Appraisal - Valuation of Subsidized Housing
Below is a MRR and PLR article in category Finance -> subcategory Real Estate.
Appraisal: Valuation of Subsidized Housing
Overview
This article explores the methodologies used to value subsidized housing, considering unique factors that impact rental and occupancy rates, as well as operating expenses. Two main scenarios are analyzed:
1. Low-income subsidized apartments with higher-than-market rental rates from HUD or other agencies.
2. Projects under the Low Income Housing Tax Credit (LIHTC) program.
Understanding Market Value
The valuation process begins by understanding market value through definitions provided by the Texas Property Tax Code and the Appraisal Institute:
- The Texas Property Tax Code considers market value as the price at which a property might sell under current market conditions, where both buyer and seller act knowledgeably and in their best interests.
- The Appraisal Institute defines it as the probable price in a competitive market, assuming a fair sale without undue pressure on either party.
An essential term to review is “knowledgeably.” Buyers must understand the commitment involved in subsidized programs and the restrictions, such as set maximum rents for LIHTC projects, often lasting 15 to 30 years.
Fee Simple vs. Leased Fee Estate
- Fee Simple Estate: Absolute ownership unencumbered by claims except for government powers like taxation.
- Leased Fee Estate: Ownership under a lease that specifies rights and obligations of landlord and tenant.
In Texas, valuations typically focus on the fee simple estate, emphasizing the assessment of market rent, expenses, and occupancy over contract terms.
Market Rent Considerations
Market rent represents the expected income a property could command without extra services that subsidized housing might require. It acts as a basis for valuation.
Valuation Methodologies
Income Approach
Subsidized program participants might receive above-market rental rates from HUD, compensating for:
1. Bureaucratic program requirements, such as inspections.
2. Challenges in dealing with socioeconomically disadvantaged tenants.
For example, HUD may offer $0.70 to $0.80 per square foot per month, whereas market rates may range from $0.45 to $0.50. This discrepancy necessitates an analysis of comparable properties in similar socio-economic areas south of downtown Houston.
Sales Comparison Approach
Both income and sales comparison approaches are used, with the cost approach being less effective due to external obsolescence reflected in rental rate differences.
Conclusion
Valuing subsidized housing involves careful consideration of unique market dynamics. It is crucial to assess each property not solely based on transactions but by adjusting for the specific factors affecting its market value. Appropriate methodologies ensure fair taxation without penalizing property owners for past business decisions or market circumstances.
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