Rent Stabilized Forecasted or Actual

[esimo]

We're doing a 16 unit apartment building with some market rate apartments, some rent stabilized apartments, and several units combined for the owner's use.

The owner only provided the most recent year's income and expense statement (2008). In the AI Handbook, it states a fee simple appraisal should use market rents to calculate income. In this case, market rent (MR) is - of course - the rent stabilized rent for several of the units. So, therefore, the next buyer could not legally or reasonably expect to receive market rents until these units were moved out of the RS program.

We agree that MR should be used for the owner's unit. How should income be calculated for the RS apartments? Does one use actual or forecasted (market) rents in calculating the NOI? Or should forecasted rents equal RS, not MR, in these cases.

In light of the bankruptcy filing last week at Stuy Town, it seems more prudent to use actual rents for the RS apartments and not MR. Even if RS buildings are typically long term holdings waiting for the upside when the RS apartments are de-regulated.

Thankfully, there are several recent sales and those buildings have at least one RS apartment as well. Still, we have a little bet right now, so I would like to win a nice lunch.

What say you? Thanks!

 

[Vernon Martin]

Are you really appraising a fee simple interest or a leased fee interest? An appraiser should use the lower of 1) the controlled or stabilized rent, or 2) market rent in forecasting rental income, just as a reasonable investor would.

 

[Howard Klahr]

Will the rent stabilization restriction be set aside through the bankruptcy? Is this property the sole asset of the debtor? Are there other properties? If so, are the properties similar to the subject (i.e. rent stabilized multi-family residential)?

Notwithstanding the above, the housing authority likely has information on how the stabilized rents are calculated for this property and under what specific rent stabilization program the subject property is encumbered. This information is likely relevant for the report as well.

Once all of the above has been determined, how to proceed and calculate an appropriate NOI for your valuation assignment should become much more evident.

 

[esimo]

Thanks for the responses.

This property is not in bankruptcy, I was simply referring to the Stuy Town deal and Tishman Speyer. They purchased Stuy Town with the objective of converted goverment subsidized units to market rate units. They were unsuccessful and will likely miss their debt payment coming due in the next month.

This property is a fee simple market value engagement for the purpose of a refi. I used MR for the owner occupied units and RS rents for the RS units. An addendum was written to offer a little background on RS and RC.

It's a little tricky because the owner is entitled to the registered rent of the apartment if they can find a renter at that price. The issue is that only the owner or each individual tenant can provide you with these various rents. DHCR, the regulating authority only verifies if a building has RS or RC (rent control) tenants.

This actually happened to a roommate I had after college. We rented an RS apartment cheaply ($824/mo). I had a great relationship with the landlord, but my roommate didn't. I saved up some money and bought a place. When I moved out the landlord increased the rent by 30% ($1200/mo) and when my roommate moved out one year later, the next tenants were paying almost double the rent ($1600) we payed just 18 months previous. This was in Harlem almost 10 years ago and the market moved upwards quickly.

So one never knows the registered rents unless provided and some of the rents seem to high to be RC but too low to be the registered RS rents. RC rents are extremely low and RS can be anywhere, depending on whether the owner made capital improvements and filed leases and increases correctly. Still, I follow Vernon Martin's advice so far, as I think this is what an investor would likely do. RS rents for RS apartments and market rents for the owner apartment.

Thanks again for the replies. So far, someone in my office is buying me lunch.

 

[Terrel L. Shields]

I think you need to be consistent.

If you are using market rent estimates for the comparables, then use them for the subject.
If you are using actual income for the comps, then use actual income for the subject.
If you don't match the two, it appears that the GIM or discount rate will be skewed.

In a regulated environment, my tendency would be to use controlled rents as the income basis of controlled apts. The rest I would aver appropriate to use MR. Again, I'd be looking at rent trends. In our area, house rents have fell by 10% or more on average in the past 18 months due to a huge surplus of unsold houses. These are being rented in an effort to help pay the mortgage. It isn't working. Builders are going under anyway.

 

[Lost Cause]

Fee Simple? I Doubt It!

You haven't answered Vernon's key question: Are you, as you state, valuing the fee simple interest, or the leased fee interest?

If it's the leased fee you are valuing, and I have no doubt that's what interests your client, you need to concern yourself with the regulated (controlled or stabilized) rents as they exist today. You may also want to consider the permitted annual increases in rent to understand what kind of income upside a potential investor in such a property can expect. You would apply market rent when it comes to currently vacant units (including any owner-occupied units).

I can't imagine under what scenario any client would care about the value of the fee simple interest of such a property. Also, if you are using stabilized rents to project income, you are not valuing a fee simple interest.

 

[esimo]

Thanks everyone.

Sorry, yes, it is the leased fee interest of the property that I am valuing and, in the end, I did what Harriman suggested. I also think this is what would an investor (or bank) would expect.

I appreciate the comment that I should apply either/or, which is what the other person in the office also said. But, given the intended user, the question, this case, should be, if the borrower defaulted, what could the bank expect to receive if they had to take it over.

Some tenants have been living in the building for a long, long time and the property has been family owned. I do suspect the registered rents are higher, but there is no way for me to know or acquire that information without having it provided by the owner.

Any lender in New York City should know about RS, and if they don't - well, that's why we have addendums.

Thanks all. I'll think of you on Friday when I eat my lunch, courtesy of my colleagues.

 

[MBD]

Did you get the DHCR report on the property to verify the legal rents and if any tenants have preferential rent?

 

[esimo]

I sent off this appraisal, but I was not able to get the registered legal rent, on the preferential rent. In a RS apartment, the registered rent is the max the landlord can charge and the preferential rent is anything below that amount the landlord wishes to charge.

The income/expenses I received only listed the preferential rents. My feeling is that the next landlord would likely charge the legal registered rent. The building is old and many of the tenants have been there forever. The daughter who inherited the building from her father also lives there, the property is debt free, etc. My feeling is that the legal, registered rent is higher than the preferential rent indicated on the income.

In any case, I have never been able to receive the rents from DHCR. As far as I know it is only made available to the prospective buyer, the owner or a tenant. This is a cash-out, and the current owner did not provide this.

Do you know - or does anyone else for that matter - how to approach DHCR to get this? I am working on another similar building with RS apartment right now.

Thanks.

 

[MBD]

The property owner has to request the DHCR to present you a copy of it.