Appraisal - Valuation of Subsidized Housing

The purpose of this article is to analyze valuation methodology for several atypical types of apartments. Various circumstances and situations can cause an apartment complex to have above-or below-market rental rates, occupancy rates and operating expenses. This analysis examines the following two situations:

1. low-income subsidized apartments, which receive above-market rental rates from HUD or another government agency, and 2. projects that are part of the Low Income Housing Tax Credit (LIHTC) program.

The LIHTC program was established by the U.S. Congress to encourage development of affordable housing in economically disadvantaged areas. Project developers receive a tax credit for following the guidelines established by the program. They typically sell these credits to Fortune 500 corporations for 45 percent to 60 percent of the total project cost, excluding land.

The first step in the valuation process is analyzing market value definitions. The following is the definition from the Texas Property Tax Code, Section 1.04 (7): market value means the price at which a property would transfer for cash or its equivalent under prevailing market conditions if:

a. exposed for sale in the open market with a reasonable time for the seller to find a purchaser, b. both the seller and the purchaser know of all the uses and purposes to which the property is adapted and for which it is capable of being used and of the enforceable restrictions to its use, and c. both the seller and the purchaser seek to maximize their gains and neither is in a position to take advantage of the exigencies of the other.

Section (b) of the Texas Property Tax Code further requires: the market value of property shall be determined by the application of generally accepted appraisal techniques, and the same or similar appraisal techniques shall be used in appraising the same or similar kinds of property. However, each property shall be appraised based upon the individual characteristics that affect the property's market value.

The definition of market value, according to the 10th edition of The Appraisal of Real Estate published in 1992 by the Appraisal Institute, is: market value is the most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.

The term which requires further review in the above definition is "knowledgeably." Is the purchaser knowledgeable regarding the effort required to comply with subsidized housing program requirements and tenants? Does he consider the effort to be rent for real estate or compensation for services? Does the purchaser of an LIHTC project understand that maximum rents are now established for at least 15 years based on deed restrictions? (LIHTC deed restrictions are now required for 30 years in Texas and most other states.)

Fee simple estate is defined in the third edition of the Dictionary of Real Estate Appraisal published by the Appraisal Institute as: absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power and escheat.

The practice in Texas is to base the assessed value on the value of the fee simple estate as opposed to the leased fee estate. This analysis is based on valuation of the fee simple estate instead of the leased fee estate.

The definition of leased fee estate in the third edition of the Dictionary of Real Estate Appraisal is: an ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others. The rights of the lessor (the leased fee owner) and the lessee are specified by contract terms contained within the lease.

The primary difference between the fee simple estate and the leased fee estate is that the tenant and landlord are each bound by commitments to pay rent and allow use of the property for a term. The contract rent agreed to between landlord and tenant may or may not be equal to market rent. For example, if a landlord entered into a 30-year lease for rent of $5 per square foot 15 years ago (when market rent was $5 per square foot) and the current market rent is $10 per square foot, the tenant has a substantial advantage. The tenant has a leasehold estate which may or may not have value depending on the term of the lease, the contract rent and market rent.

The Dictionary of Real Estate Appraisal defines leasehold estate as the interest held by the lessee (the tenant or renter) through a lease conveying the rights of use and occupancy for a stated term under certain conditions.

Conversely, if the tenant agreed to a rental rate of $15 per square foot in a strong market 10 years ago, and is committed to pay that rent for another 10 years, there is a substantial advantage to the landlord, and the tenant has a leasehold estate with a negative value. Practice in Texas is to establish the assessed value based on the fee simple estate instead of the leased fee estate. Therefore, the relevant criteria for determining market value includes market rent, market expenses, market occupancy and market derived capitalization rates. If a taxpayer made a poor business decision 10 years ago and has substantially below-market rent, it is inequitable for the taxing entities to reduce their ad valorem tax due to the bad business decision of the property owner. Conversely, if a property owner made a fortuitous or wise business decision and entered into an above-market lease, it is not appropriate to collect an above-average level of ad valorem tax from him because of his luck or prudence.

Market rent is defined by the third edition of the Dictionary of Real Estate Appraisal as: the rental income that a property would most probably command in the open market; indicated by current rents paid and asked for comparable space as of the date of appraisal.

Market rent is the compensation paid for the use of the real estate. It should not include compensation paid for factors other than the use of the real estate such as additional services which are not typically provided.

The next step in this process is to analyze valuation of properties which participate in subsidized programs which receive above-market rental rates. The final section will address valuation of projects in the LIHTC program.

Valuation of Subsidized Housing

This analysis will consider both the income and the sales comparison approaches to value. The cost approach is not utilized since it would provide similar results after calculating external obsolescence due to differences in rental rates.

Income Approach:

Apartment owners who participate in subsidized housing programs may or may not receive above-market rental rates. For many years, HUD offered above-market rental rates as an inducement to property owners to participate in the program. There are two reasons for HUD paying an above-market rental rate:

1. to compensate for the inconvenience of dealing with a bureaucratic government program which mandates detailed inspections not typically required in the private market; and 2. to compensate for working with residents who tend to be at the lowest socioeconomic level in our society.

It has not been unusual for HUD to pay contract rent of $0.70 to $0.80 per square foot per month for subsidized housing projects, even though the market rent for competing projects might only be $0.45 to $ 0.50 per square foot per month. The rent and sales comparables used in this analysis are located in a neighborhood characterized by income levels in the bottom quartile of the Houston area, minimal new construction of residential or commercial buildings for 25 years and



Posted by Billy Hannah on December 13, 2008 at 12:00 AM

About Billy Hannah
Billy Hannah is affliated with ERA Adams Pevey Realty Inc., which is located in Rincon, GA. For further assistance please use the contact information located on the right.



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Local Information for Rincon, GA

Latitude: 32.293258 -- Longitude: -81.234171


ZIP Codes for Rincon, Georgia 31326 
Area Code for Rincon, Georgia 912
Time zone for Rincon, Georgia EST



Other Area Cities:   Rincon, GA  Garden City, GA  Savannah, GA 

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Rincon is a city in Effingham County, Georgia, United States. The population was 4,376 at the 2000 census. The City of Rincon, in the southeast area of Effingham County, was first incorporated as recently as 1927. Even though its incorporation was not that long ago it appears that the earliest settlers came to the area in 1751. But, its existence as a full-fledged community with families and businesses dates back to the late 1800's. The origin and development of Rincon, Georgia really got its start with the coming of the railroad. Around the time of the turn of the century a rail line was built from the Carolinas across the state line at the Savannah River and southward to Savannah. The name of the city is believed to have had its origin from the Spanish or Mexican name "Rincon" after a small but prosperous town in Mexico. Once the railroad and depot were built a telegraph operator or agent is known to have been on duty as early as about 1895. -- Source: Wikipedia.com




Georgia 2000 Census Population Profile Map

Rincon Georgia United States
Population 4,376 8,186,453 281,421,906
Median age 30.9 33.4 35.3
Median age for Male 30.6 32.1 34
Median age for Female 31.1 34.6 36.5
Households 1,681 3,006,369 105,480,101
Household population 4,376 7,952,631 273,643,273
Average household size 2.6 2.65 2.59
Families 1,222 2,111,647 71,787,347
Average family size 3.06 3.14 3.14
Housing units 1,892 3,281,737 115,904,641
Occupied units 1,681 3,006,369 105,480,101
Vacant units 211 275,368 10,424,540

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Billy Hannah - ERA Adams Pevey Realty Inc.
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ERA Adams Pevey Realty Inc.


5758 Hwy 21 PO Box 559
Rincon, GA 31326

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FAX: 912-826-2556



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