Presented by Peter S. Eckert, CRE, MAI, SRA Peter S. Eckert & - - PowerPoint PPT Presentation

Presented by Peter S. Eckert, CRE, MAI, SRA

Peter S. Eckert & Company, Inc.

Overview

What are the Significant Factors that impact

Affordable Housing Values?

How is the Income Stream impacted by LIHTC

restrictions and regulatory agreements? restrictions and regulatory agreements?

How are Expenses affected by the need t0 comply with

LIHTC regulatory agreements?

How are valuation measures such as Cap Rates

impacted by the presence of these restrictions?

How does the Marketplace perceive values of LIHTC

properties?

Peter S. Eckert & Company, Inc.

• Va. Code §58.1-3295.1

In Assessing the Fair Market Value of Affordable

Rental Housing, one must consider:

ACTUAL Incomes ACTUAL Expenses ANY OTHER EVIDENCE that is Relevant MUST Employ the Income Approach

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Step by Step

Highest & Best Use

Land and Improvements

Sales Comparison Approach

Data Research Data Research Un-complicating Complicated Sales

Cost Approach

Is this a valid methodology?

Income Approach

The True Measure of Value

Market Observations

Comments, Questions, Trends & maybe some answers

Peter S. Eckert & Company, Inc.

Highest & Best Use Considerations

Developers pay less for land to be developed with

affordable housing. This is a function of: affordable housing. This is a function of:

Lower income expectations generate less return to land;

hence, a lower value.

Propensity to push as many costs into the “eligible” category

to increase the amount of tax credits.

Typically, a clear pattern will be evident when comparing

affordable to conventional land sales.

In periods of high demand, the tax credit developer will often

be “pushed out” of the market because of high prices.

Peter S. Eckert & Company, Inc.

Highest & Best Use Considerations

LAND - Assessors may wish to establish a two-tier land LAND - Assessors may wish to establish a two-tier land

value approach if:

There is a clear H&B Use distinction between affordable

and conventional sites in your market; and,

Actual sales demonstrate these price differentials.

Peter S. Eckert & Company, Inc.

Highest & Best Use Considerations

BUILDINGS – Affordable housing is most often found BUILDINGS – Affordable housing is most often found

to be of:

Lesser Quality or More Basic Construction Fewer Special Unit Features; and, Fewer Project Amenities

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Highest & Best Use Considerations

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Construction Differences

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Project Amenity Differences

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Project Amenity Differences

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Unit Amenity Differences

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Unit Finish Differences

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The Sales Comparison Approach

Un-complicate the Complicated Is It the Regulatory Agreement? Is It the Regulatory Agreement?

OR

Is It the Financing?

The initial terms of regulatory agreements are expiring so there is a move to sell or retain, re-credit and rehabilitate. Recent sales show evidence that the prices are affected by the regulatory agreement and/or financing arrangements.

Peter S. Eckert & Company, Inc.

The Sales Comparison Approach

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The Sales Comparison Approach

Is Excluding the Approach a Potential USPAP

Violation?

Will Jurisdictional Exception Rules Apply? Complicated Hypothetical Assumptions?

The Sales Comparison Approach must remain valid in order to supply the necessary market data to apply the Income Approach but the approach in its standard form may be relegated to a secondary role.

Peter S. Eckert & Company, Inc.

The Cost Approach

Relied Upon by Developers for Feasibility Reasons Relied Upon by Investors

Relied Upon by Tax Credit Syndicators

Relied Upon by Tax Credit Syndicators Relied Upon for New Construction Assessments Applicable for Assessments?

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The Income Side of the Income Approach

Obtainable Rents Limited by the Market & by Median Family Income

Levels

Rent Increases are Limited by Median Family Income Growth Other Income may be impacted by affordable housing restrictions Weaker Tenant Credit Strength typically results in collection losses Weaker Tenant Credit Strength typically results in collection losses Many Prospective Tenants earn too much to qualify Many Prospective Tenants earn too little to afford the rent Section 8 Tenants sometimes smooth out the rental stream Section 8 Tenants sometimes create a greater burden on management LIHTC properties reflect market occupancies if not rent constrained LIHTC properties reflect higher occupancies if rent constrained

Peter S. Eckert & Company, Inc.

The Income Side of the Income Approach

Obtainable Rents - Owner/Manager has less control Rent Increases – Owner has less control; limited by factors

that have little to do with operations & market forces

Other Income – Implied restrictions on certain collections;

make sure this income cannot be construed as “rent” Other Income – Implied restrictions on certain collections; make sure this income cannot be construed as “rent”

Weaker Tenant Credit Strength – serving the weaker end of

the market; target market is economically vulnerable

Earn too much to quality – reduced tenant pool Earn too little – reduced tenant pool Section 8 Tenants – rules enforced by others

***All result in limits on Effective Gross Income***

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The Income Side of the Income Approach

LIHTC Rent Caps vary by locality in Virginia. Be sure

to understand your market area limitations. The rents are prior to adjustment for utility allowances.

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The Expense Side of the Income Approach

• Credit, Application and Compliance Process is Complicated & Burdensome:
• Paperwork Intensive

1.

More stringent initial income qualification process

2.

More stringent continual income qualification process

3.

Income Verification Process is not just 3 pay stubs

4.

Additional 3rd Party Compliance Officer Review

• Subject to Continual Agency Audit (VHDA)
• Subject to Limited Partner Audit
• Subject to Limited Partner Audit
• Non-compliance triggers mandatory reporting (8823) Report of Non-Compliance…)
• Personnel Costs are Higher
• Most Owners Employ Experienced Managers as Compliance Officers
• Paperwork Burden Often Requires Additional Management Personnel
• Training Burden in Terms of Initial Time & Cost
• Training Burden in Terms of Continuing Time & Cost/2 to 5 Seminars Per Year
• Auditing Costs are Higher in affordable housing operations
• Subject to Annual or more frequent Agency Audit (VHDA) – Review 20% of the files/Owner Pays the Fee
• Subject to Periodic Limited Partner Audit
• Does Affordable Housing Merit Its Own Expense Ratio Analysis?

Peter S. Eckert & Company, Inc.

The Expense Side of the Income Approach

Credit,

Application and Compliance Process is Complicated & Burdensome:

Paperwork Intensive 1.

More stringent initial income qualification process

1.

More stringent initial income qualification process

2.

More stringent continual income qualification process

3.

Income Verification Process is not just 3 pay stubs

4.

Additional 3rd Party Compliance Officer Review

Subject to Continual Agency Audit (VHDA) Subject to Limited Partner Audit Non-compliance triggers mandatory reporting (8823) Report

• f Non-Compliance…)

Peter S. Eckert & Company, Inc.

The Expense Side of the Income Approach

Peter S. Eckert & Company, Inc.

The Expense Side of the Income Approach

Personnel Costs are Higher:

Most Owners Employ Experienced

Managers as Compliance

Most Owners Employ Experienced

Managers as Compliance Officers

Paperwork

Burden Often Requires Additional Management Personnel

On-Site and Front Line Managers Play a Crucial Role in Tax Credit

Compliance so they need Training and Experience

Training Burden in Terms of Initial Time & Cost Training Burden in Terms of Continuing Time & Cost/2 to 5

Seminars Per Year are typical for Tax Credit Managers

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The Expense Side of the Income Approach

Management Salary Costs are higher:

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The Expense Side of the Income Approach

Management Fee Costs are higher:

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Peter S. Eckert & Company, Inc.

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The Expense Side of the Income Approach

Auditing Costs are Higher:

Subject to Annual or more frequent Housing Finance Agency Audit

Subject to Annual or more frequent Housing Finance Agency Audit Inspects 20% of the Units and Review 20% of the files Owner Pays the Fee Subject to Periodic Limited Partner Audit Potential Oversight by Other Agencies This is why 3rd party compliance reviews are recommended

Peter S. Eckert & Company, Inc.

The Expense Side of the Income Approach

Does Affordable Housing Merit Its Own Expense Ratio Analysis?

Peter S. Eckert & Company, Inc.

Why is Affordable Housing Less Valuable/Why Should Cap Rates be Higher?

Each LIHTC property has a Regulatory Agreement that is a long

term covenant running with the land. The restrictions are term covenant running with the land. The restrictions are usually in place for a period of up to 50 years. This Regulatory Agreement is binding and is enforced by the Federal government

• through the Internal Revenue Service and the State government
• through the Virginia Housing Development Authority.

The Regulatory Agreement is not financing; it is a covenant that

runs with the land and requires that the property remain affordable for low income persons. Both the rent and the resident’s maximum income are restricted.

Peter S. Eckert & Company, Inc.

Why is Affordable Housing Less Valuable/Why Should Cap Rates be Higher?

Household income is restricted to either 50% or 60% of the

Median Family Income (MFI), as published annually by Median Family Income (MFI), as published annually by

• HUD. A household can not make one dollar more than the

maximum household income allowed in the locality. All sources of income of every kind are counted towards this test and this test is applied to each tenant each year on the tenant’s lease anniversary date. The annual income from every source, for each occupant, is third party verified and certified, whether it is a bank account, alimony, annuity, etc.

Peter S. Eckert & Company, Inc.

Why is Affordable Housing Less Valuable/Why Should Cap Rates be Higher?

Rents are restricted based on a formula which uses Rents are restricted based on a formula which uses

30% of 50% or 60% on a market’s MFI. It makes no difference what the market rate properties are charging for a comparable apartment.

Peter S. Eckert & Company, Inc.

Why is Affordable Housing Less Valuable/Why Should Cap Rates be Higher?

• The position of the general and investment partners exhibits additional risks and

complexities to the extent that,

• The general partner has committed to the limited partner to personally guarantee the

compliance of Regulatory Agreement. If non compliance is discovered by the Government, heavy fines, penalties and the recapture of the Tax Credits occurs.

• The investment partner can sell its interest however experience has shown that

indemnification of the parties, especially within the initial 15 years period, is causing a lowering of prices in an attempt to minimize future non-compliance risk.

• Recent sales/purchases of GP/LP positions is made more expensive due to legal reviews

by funds attorneys, agency attorneys, investor attorneys and buyer attorneys.

Peter S. Eckert & Company, Inc.

Why is Affordable Housing Less Valuable/Why Should Cap Rates be Higher?

Recent sales/purchases of general/investor positions represent a new wave of

activity in this market. In virtually all cases, these are older properties. A mandated comprehensive rehabilitation is a requirement of the primary mandated comprehensive rehabilitation is a requirement of the primary lender, VHDA. Some of the implications are:

Expensive renovations and replacements are being required in order that the

property maintain its marketability;

There is a question as to whether these replacements enhance or simply

preserve value;

Compliance periods continue or start over again; VHDA loan terms are diminishing investor’s reversion prospects; All of the above result in more restrictions and higher risk for owners; hence, a

higher cap rate is indicated.

Peter S. Eckert & Company, Inc.

Cap Rate Selection

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Cap Rate Selection

Direct Market Comparison reveals a clear difference

between conventional and tax credit Cap Rates.

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Cap Rate Selection

Direct Market Comparison reveals a clear difference

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Cap Rate Selection

The prevailing custom in the marketplace is to add 25,

50 or 100 basis points to the “conventional cap rate” to 50 or 100 basis points to the “conventional cap rate” to reflect the LIHTC encumbrance, depending upon the variable characteristics of the subject property. Along with… Adjustments to Income & Expenses

Peter S. Eckert & Company, Inc.

Takeaways & Trends

Remember, we are valuing affordable housing, not upscale, not

luxury accommodations.

The target market is economically vulnerable. The target market is economically vulnerable. Regulatory agreements are encumbrances and, to some degree

(hopefully measurable) will always render a property less valuable than one free of the encumbrance.

Selected expenses are almost always higher for tax credit

properties.

Compliance periods last long after tax credits/benefits are

exhausted.

Don’t forget to examine the terms of the financing.

Peter S. Eckert & Company, Inc.

Takeaways & Trends

Some consideration has been given to separating or

bifurcating the real estate tax rate for affordable housing. Would this mean giving up local control over taxes and Would this mean giving up local control over taxes and assessments to the General Assembly?

Hundreds of Section 42 properties are nearing expiration

dates on their initial compliance periods so many of these properties are being sold or held for renovations and re-

• crediting. The future will bring more data and hopefully

more clarity to this segment of the market.

Peter S. Eckert & Company, Inc.

Questions & Answers

Real Life Situations? Current Appraisal Problems? War Stories or Lessons Learned?

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