The Forrestal Group, Inc.

Affordable Housing

Use the links below to learn more about each of the following:

Low Income Subsidized Housing–History & Overview

The Forrestal Group, Inc. services represent clients who own and manage low–income apartment properties built under the guidelines of the U.S. Government Section 515 (Rural Development), IRS Section 42 Low Income Housing Tax Credit (LIHTC), Section 8, and other HUD (Housing and Urban Development) programs.

Section 515–Subsidized Housing background

Section 515 Low Income Housing was built under the guidelines of the Farmers Home Administration (FmHA) Section 515 multifamily Housing Program. USDA Rural Development currently administers this program. The purpose of the program is to provide affordable housing for low–income families and senior citizens in small or rural communities.

To encourage development of these projects, USDA Rural Development provides an attractive financing package consisting of a 1% interest rate loan, 50–year amortization and 3% – 5% equity investment. These are highly leveraged loans, equivalent to 95% – 97% of development costs. In return for this favorable financing, the property owners must adhere to the following restrictions:

  • Restricted and reduced rents which are below conventional market rents
  • Annual profit cap equal to 8% of initial equity – which is not guaranteed and often not attained
  • Approval of sales and transfers of ownership interest by USDA
  • Section 515 restrictions pass to subsequent owners for term of the loan

Valuation Methodology

Indiana, as typical of most states, real property assessment guidelines require real estate to be assessed at its market value, which, in some states, is defined as “the market value–in–use of a property for its current use, as reflected by the utility received by the owner or a similar user, from the property.” In accordance with this definition, the subject property is valued as a subsidized housing project. To properly account for the unique characteristics associated with Section 515 housing projects, the Income approach is as well as market value since it considers the subject’s operation as a subsidized housing project encumbered by a restricted revenue stream, annual reserve requirements, return on equity limits, and concessionary financing.

“Property Assessment Valuation, Second Edition: (Chapters 10, 11, and 12), published by the International Association of Assessing Officers is often used as a reference in valuation of low income housing via the Income Approach. The subject’s actual financial statements are analyzed for the most applicable year(s) and usually summarized in a spreadsheet. Stabilized net operating income (NOI) is estimated as of the assessment date. The stabilized net operating income is divided by a market derived capitalization rate, producing a stabilized value estimate. Since real estate taxes are excluded from the stabilized net operating income projection, and effective tax rate component must be added to the capitalization rate resulting in an effective capitalization rate. The value of the FmHA favorable financing is also taken into consideration and added to the aforementioned stabilized value estimate. The procedure is further illustrated utilizing the Kentucky Department of Revenue “Guidelines to Assessing Low Income Subsidized Housing” as developed and implemented statewide in the year of 2000.

Capitalization Rate Development

The effective capitalization rate utilized in this valuation process considers the liquidity of a viable sales market for Section 515 housing projects. Sales activity is quite infrequent due to governmental program restrictions and cash flow limitations. Also, the Tax Reform Act of 1986 reduced many tax benefits associated with investing in Section 515 developments, creating a disincentive for potential buyers. All benefits and restrictions are considered to develop a market derived capitalization rate in recognition of the limited buyer–investor demand for Section 515 housing. Therefore, it is logical that an overall capitalization rate should be higher for this type of rural restricted housing project as compared to a conventional property without any governmental limitations.

How does The Forrestal Group, Inc. value Affordable Housing?

  • The Forrestal Group, Inc. endeavors to develop the assessment for affordable housing properties using the income approach to valuation.
  • We take into account the restricted rents, but do not consider the tax credits unless it is a state law such as Tennessee. Several taxing jurisdictions have ruled that assessors must take restricted rents into account and that tax credits are not considered as real property – an exception is the state of Tennessee, which does consider the tax credits.
  • We research and apply guidelines of the state where the property is located.
  • Our professional analysts considers all of the benefits and all of the restrictions including law of marketability, illiquidity, rent restricts, and low market characteristics.
  • When an appraisal is required, we employ a state certified general appraiser to perform this service.
  • The average reduction in the assessment of low income subsidized housing for Section 42 Low Income Housing Tax Credit properties over the past five (5) years and hundreds of properties has ranged from 19–55%.
  • The track record of The Forrestal Group, Inc. can be supported by our client’s references that are available upon request.

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IRS Section 42–Low Income Tax Credit Program

What is the LIHTC Program?

This program was established in 1986 under Section 42 of the Internal Revenue code to replace other low and moderate housing programs that provide direct subsidies to low income housing properties or to tenants. Many of these programs, such as Section 8 subsidized apartments, are being phased out. However, the federal government is still granting Section 8 vouchers to individuals and families. Some things to consider:

  • States allocated a certain amount of federal income tax credits annually
  • The State Housing Authority (Indiana IHFA) is the state agency authorized to award federal income tax credits
  • The maximum income population served is those making no more than 60% of the area’s median income

Purpose of the Program

Provide affordable, safe, sanitary and efficient housing to low income families by providing an incentive in the form of federal income tax credits to developers.

How does the Program Work?

The developer, working alone or with for–profit subsidiary of charitable organization, applies to the housing authority for tax credit allocation. Tax credit awarded to developers with best proposals based on:

  • Financial feasibility
  • Amenities
  • Length of commitment to maintain property as affordable
  • Social service and self–sufficiency programs
  • Etc.

The developer agrees to maintain property as affordable housing for, at least, 15 years. Some properties have pledged to maintain the property as affordable housing for much longer terms. The covenant to maintain as affordable housing is a deed restriction that runs with the property.

The Tax credits are purchased by individual investors in exchange for investment on the market

The current discount is approximately $0.70 – $0.80 per $1.00 of the tax credit. The procedure is to discount the tax credits over a number of years at an acceptable rate.

Proceeds from tax credits are used by the developer for construction costs, or to pay down the mortgage, thereby reducing the amount of debt on the property.

Does the property receive any rent subsidies from the federal or state government?

No. Rents are set at 30% of the gross income of the targeted tenant population. The following apply:

  • If the property is targeted to tenants making no more than 60% of the area’s median income, then the rent is set at 30% of 60% of the area’s median gross income.
  • If the targeted population is tenants making o more than 40% of the area’s median income, then the rent is set at 30% of 40% of the area’s median gross income.
  • HUD sets maximum allowable rents
  • LIHTC properties are limited to charging rents set by HUD
  • Most properties do not charge the maximum rents, because it is more important to have fully–occupied properties

Section “8” Rental Assistance Program–How does this work?

  • Recipients of Section 8 vouchers are eligible to live in properties that are LIHTC properties
  • Usually Section 8 voucher recipients will be making less than the targeted population serviced by the LIHTC property
  • The federal government subsidizes a Section 8 tenant’s rent up to rents charged to other tenants
  • Subsidized rent is calculated in the income of the property just as if it were rent received from the tenant
  • The LIHTC property receives no more rent from a Section 8 tenant than any other tenant

Affordable Housing – How should the assessment be calculated?

The Forrestal Group, Inc. endeavors to develop the assessment for affordable housing properties using the income approach to valuation.

  • We take into account the restricted rents, but do not consider the tax credits unless it is a state law such as Tennessee and a few other states. Several taxing jurisdictions have ruled that assessors must take restricted rents into account and that tax credits are not considered as real property – an exception is the state of Tennessee, which does value the tax credits.
  • Our professional analysts considers all of the benefits and all of the restrictions including law of marketability, illiquidity, rent restricts, and low market characteristics
  • The average reduction in the assessment of low income subsidized housing for Section 515 and Section 42 Low Income Housing Tax Credit properties over the past five (5) years and hundreds of properties has ranged from 19–55% with an average of thirty five (35%) percent.
  • The track record of The Forrestal Group, Inc. can be supported by our client’s references that are available upon request

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Low Income Subsidized Housing – There is a Difference

Low Income Housing Apartments are different;
Example – Section 515

  1. Income has limitations due to restricted rents but may consist of income from several sources such as
    • Income received from the tenant
    • Income received from a Rental Assistance Program
    • Income received from a Mortgage Interest Subsidy Program
  2. Occupancy is restricted due to income qualifications
  3. Use is restricted due to Land use deed restrictions or the State Housing Finance Agency Agreements
  4. Profits are limited to a specific return on the initial down payment if a profit is available
  5. Sales are extremely rare in the open market
  6. Highest and Best Use is restricted to Low Income Subsidized Apartments
  7. Buyers will not pay for an income stream that they cannot receive as related to the conventional market

At the Forrestal Group, Inc. we recognize that there is a difference between conventional apartments that are not restricted and Low Income Subsidized Apartments that are controlled by the restrictions and limitations.

We know how to recognize “Market Value” and “Market Value–In–Use” as it relates to Low Income Subsidized Apartments.

The Forrestal Group, Inc. considers assessment methodology that measures all of the differences.

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