Section 8 Residential Appraisal

[Texas Transient]

An appraiser in our office has a difficult assignment and has contacted the local NC appraisal board for answers. In the meantime, we were hoping someone out there may help us with some answers. The following is the email our appraiser sent to the board.....Thanks, WB

"We are valuing a Section 8 property for the protesting of property taxes in Morehead City, NC. A use restriction till year 2045 (the remaining useful life of the property) limiting the property use to renting to very-low, low, and moderate income tenants applies. No HUD mortgage. Existing mortgage appears at market rates. HAP contract in effect till 2011 at which time it will most likely be renewed. No tax credits left. Limited distribution of $51,000 per year. Cash available for distribution $0.00 in 2004, 2005, 2006 and first 4 months of 2007 when it sold. Cash available for distribution at 12/31/07 was $42,534. Property owner also owns the management company. They expensed just a little more than half their allowed management fee. Limited distributions are cumulative and have been on the books through three owners.

We plan to use only the income approach and capitalize the maximum limited distribution. Does this sound reasonable? We may get data for extracting a cap rate or may have to build one from market. Any suggestions? Does a bond rate for a Baa seem a similar level of risk?

Any help would be greatly appreciated, or a name".

 

[Lee Lansford]

Just a hunch, but I'll be surprised if your enquiry nets a response.

I have to take an educated guess and state that the Appraisal Board is not in existence (due to limitations on time, resources and their mandate) to instruct an appraiser as to the appropriate approach to the solution of an appraisal problem.

But...I might be wrong in this particular instance.

 

[Texas Transient]

perhaps....but at least we can say we contacted them and asked their opinion to be on the safe side.....

 

[Don Clark]

Mr. Blackford,

I am not an expert in section 8. I also do not have your level of qualifications, nor do I have any background in the appraisal of the type of property you are referring to. But.....I do have common sense, and prior to licensing I completed many different types of commercial appraisals. The largest such commercial appraisal was a 96 unit apartment building that was being taken as an asset by the RTC. I completed the appraisal for the RTC in 1991. The value of the apartment complex at that time was $3+ million. The operating income statement was management contrived and loaded with expenses that were personal and not related to the operation of the subject.

Here is how I see what you need to answer to do the appraisal:

1. HBU.....that is not likely to change since it appears to be locked in to the section 8 program

2. The most meaningful way to do the appraisal. I agree that the only real meaningful approach to value is the Income approach to value. I doubt there is any real market for such a restricted property otherwise.

That being the case, I would do the appraisal using only the income approach to value. I would use any appropriate cap rate available or that could be built from market data. If more than one way is available to develop a rate I would use as many as would be meaningful.

Base on my limited knowledge and expertise, that is how I see it. I do not believe any other approach to value would be meaningful, and in fact could be misleading.

 

[Kevin Mc]

2. The most meaningful way to do the appraisal. I agree that the only real meaningful approach to value is the Income approach to value. I doubt there is any real market for such a restricted property otherwise.

That being the case, I would do the appraisal using only the income approach to value. I would use any appropriate cap rate available or that could be built from market data. If more than one way is available to develop a rate I would use as many as would be meaningful.

Base on my limited knowledge and expertise, that is how I see it. I do not believe any other approach to value would be meaningful, and in fact could be misleading.

I have done many Sec 8 properties but none with such restrictions. My bold, I agree with Don. It seems the income approach would be the only way to approach the assignment. Are these types of restrictions common in NC?

 

[Lost Cause]

I agree with everything Mr. Clark has said.

I wonder, based on the highlight I made in red, if this might be a LIHTC project (Low Income Housing Tax Credit). While section 8 projects don't always have the kind of long-term restrictions you speak of, LIHTC projects always do.

I wouldn't think you'll get a response from the Board on such a detailed question, either.

An appraiser in our office has a difficult assignment and has contacted the local NC appraisal board for answers. In the meantime, we were hoping someone out there may help us with some answers. The following is the email our appraiser sent to the board.....Thanks, WB

"We are valuing a Section 8 property for the protesting of property taxes in Morehead City, NC. A use restriction till year 2045 (the remaining useful life of the property) limiting the property use to renting to very-low, low, and moderate income tenants applies. No HUD mortgage. Existing mortgage appears at market rates. HAP contract in effect till 2011 at which time it will most likely be renewed. No tax credits left. Limited distribution of $51,000 per year. Cash available for distribution $0.00 in 2004, 2005, 2006 and first 4 months of 2007 when it sold. Cash available for distribution at 12/31/07 was $42,534. Property owner also owns the management company. They expensed just a little more than half their allowed management fee. Limited distributions are cumulative and have been on the books through three owners.

We plan to use only the income approach and capitalize the maximum limited distribution. Does this sound reasonable? We may get data for extracting a cap rate or may have to build one from market. Any suggestions? Does a bond rate for a Baa seem a similar level of risk?

Any help would be greatly appreciated, or a name".

We've done a lot of subsidized projects here and what we commonly see is this: The appraiser derives a market cap rate based on comparable sales. Then the cap rate is reduced to account for the reduced risk these type projects typically represent. The rate reductions I've seen vary from 50 to 200 bp, and it would depend upon much the appraiser believes risk to be mitigated. That can be difficult to objectively quantify.

 

[Texas Transient]

so far your advice is very helpful, please keep them coming...thank you

 

[Walter Kirk]

Since the property is deed restricted the only thing that you can do is employ the income approach. One good point is that Section 8 rentals are very stable with almost no collection problems or vacancy loss.

 

[Texas Transient]

Thank you Walter, I greatly apprecitate your input. We pretty much agree that the income approach is the way to handle this report, however, there is an ongoing argument since there are no local Section 8 apartments for comparison....in that no comparables were included in our intial report conventional or otherwise. This seems to smack the appraisal process completely out of the ballpark in treading unknown territory. It just doesn't pass the smell test for me. There has to be a way to compare this property to something, even to a conventional apartment if nothing else to show dissadvantage (or advantages depending on the level of mkt rent) of a constant income level, even though it is guaranteed (with certain criteria met of course). I have also been told that certain methodology is required for Section 8 when bringing these types of value conclusions before a tax board for protest purposes. Just trying to get a handle of what those are. HUD sure isn't helpful in this matter!

Thanks again for you comments, Walter...wb

 

[Michigan CG]

Thread moved to commercial/Industrial at thee request of the OP.

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One good point is that Section 8 rentals are very stable with almost no collection problems or vacancy loss.

I agree with the obove, i did three of these properties two years ago and they had it down to a science...when one of the tenants would, um, "leave" (pass away), they had a new person in there in three days.