The Real Estate Appraisal An Essential Building Block in LIHTC Development

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By Cash Gill, MAI, Gill Group, Inc.

A key element in the development or acquisition of a low-income housing tax credit (LIHTC) property is the real estate appraisal. Accordingly, it can be useful to provide a refresher that defines what an appraisal is and spells out the purpose, process, and contents – for both affordable housing industry newcomers and seasoned veterans.

In simplest terms, an appraisal is a written estimate of the dollar value of a real estate property (existing or proposed), including the underlying land. In the context of the LIHTC program, this could be an existing tax credit development or a proposed new project that has yet to be built (i.e., through new construction or acquisition/rehabilitation).

An appraisal is an opinion of the market value of the subject property. At a minimum, an appraisal must be prepared in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP), the single most important publication to any appraiser of real property. But there may be other additional requirements or guidelines that also must be followed (e.g., state HFA, HUD, USDA Rural Development).

USPAP defines market value as:

“A type of value, stated as an opinion, that presumes the transfer of a property (i.e. a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal.”

An appraisal differs from a market study, which is narrower in scope and provides an opinion about the feasibility of a proposed LIHTC project as currently structured in a particular location.

Multiple Reasons for Appraisals

Appraisals are done for different reasons. They may be required by a state housing finance agency (HFA) with applications submitted by developers requesting federal housing tax credits; by a government agency or lender in conjunction with a loan request (e.g., HUD, Fannie Mae, Freddie Mac, Rural Development); in connection with the sale or transfer of a property; or to value the general or limited partner interests in a partnership that owns the properties, such as to pave the way for the sale and resyndication of a Year 15 LIHTC property.

In the LIHTC program, an appraisal is typically used to determine if the transfer amount or sales price for a property is at a market rate, whether the proposed development cost is reasonable, and to set the amount of the tax credit eligible basis.

Appraisals are typically requested by developers for submission to state HFAs with tax credit applications. However, there may be other users of an appraisal report, or parties that order an appraisal, beyond the state HFA. These might include government agencies or other funding sources involved in the transaction (e.g., HUD, Rural Development, Fannie Mae, Freddie Mac, syndicators, private lenders).

Preparer, Format, Contents

An appraisal of a LIHTC property must be completed by a General Certified appraiser that is licensed in the state in which the property is located. In addition, the appraiser may be required to meet additional criteria set out in the state’s qualified allocation plan.

In developing an appraisal, an appraiser will typically collect market data and then visit the site, making a physical inspection of the property and surrounding neighborhood and interviewing various people.

An appraisal normally takes from two weeks to 30 days to complete and can cost anywhere from a few thousand dollars to significantly more. The final product, a written report (now commonly a PDF file posted on the appraisal company’s Web site for the client to view), can range from 50 to several hundred pages, depending on the complexity of the assignment and the transaction.

An appraisal report states an opinion of the dollar market value of the property and typically includes text, maps, and charts. The report contains descriptions of the property and surrounding land uses, the proposed use of the property, how the value was determined, and the appraiser’s qualifications.

Approaches to Determining Value

For real estate, there are three different methods – or “approaches” – to developing an estimate of the value of a property. These are the:

  • Cost Approach, under which the appraiser attempts to identify and verify the cost to build or replace a project. For a new LIHTC development, the appraiser will largely depend on the developer’s pro forma and assess whether the costs are reasonable, based on published cost manuals, available market data, and interviews with pertinent parties. Appraisers will usually consider the cost approach first, in order to come up with a value of the land, which is needed to determine the project’s eligible basis (which excludes the value of the land).
  • Sales Comparison Approach, under which the appraiser looks at recent sales prices for comparable properties and makes various adjustments (e.g., for project size, location, etc.). However, an appraiser often may be unable to find many recent sales of comparable other affordable multifamily rental properties in the same vicinity as the subject property. In addition, affordable housing properties can have different use restrictions imposed by different government programs that can make it difficult to adjust the appraised value of a property with any degree of accuracy. Accordingly, the sales approach either carries less weight or is omitted when dealing with the restricted value scenario.
  • Income Approach, under which the appraiser estimates the value of the property based upon the historical or projected net operating income generated by rents. This is the most common approach used for LIHTC projects. Under the Income Approach, there are four possible value estimates. These include: 1. As Is Market Value, Subject to Restrictions. This is the most common one used for LIHTC appraisals. 2. Prospective Market Value, Subject to Restrictions 3. As Is Market Value, Conventional 4. Prospective Market Value, Conventional.

An appraiser may provide more than one value in an appraisal report. Rural Development, for instance, typically requires multiple values.

Selecting an Appraiser

In selecting an appraiser for a LIHTC project, developers and owners should make sure that the individual has the proper credentials (i.e., is certified and licensed in the state), and has experience with and an understanding of the LIHTC program and other government funding programs that the project will use. State HFAs may also have a list of qualified appraisers that they require or encourage tax credit applicants to use.

The appraisal is one of the essential building blocks in LIHTC development. As such, a better understanding of what it is and how it is done can benefit everyone.

Cash Gill, MAI, is Vice President of Gill Group, Inc., a Dexter, Mo.-based firm that prepares real estate appraisals and market studies and offers other consulting services. He is also Missouri Real Estate Appraisers Commissioner, and a member of the National Council of Housing Market Analysts and the Editorial Advisory Board of Tax Credit Advisor. He may be contacted at 1-800-428-3320, [email protected].