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Appraising Affordable Housing

What is affordable housing? These days, it is generally rental housing that is available to income-qualifying tenants at below market rent. Most people think of the Dept. of Housing and Urban Development (HUD) which initially created this type of housing nearly sixty years ago through a myriad of programs. Back then almost all were project-based, meaning tenants could only rent below-market units in that building or complex, and many were mortgage subsidized rather than rent subsidized.

By the early nineteen nineties, the HUD contracts were expiring and the government scrambled for creative ways to preserve the stock of existing affordable rental housing. In some of the larger urban markets with very high market rents, many owners opted out of the program and converted the properties to market-rate housing, but in many markets HUD and owners came up with a renewal plan to remodel and recapitalize the projects and preserve the affordability of the units into the future.

Not long thereafter, a provision was added to the federal tax code to allow for an income tax credit over ten years or more to investors that purchased low income housing tax credits (LIHTC). This acted as additional equity in a project, which reduced the mortgage amount and allowed the property to offer units at below-market rents to tenants that qualified at various percentages of the area or county median income level.

Challenges of Valuing Affordable Housing Now

Because of the changes over the years, from HUD project-based programs for families, seniors and special needs renters to tenant-based vouchers and LIHTCs, the appraiser needs to understand how each of these programs impacts market value. This is further complicated by the layering and overlap of different programs and by for profit versus non profit ownership. If a property has multiple layers of rental subsidies with different expiration dates, how does this impact market value?

In some states and local jurisdictions, non profit owned affordable housing is exempt from property taxes. If the property is appraised for its market value, is it fair to assume that the likely buyer profile will be another non profit buyer? What if the property has a Land Use Restriction Agreement (LURA) for one phase and a Section 8 Housing Assistance Payment (HAP) contract in another, how might this impact the overall market value of the property? The answer is there are no simple answers and it will vary from project to project. We have provided a brief list of the various subsidy programs at the end of this section for further information.

Great Lakes Realty Advisory Group has been valuing affordable housing for nearly thirty years in large urban markets like Chicago and in small, rural markets like Vernon County in southwestern Wisconsin. That breadth of experience and exposure to the evolution of the various programs that fund affordable housing uniquely qualifies us to understand and properly evaluate the market value of this type of housing. Please contact Doug Connor at (608) 255-3802 or by email at dconnor@glrag.com for more information or to explore your options prior to selling, acquiring or refinancing your affordable housing property.

Brief List of Subsidy Programs

1. HUD Section 8 - Project-Based and Voucher Rental Assistance Originally provided for new construction or substantial renovation projects until 1983. Since then HUD funds existing Section 8 projects through housing assistance payments, or HAP. Typically this is based on the difference between 30% of the tenant’s determined income and HUD-determined contract rents with or without utility allowances. Most project-based Section 8 HAP contracts are renewed annually. Vouchers are also typically provided through a public housing agency, such as a county CDA directly to income qualifying tenants, but are not project based, thereby allowing the tenant to receive rental assistance regardless of the rental project. This has become more prevalent as project-based Section 8 agreements have expired and many of these properties are no longer participating in the program.

2. HUD Section 236 - Project-Based Rental Assistance Originally set up by HUD in 1968 as a 40-year mortgage program for affordable housing through interest rate subsidies to the lender between 1% and the interest rate set at the time of the loan with the project owner required to restrict tenant income levels to 80% of AMI (Area Median Income or sometimes, County Median Income, CMI). Subsequently, HUD required reduced rents at their determined market rental levels, or a project-based rental subsidy in the form of a rental supplement or rent assistance payment. Since most of the original 40-year mortgages have subsequently expired, the Section 236 is administered by various state agencies and generally falls under other set-aside provisions for designated affordable housing units.

3. Land Use Restriction Agreement (LURA)

A LURA is a covenant “running with the land”, or deed restriction that is binding for the owner, as well as its successors and assigns, all subsequent owners and all holders of any interest in the property. Often it accompanies a Multifamily Housing Revenue (Tax-exempt) Bond financing. It can vary, but typically requires a minimum of 20% of the units be rented to “qualifying tenants” at some percentage of AMI or CMI for a period of 15 years. Often a LURA can be terminated earlier if the bonds are retired through a refinancing or recapitalization of the project, or when any HUD Section 8 or 236 payments terminate.

4. HOME Funds HOME funds are awarded as formula grants that allow state and local governments to use HOME funds for direct loans, loan guarantees or other forms of credit enhancements, rental assistance or security deposits. The HOME set-aside is also typically in the form of a LURA, which mandates that certain units be set aside for a stated duration of time.

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Due Diligence Consulting

Every time Great Lakes Realty Advisory Group appraises an income-producing property for a lender or for an owner, we have to verify rents and expenses. Sometimes this is very straight-forward and, in such cases, we are merely blessing someone else’s efforts and diligence. However, what we encounter more often are rent rolls that may not tie-off with leases, or irregularities between operating or profit and loss statements. Similarly, expense reimbursements may not be correctly applied to some tenants. These discrepancies can go unnoticed especially for tenants that have renewed their leases over a long period of time.

Sometimes a property is over-assessed or can be converted to separate metering, both of which can save thousands of dollars. Another common situation is a property that may have gone through more than one ownership/management company over the years. Leases were not standardized, may have changed, or accounting may have re-categorized certain income, expenses and pass-throughs.

In short, we approach each property much like a typical market buyer that would want to understand the income stream and look for value enhancing features. We can go through a property’s records and within a day or two and isolate discrepancies. We can then prepare a brief memo that points out items that do not tie-off with leases or operating statements - sort of like a computer anti-virus check on your multi-tenant property operations.

By hiring an independent firm to cross-check your property’s operations, you take the burden away from yourself or your already over-worked staff, but more importantly, you get an independent opinion and advice from an outside professional. For more information, please call Doug Connor at (608) 255-3802 or by e-mail at: dconnor@glrag.com.

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VALUATION OF BIKE TRAILS

Most people that hike or bike on a recreational trail don’t think about how it came to be, but may remember when it used to be a railroad line. Over the years, short lines and industrial leads or spur lines (rail corridors) became less utilized as large manufacturers shut down their facilities or demand for industrial or agricultural freight diminished over time. Background

Railbanking is a method by which corridors that would otherwise have been abandoned are preserved for future rail use through interim conversion to a trail. Established in 1983 as an amendment to the National Trails System Act, railbanking allows the linear corridor to remain intact once the railroad removes the rails, ties and equipment, in exchange for its potential future rail use. This allows a corridor to be resurrected for rail use again, either for freight service or for a commuter line, while turning it over to any qualified private organization or public agency for interim trail use. A corridor that is railbanked precludes abandonment and preserves the railroad's right to transfer all forms of ownership, including easements, to a trail group. This arrangement is mutually beneficial because it allows public recreational use, avoids abandonment and having to sell off the corridor piecemeal. Not only does it save time and generate capital for the railroad, but It usually avoids costly removal of bridges and other custom-engineered site improvements, and potential litigation over ownership issues.

Valuation Methodology and Challenges

Most railbanked corridors that are targeted for a recreational trail or bike path are acquired by compensating the railroad at market value for the underlying land, as well as the bridges, culverts, earthwork and necessary site improvements either through outright purchase, donation or a combination of the two through what is called a Bargain and Sale Agreement. In nearly all cases, the assets must be valued by a qualified appraiser and the appraisal must meet state, federal and IRS requirements, especially if the railroad is seeking an income tax deduction through donation.

All market valuation is based on the highest and best use of the property. In most cases, the targeted railbanked trail is a contiguous linear real property corridor that is bridged or tunneled over or under obstacles such as rivers and highways. Thus, the site improvements are essential to trail use just as they were to railroad use, albeit they were designed to accommodate much heavier load capacity. If the highest and best use is to preserve the property as an intact corridor, then the proper valuation methodology is generally “Across-the-Fence” or ATF, where the corridor land is segmented and valued based on values for the adjacent land “on either side of a hypothetical fence”.

Over the years, we have seen other appraisals were ATF may have been applied, but incorrectly. For example, the appraisal may discount individual land parcels for shape or access, which is really piecemeal valuation. ATF assumes the highest and best use is for the corridor to remain intact, not split-off and sold individually. The simplest definition for proper ATF valuation is that it reflects the value of the adjacent land on a unit rate per square foot or per acre applied against the actual corridor land area within that particular segment. Of course segmentation is subject to the appraiser’s judgement, but is typically driven by adjacent zoning. Many times a rail corridor acts as a boundary between two zoning districts, say with one side being residential and the other side being commercial zoned. It is up to the appraiser to determine which side might benefit and actually acquire the subject corridor land for expansion or additional parking and value it at that unit rate. If both sides would benefit equally from the corridor land, then ATF value defaults to the higher and better use (value) - in this case commercial, rather than residential land value.

Often, railroad rights-of-way vary in slope and topography compared to the adjoining land due to cuts and fills required to provide a relatively level surface over their length. Any earthwork required to create a level r.o.w. bed is considered part of the site improvements under a transportation corridor valuation scenario. To the extent that the earthwork contributes to the value of the property, it should be included in the site improvements valuation. However, replacement cost new should not reflect the same level of construction. For example, ballast for a railroad bed is typically super-adequate (i.e. beyond normal utility) for recreational trail use, which is also true for the load requirements of any bridges.

Perhaps the most controversial appraisal issue involves use of an enhancement factor. In some situations a multiplication or enhancement factor is applied to the ATF value to account for the cost involved in assembling a corridor property. Our experience has shown that enhancement or assemblage factors applied to the ATF land values are occasionally market justified, but usually only in major urban areas with much higher land costs and greater benefits beyond recreational trail use.

Generally, however, there is limited demand for a former railroad right-of-way except for trail use. Most trail owners and operators are public or a consortium of public and private organizations with limited funding resources that could not afford to assemble and acquire the land from multiple property owners to build a new trail. In most cases, this shallow buyer pool or limited demand buyer profile cannot be ignored and often precludes an enhancement factor, except in large metropolitan areas where there may be other linear corridor user/buyers such as communication companies or cable providers.

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Valuing Cheese Plants

Wisconsin’s dairy industry is robust with milk production at about 30 billions pounds annually with roughly 130 production facilities producing 25% of the nation’s cheese. Consolidation within the industry has caused a drastic reduction in the number of cheese making facilities statewide, but increased the size of the typical plant. Recent growth has seen construction of a new addition for cold storage and/or production to an older, multi-addition facility.

Because newer, operating facilities or “turn key” cheese plants almost never sell, sales often reflect outdated and somewhat obsolete properties that require significant remodeling and costly upgrading. This means that replacement cost is an important factor in market valuation and because of the integral nature of refrigerant coolant and milk distribution systems, machinery and equipment (M&E) are generally considered part of the real estate and typically not removed, unless the property is being sold under duress, such as liquidation or deposition.

We specialize in valuation of cheese making facilities throughout Wisconsin and have provided appraisals of these specialized properties for over fifteen years. This evolved from valuation of similar food processing, cold storage and specialized agricultural/industrial properties. 

Many commercial appraisers are unfamiliar with how to value related personal property and erroneously exclude integral M&E from the value of the real property; we use the term Market Value of the Real Property and related Personal Property. Similarly, national building and equipment cost services such as Marshall Valuation Service do not include all of the extensive M&E that is integral to cheese making and dairy production facilities. That is why it is important to have an extensive in-house database comprised of actual construction costs from local projects.

For more information, we encourage you to email us: dconnor@glrag.com

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Local Organic Food Hubs

The USDA defines a Food Hub as, “a business or organization that actively manages the aggregation, distribution and marketing of source-identified food products, primarily from local and regional producers to strengthen their ability to satisfy wholesale, retail and institutional demand.” Like most goods in this country, food costs have been going down for decades as large-scale operations leverage economies of scale for greater efficiency and competition. Local food systems are learning new ways to take advantage of similar practices and achieve similar cost reduction.

The growth of local organic food production in Wisconsin has been rising rapidly. According to 2016 Wisconsin Agricultural Statistics, the state still has less than two percent of the total farms certified for organic production (1,204 farms in 2015), but production now includes nearly 4.4 million acres planted for organic crops with cows producing 370 million pounds of organic milk.

A Larger Role for Local Organic Retailers

This growth in organic food production mandates that local food systems actively pursue new pathways and supply chain efficiency to present lower cost organically produced food to the market, such as working with large-scale community institutions like hospitals and schools, as well as restaurants and grocery stores. One solution is for established local and regional organic food stores to assume a larger role in the production, processing, cold storage and distribution.

Supply of Food Production Real Estate

In southern and south-central Wisconsin, we see numerous USDA and FDA food production and cold storage properties that are aging and under-utilized. Often they are quite large and were built and operated by big food companies that are no longer in business or have consolidated their operations. Stiff competition in the industry, outdated facilities with costly remodeling expenses and excessively large buildings have created over-supply. Recent examples include: Kraft-Oscar Meyer, Kerry Ingredients, Wisconsin Cheeseman and Alcam Creameries, to name just a few. Sometimes, these buildings are remodeled for other types of food ingredient or product manufacturing and storage/distribution, but often they sit vacant for extended periods of time. This drives down their value and lowers their cost, making them potentially more affordable to an organic retailer looking to  become more proactive in the facilitation of a local/regional Food Hub.

These properties also have extensive cold storage equipment and interior product distribution lines already in-place that may require repairs and upgrading, but are far more cost-effective than new construction. Lager facilities can be partitioned to create smaller spaces for lease, thereby freeing up capital for start-up expenses. There are a myriad of options for recycling these food-ready facilities for the emerging Food Hub economy, whether that’s storage for artisinal cheese, meat, local-grown vegetables or processing, packaging, storage and distribution. It is time to make these under-utilized facilities productive again.

Please contact us for more information: dconnor@glrag.com