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Appraising apartments with HUD grants

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lilylou

Thread Starter
Freshman Member
Joined
Oct 23, 2008
Professional Status
Certified General Appraiser
State
Indiana
I was asked to appraise an approximate 50 unit apartment project. The project is under complete renovation and will receive "grant" money from a HUD program. The montly rents will likely be higher than the neighborhood would support. The program is for mentally ill etc. that can live on their own. As you can see I don't have all the details. My question is do you value the apartment project with market rates and then a separate valuation with the "grant" consideration. The property representative indicated the cash flow would be much greater with this program. Is this a "market Value" and I assume it would require an extraordinary assumption about the "grants" being in place and for how long.

I know this is vague, just trying to get an idea of what type of appraisal work would be involved.

Thanks!!
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
Lily ...
This is very much like a low income housing tax credit, or sounds like it. In the past I have done these assignments and provided two value estimates for the exact reasons you suggest. Market value, considering market rents and expenses and then Investment Value considering the special "other" conditions, including special rate financing over longer terms, tax credits, increased expenses as a result of the program, etc..
Be very careful to fully understand the program before you dive into the assignment as they can be tricky. It is my belief that no one will pay above market rents, and Id pay specific attention to see if rents are subsidized at higher levels becasue of the tenancy. Additionally, as I mentioned, typically these programs require auditing, special book keeping, etc and the expenses should reflect these items as well under the investment value.
At the time I completed the assignments there were no sales anywhere in the country, however, this may have changed as these programs have been around for in excess of 10 years.

Good luck. Hope this helped.
 

Stephen J. Vertin MAI

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified General Appraiser
State
Illinois
Lilylu:

First welcome to the forum. I have done a number of low income grant loans within Indiana. Most recently 2 in South Bend in Oct 2008. You are right about your post being vague:)

There are a number of programs and it depends how yours is structured. Be aware, in Indiana most of these programs eliminate real estate taxes. Unlike many other states Indiana's low income housing pays no real estate taxes. Go figure.

Another issue, while rents possibly (and I emphasize possibly) are higher than market I have found cumbersome governmental regulations tend to increase operating expenses. I am sure none of the owners told you that, did they?

Keep in mind you have given very few details. With that said, as a general rule I have found very little value difference between these projects and general market product. However, there are certain tax credits, not grants, that tend to elevate the feasibility of projects compared to market products. In other words, under these programs, it becomes feasibile to build a specific project verses markets demanding such product.

If you give some more details I would be glad to help. There are very few programs I have not had experience with. In what City is your property?
 

lilylou

Thread Starter
Freshman Member
Joined
Oct 23, 2008
Professional Status
Certified General Appraiser
State
Indiana
Thank you for your replies. At this point in time, the client has placed the project on hold since we asked for a little more on the fee. We were not given an accurate picture of what was to be appraised at the time the fee was quoted. I am waiting to see if we get the project or they find someone else to do the appraisal for less. I am very conscience of making sure I satisfy "competency" provisions to handle this assignment. If we ultimatey get the project back, I will get all the info on what type of program this is. The property is located in Indianapolis. The client informed me that this loan was for a "not for profit" and they didn't want the fee to be so high because they are not loaning that much. My position is-their loan to value ratio does not change my amount of work to do the appraisal properly. Thanks again for your replies and I'll update if I get the assignment.
 

Stephen J. Vertin MAI

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified General Appraiser
State
Illinois
Just curious, if I were to bid the job, and it was here is Chicago, I would bid $2,500 for a summary and $3,500 to $4,000 for a self-contained. What did you bid on the deal?
 

PL1957

Senior Member
Joined
Jul 19, 2004
Professional Status
Certified General Appraiser
State
Illinois
Just curious, if I were to bid the job, and it was here is Chicago, I would bid $2,500 for a summary and $3,500 to $4,000 for a self-contained. What did you bid on the deal?
That would be for "as is", "as completed" and "as stabilized" values for both market and HUD rent levels?
 

JT1974

Senior Member
Joined
Dec 16, 2006
Professional Status
Certified General Appraiser
State
Wisconsin
Stephen and/or PL1957,

Do either of you know of any good data sources regarding the sale of Section 42 Tax Credits? I appraised several LIHTC apartment projects about 6 or 7 years ago and recall the tax credits would sell for about 70 to 80 cents on the dollar (usually to banks). However, I don't recall where my old boss got the data from. I suppose the banks that tend to finance these properties would be a good resource, but maybe either of you know of another resource?

To anyone who is unfamiliar with this type of project:

In Wisconsin (and other States), low-income housing is often subsidized by tax credits given to the developer. The developer can sell these credits for cash that is used to help "bridge the gap" between the value of the project as if it were market oriented and the typically lower value due to rent restrictions that will be in place for around 15 years (sometimes longer). Basically, if an apartment project costs $1,000,000 to build but will only be worth $800,000 upon stabilization, government agencies will typically offer tax credits worth $200,000 or somewhere in that neighborhood. The tax credits basically make the project financially feasible. Otherwise, nobody would be building low-income housing.
 

Michigan CG

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Staff member
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Nov 1, 2006
Professional Status
Certified General Appraiser
State
Michigan
Just curious, if I were to bid the job, and it was here is Chicago, I would bid $2,500 for a summary and $3,500 to $4,000 for a self-contained. What did you bid on the deal?

Self-Contained?

I have never heard of self-contained reports except for those for designation. All reports that I have written, or been involved with are summary reports.
 

Michigan CG

Moderator
Staff member
Moderator
Joined
Nov 1, 2006
Professional Status
Certified General Appraiser
State
Michigan
Stephen and/or PL1957,

Do either of you know of any good data sources regarding the sale of Section 42 Tax Credits? I appraised several LIHTC apartment projects about 6 or 7 years ago and recall the tax credits would sell for about 70 to 80 cents on the dollar (usually to banks). However, I don't recall where my old boss got the data from. I suppose the banks that tend to finance these properties would be a good resource, but maybe either of you know of another resource?

To anyone who is unfamiliar with this type of project:

In Wisconsin (and other States), low-income housing is often subsidized by tax credits given to the developer. The developer can sell these credits for cash that is used to help "bridge the gap" between the value of the project as if it were market oriented and the typically lower value due to rent restrictions that will be in place for around 15 years (sometimes longer). Basically, if an apartment project costs $1,000,000 to build but will only be worth $800,000 upon stabilization, government agencies will typically offer tax credits worth $200,000 or somewhere in that neighborhood. The tax credits basically make the project financially feasible. Otherwise, nobody would be building low-income housing.

Above is basically my experience. They are pain in the a-- reports and from what I can remember the fees were $5,000+.
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
Stephen and/or PL1957,

Do either of you know of any good data sources regarding the sale of Section 42 Tax Credits? I appraised several LIHTC apartment projects about 6 or 7 years ago and recall the tax credits would sell for about 70 to 80 cents on the dollar (usually to banks). However, I don't recall where my old boss got the data from. I suppose the banks that tend to finance these properties would be a good resource, but maybe either of you know of another resource?

To anyone who is unfamiliar with this type of project:

In Wisconsin (and other States), low-income housing is often subsidized by tax credits given to the developer. The developer can sell these credits for cash that is used to help "bridge the gap" between the value of the project as if it were market oriented and the typically lower value due to rent restrictions that will be in place for around 15 years (sometimes longer). Basically, if an apartment project costs $1,000,000 to build but will only be worth $800,000 upon stabilization, government agencies will typically offer tax credits worth $200,000 or somewhere in that neighborhood. The tax credits basically make the project financially feasible. Otherwise, nobody would be building low-income housing.


In the projects I have done, four that I remember (I would turn these assignments down today), the tax credits were sold prior to the appraisal being completed and there was a purchase agreement provided for the tax credits at the time of the appraisal assignment. A check with other purchasers, also large banks or investment firms as I remember, the credits were rather fixed in price at also $.70 - $.75 on the dollar. I dont recall calculation of the tax credits in the same way as outlined above, that would have made a bit more sense, but to my recollection the amount of the tax credits were based upon the total dollar amount of construction of the sticks and stones with the land value omitted from the calculation.
Our fees for these assignments were much higher than those quoted by Mr. Vertin and we simply never did a self-contained report. We had decided early on, given the requirements of a self-contained, that there was way too much liability associated with a self contained report and while we would write them to the level of what was believed to be self-contained, we would still call them summaries because there are always things that may not be fully explained, one small piece of data left out of the report, that would be subject to much criticism were the report lable to be self-contained.
Im sure appraisers successfully complete these all the time, it was just our decision to never do so because of the potential to omit some small item that would disqualify the report.
At the time we did these reports there were no sales of LIHTC projects and if memory serves me right the maximum allowable rents were based upon median incomes and the calculated rents always exceeded market rents.
I agree with Mr. Evans, these assignments were very difficult from both a conceptual viewpoint and that of appraisal methodology.

All that being said, it sounds like the OP assignment is much different than a LIHTC project and specifics would be needed prior to knowing how to treat the assignment.
 
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