How does Bond Financing - Special Tax affect lot value?

[Peyton8]

I am working on a subdivision where the developer plans on obtaining bond financing for the site improvements which will then be paid back via an ongoing Special Tax on each lot. This is new to our area, so lot comps are not available. I have included the special tax in my DSO, but am not sure how to discount my lot values for this tax.

If lots or homes are for sale in two side by side projects with all other factors the same and one has this special tax while the other does not, the lot values in the project with the special tax would have to be lower to expect buyers to buy.

We have tossed back and forth the idea of determining the lesser amount of house you could finance in the project with the higher taxes and using that number for the adjustment. Basically, if the additional tax per year results in $20,000 less that could be financed over the life of the loan, then the lot value would be expected to be $20,000 less in this project.

Does this make sense? Or... any other ideas?

 

[Vernon Martin]

I think you have the right idea, but are you appraising the subdivision or just a lot?

The way I've handled it in the past for subdivisions is to use the ordinary valuation methods to estimate prospective market value and then deduct the entire bonded indebtedness afterward. That keeps things simple for the bulk sale scenario that the lenders are interested in.

If you're appraising only one lot, I think the easiest way to adjust would be to just deduct the lot's share of the bonded indebtedness.

 

[PropertyEconomics]

I am working on a subdivision where the developer plans on obtaining bond financing for the site improvements which will then be paid back via an ongoing Special Tax on each lot. This is new to our area, so lot comps are not available. I have included the special tax in my DSO, but am not sure how to discount my lot values for this tax.

If lots or homes are for sale in two side by side projects with all other factors the same and one has this special tax while the other does not, the lot values in the project with the special tax would have to be lower to expect buyers to buy.

We have tossed back and forth the idea of determining the lesser amount of house you could finance in the project with the higher taxes and using that number for the adjustment. Basically, if the additional tax per year results in $20,000 less that could be financed over the life of the loan, then the lot value would be expected to be $20,000 less in this project.

Does this make sense? Or... any other ideas?

I would think, lacking market evidence as support, deduction of the bond expense may not accurately reflect market reaction. While your reasoning is supported from an academic viewpoint, it lacks market support and I think it important to disclose that. Sounds like in your market you are in unchartered waters and caution is the word of the day.
Typically these bonds have a pay off period (10 years in my area) and may be assessed based upon frontage, thus narrower lots have lower obligations while corner lots have much higher obligations. Recognition of these factors would be important as would their discount to a present value for adjustment purposes.

I wish you luck on this assignment.

 

[Peyton8]

Thanks for the help. In this case, the payback is over a 30 year period and is assessed based on the lot type - single family vs. duplex. At an average rate of $1,800 per year, this ends up being quite an expense to the homebuyer ($54,000 total over 30 years). And the homes will likely be priced in the $300,000 range.

I will fully explain the situation/scenario in my report, as well as the possibility that buyers may shy away from this project due to the additional tax. I will also discuss the difference in the amount of home they can purchase due to the higher monthly payments associated with the tax. Caution and Full Disclosure.

Again, thanks for your input !!

 

[JT1974]

I remember reading a thread with this same question about 6 months ago. I think Dave (Adept Appraisal) had a similar situation in northern Illinois. He may be able to shed some light as to the market's reaction to lots with special assessments for infrastructure.

Dave...........are you out there? Help us out here buddy!