Upload
rodger-lester
View
215
Download
1
Embed Size (px)
Citation preview
Case Study: Disposition of a Year 15 Property
2012 North Carolina Affordable Housing Conference
Presented by:Jeff Carroll, PresidentAllen & Associates Consulting, Inc.3116 Glen Summit DriveCharlotte, North Carolina 28270Phone: 704-905-2276 | Fax: 704-220-0470E-Mail: [email protected]
Introduction
Allen & Associates Consulting is a multi-disciplinary consulting firm specializing in affordable housing. Our practice areas include development consulting, property dispositions, valuation & market feasibility work, and engineering assignments (including capital needs assessments & utility studies).
The purpose of this presentation is to demonstrate how Allen & Associates might assist you in the disposition of your Year 15 property.
This presentation is based on an actual disposition we were recently engaged to handle.
The Problem
The owner of a HUD-subsidized Year 15 tax credit property located in Portsmouth, Virginia was thinking about selling.
He received an offer for $1 million, but felt the property could be sold for $2 million.
He asked Allen & Associates to assist him in the disposition of his property.
Our efforts brought him $5.2 million.
The Property
The property included 134 HUD-subsidized units which were originally constructed in 1978.
It was renovated in 1990 with tax credits and had completed its initial 15-year compliance period.
The property included 2, 3 and 4 bedroom units.
Type Units Rent
2BR/1.0BA 68 $582
3BR/1.5BA 50 $760
4BR/2.0BA 16 $813
Total/Average 134 $676
The HAP contract for the property was up for renewal. Here’s where the contract rents stood at the time:
Minimum Sales Price
The owner needed at least $3.1 million for this property:
◦ The property included $2.6 million in assumable debt which could not be prepaid.
◦ The property included $0.2 million due to the general partners.
◦ The partnership needed to yield approximately $0.3 million on the sale to cover exit taxes.
Clearly, the $1 million offer would not do. And the $2 million the owner was willing to accept would not be enough, either.
Traditional Methodology
The traditional method for valuing Year 15 properties is to apply an “as is” capitalization rate to the “as is” net operating income.
This approach, which has some significant shortcomings, is presented below:
Historic $/Unit Pro Forma
2005 2006 2007 $/Unit $
Effective Gross Income $7,621 $7,701 $7,780 $7,850 $1,051,900
Total Operating Expenses $4,951 $5,325 $5,069 $5,250 $703,500
Net Operating Income $2,670 $2,376 $2,711 $2,600 $348,400
Capitalization Rate 9.75% 9.75%
“As Is” Value $26,667 $3,573,000
Flaws in The Traditional Methodology
The traditional methodology does not evaluate how much a property could be sold for, assuming tax credits are used for renovation. The traditional methodology does not consider the following:
◦ Income capitalization assumes that a property is operated in its current “as is” condition indefinitely. If sold for renovation, this is not so.
◦ The traditional methodology fails to recognize upward rent potential by virtue of renovation. This can be significant for many properties.
◦ The traditional methodology fails to recognize potential reductions in operating expenses by virtue of renovation:
Reconfiguring Utilities: Passing electric, water & sewer through to residents. Energy Efficiency: Installing new appliances, doors, windows, and HVAC systems. Replacement Reserves: Major renovation typically results in reduced reserve requirements.
◦ The traditional methodology fails to account for the availability of tax credits associated with properties located in QCTs or DDAs.
◦ The traditional methodology fails to account for the availability of tax credits associated with properties found on the historic register.
Our Approach
Here’s what we did instead:
◦ Step 1: Establish a Scope of Renovation◦ Step 2: Derive a Renovation Cost Estimate◦ Step 3: Evaluate the Utility Configuration ◦ Step 4: Establish Post-Renovation Rents ◦ Step 5: Establish Post-Renovation Operating Expenses◦ Step 6: Estimate Post-Renovation Debt Capacity◦ Step 7: Estimate Available Renovation Tax Credit Equity◦ Step 8: Estimate the Value of the Property◦ Step 9: Identify a Developer to Purchase the Project◦ Step 10: Work with Developer to Close the Transaction
Note: Because our goal is to maximize sales proceeds to the Seller, we are paid by the Buyer at closing. If the transaction does not close, we do not get paid.
Step 1: Establish a Scope of Renovation
In the course of establishing a scope of work for this project, we conducted a unit-by-unit inspection of the property to evaluate the following site improvements & building systems:
Site ImprovementsTopography
Storm Water DrainageIngress & EgressPaving, Curbing & ParkingSidewalks & PatiosLandscapingRecreational FacilitiesUtilities
EnvironmentalOffsite
Improvements
Building SystemsFoundationStructural FrameExterior WallsRoofPlumbingHVACElectricalVertical
TransportationLife SafetyInterior FinishesADA Requirements
Step 2: Derive a Renovation Cost Estimate
Next, we developed a renovation cost budget for the subject property based on our scope of work:
$ $/Unit
Site Improvements $416,000 $3,104
Building Systems $4,476,592 $33,407
General Requirements $293,555 $2,191
Builder Overhead $97,851 $730
Builder Profit $293,555 $2,191
Bonding Fee $50,198 $375
Renovation Cost $5,627,751 $41,998
Step 3: Evaluate the Utility Configuration
Next, we evaluated the configuration of tenant-paid utilities for the subject property and established post-renovation utility allowances.
Establishing post-renovation utility allowances is an essential step in evaluating achievable rents for (and, consequently, the value of) tax credit properties:
Utility / SourcePre-
RehabPost-Rehab
Heat/Gas No No
Heat/Electric Yes Yes
Cooking/Gas No No
Cooking/Electric Yes Yes
Other Electric Yes Yes
AC/Electric Yes Yes
Hot Water/Gas No No
Hot Water/Electric Yes Yes
Water No Yes
Sewer No Yes
Trash No No
Utility Allowance / Unit Type
Pre-Rehab
Post-Rehab
2-Bedroom $82 $100
3-Bedroom $98 $128
4-Bedroom $108 $143
Step 4: Establish Post-Renovation Rents
Next, we established post-renovation achievable rents for the subject property.
Achievable rents are defined as the lesser of market or program rents (net of utility allowances). Market rents reflect the pricing for similar properties in the marketplace.
Our concluded rents reflected the post-renovation condition and utility configuration (water & sewer passed through to the residents) for the subject.
Establishing post-renovation achievable rents is an essential step in evaluating the “as is” value of a property being sold subject to renovation with tax credits:
Unit Type Units $/Unit $
2BR/1.0BA 68 $650 $530,400
3BR/1.5BA 50 $825 $495,000
4BR/2.0BA 16 $925 $177,600
Total/Average 134 $748 $1,203,000
Step 5: Establish Post-Renovation Operating Expenses
Next, we established post-renovation operating expenses for the subject property.
Our analysis, which included the compilation of operating expenses for comparable properties in the area, accounted for the new utility configuration (water & sewer passed through to the residents) for the subject property:
Comparable $/Unit Pro Forma
#1 #2 #3 $/Unit $
Maintenance & Operating $1,369 $1,794 $968 $1,751 $234,610
Utilities $586 $637 $457 $441 $59,129
Administrative $1,449 $1,416 $1,270 $1,268 $169,895
Taxes & Insurance $724 $691 $702 $862 $115,452
Replacement Reserves $300 $300 $300 $300 $40,200
Total Operating Expenses $4,427 $4,499 $3,697 $4,622 $619,286
Step 6: Estimate Post-Renovation Debt Capacity
Debt Capacity
Gross Potential Rent $1,203,000
Other Income $17,472
Vacancy & Collection Loss $48,819
Total Operating Expenses $619,286
Net Operating Income $552,367
Debt Coverage Ratio 1.15
Debt Service, Total $480,319
Debt Service, Assumed Debt $337,540
Debt Service, Additional Debt $142,779
Next, we determined the amount of debt which could be placed on the subject property after renovation. Our estimates, which reflect the terms of the assumed debt and market interest rates at the time of this transaction, are found below:
Assumed Debt
Debt Service, Assumed Debt $337,540
Loan Constant, Assumed Debt 0.1263
Loan Amount, Assumed Debt $2,672,820
Additional Debt
Debt Service, Additional Debt $142,779
Loan Constant, Additional Debt 0.0816
Loan Amount, Additional Debt $1,749,742
Step 7: Estimate Available Renovation Tax Credit Equity
$ $/Unit
Renovation Cost $5,627,751 $41,998
Soft Costs $1,848,057 $13,791
Developer Fee $1,569,000 $11,709
Subtotal $9,044,808 $67,499
Ineligible Costs $924,029 $6,896
Eligible Basis $8,120,780 $60,603
Basis Boost (30% for QCT) $2,436,234 $18,181
Qualified Basis $10,557,013 $78,784
Applicable Percentage Rate 9.00% 9.00%
Annual Tax Credit $950,131 $7,091
Tax Credit Recovery Period 10 10
Total Tax Credit $9,501,312 $70,905
Equity Pricing $0.90 $0.90
Equity, Renovation Tax Credit $8,551,181 $63,815
Next, we estimated the available renovation tax credit equity associated with this transaction.
Our estimate included a detailed soft cost budget, estimated developer fees, and an estimate of ineligible costs.
Our estimate also accounted for a 30% basis boost because the subject property is located in a Qualified Census Tract.
Finally, our estimate reflected the published APR and tax credit equity pricing at the time of this transaction.
Step 8: Estimate the Value of the Property
Value Estimate $ $/Unit
Loan Amount, Assumed Debt $2,672,820 $19,946
Loan Amount, Additional Debt $1,749,742 $13,058
Equity, Renovation Tax Credit $8,551,181 $63,815
Equity, Acquisition Tax Credit $1,376,819 $10,275
Sources of Funds $14,350,562 $107,094
Renovation Cost $5,627,751 $41,998
Soft Costs $1,848,057 $13,791
Developer Fee $1,569,000 $11,709
Value, Subject to TC Renovation $5,305,754 $39,595
Acquisition Equity Estimate $ $/Unit
Value, Subject to TC Renovation $5,305,754 $39,595
Value, Land $670,000 $5,000
Qualified Basis $4,635,754 $34,595
Applicable Percentage Rate 3.30% 3.30%
Annual Tax Credit $152,980 $1,142
Tax Credit Recovery Period 10 10
Total Tax Credit $1,529,799 $11,416
Equity Pricing $0.90 $0.90
Equity, Acquisition Tax Credit $1,376,819 $10,275
Next, we estimated the value of the property, subject to renovation with tax credits. We began by estimating the sources of funds available for this project. This included the assumed debt, the additional debt, and the renovation tax credit equity discussed previously. From total sources we deducted renovation costs, soft costs, and developer fees to arrive at a value estimate for the property.
It is important to note that the total sources of funds also included an estimate of the acquisition tax credit available for this project. The acquisition tax credit is a function of the value of the property, however, and vice versa. Consequently, we set up an iterative routine and converged on the final concluded acquisition tax credit and property values found below:
Step 9: Identify a Developer to Purchase the Project
Next, we identified a qualified developer to purchase and renovate the subject property with tax credits.
Because our practice is national in scope, we have earned the trust of developers throughout the country. Since 2000, we have worked on over 2500 transactions with over 200 developers in 41 states.
We ended up recommending a successful regional for-profit developer with in-house management who specializes in tax credit renovation projects.
We provided our underwriting to the developer, who immediately expressed an interest in the property. Within one week, the developer provided a $5.2 million offer to the owner, pending receipt of tax credits for renovation.
Step 10: Work with Developerto Close the Transaction
Finally, we worked with the developer to close the transaction. In the course of doing so, we assisted with the following:
Putting together the tax credit application Compiling third-party reports including:
◦ Scope of Work◦ Capital Needs Assessment◦ Energy Study◦ Market Study◦ Rent Comparability Study◦ Appraisal
Reviewing third-party reports including:◦ Survey◦ Title Work◦ Phase I Environmental Assessment◦ Accessibility Study
Identification of debt and equity sources
The project was awarded tax credits and sold for $5.2 million later that year, and we were paid by the buyer/developer for our work.
We valued the property at $5.3 million for the owner, who was initially willing to sell the property for $2.0 million. Clearly, this was an excellent outcome for everyone.
Qualifications
Jeff Carroll, President of Allen & Associates Consulting, is a certified general appraiser, licensed to appraise real estate in the states of Alabama, Delaware, Florida, Georgia, Kentucky, North Carolina, South Carolina, Tennessee, Texas, Virginia and West Virginia. Mr. Carroll, an associate member of the Appraisal Institute, is currently completing the requirements necessary to obtain the MAI designation.
Mr. Carroll is a member of the National Council of Affordable Housing Market Analysts, where he previously served on the Executive Committee and chaired the Data and Ethics Committees. Mr. Carroll has successfully completed the NCAHMA peer review process. Mr. Carroll has also served as a market study reviewer for the Georgia and Michigan housing finance agencies.
Mr. Carroll has written articles on affordable housing, development, property management, market feasibility, and financial analysis for Urban Land magazine, The Journal of Property Management, Community Management magazine, Merchandiser magazine, HousingThink, and a publication of the Texas A&M Real Estate Research Center known as Terra Grande.
Mr. Carroll has conducted seminars on affordable housing, development, property management, market feasibility, and financial analysis for the American Planning Association, Community Management magazine, the Georgia Department of Community Affairs, the Manufactured Housing Institute, the National Association of State and Local Equity Funds, the Virginia Community Development Corporation, and the National Council of Affordable Housing Market Analysts.
Mr. Carroll is also an experienced developer and property manager. His experience includes the development of tax credit and bond financed apartment communities, conventional market rate apartments, manufactured home communities, and single family subdivisions. He has also managed a portfolio of apartment complexes and manufactured home communities.
Mr. Carroll received his Bachelor’s Degree in Engineering from Clemson University and his Master’s Degree in Business Administration from Harvard University.