of O’Connor & Associates. The firm, in business since 1974, specializes in real estate appraisals, research, and state and federal tax reduction services nationwide. To view entire article please visit the following link :
http://www.poconnor.com/article.asp?id=48
Read more articles by: Patrick O'Connor
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