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Harris County Appraisal District Presentation

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This is a presentation by HCAD regarding appraisal of multifamily rental property.

This is a presentation by HCAD regarding appraisal of multifamily rental property.

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  • 1. Houston Apartment Association Presentation
    Commercial Property Division
    Bobby Larry RPA, CAE Division Director
    Jim Robinson, Chief Appraiser
  • 2. Land Use Codes
    Definitions
    Units
    Stories
    Properties
    Units
    4209
    Apartment Structure
    4-20
     
    3,308
    36,556
    4211
    Apartment Garden Style
     
    1-3
    2,275
    461,686
    4212
    Apartment High Rise
     
    4 or more
    108
    18,809
    4221
    Apartment Subsidized Housing
     
     
    279
    30,209
    4222
    Apartment Tax Credit (LIHTC)
     
     
    209
    43,889
    Within Harris County, there are a total of 6,179 apartment properties, consisting of 591,149 units, classified as State Class Code B1. HCAD has defined five (5) distinct apartment types that are categorized based on size, type, and use.
    APARTMENT TYPES
    Jim Robinson, Chief Appraiser
  • 3. Apartment structures are categorized into five (5) building classes. The building classification system was implemented based on rent levels, age, amenities, physical condition, and functional design of the project. The building classes vary from Class “A “ to Class “E”. The Class “E” building classification is utilized exclusively for apartments valued based on the costapproach, which are typically new apartments; older properties in which the current use is no longer the highest and best use, and properties with unique features that do not correspond with the other classifications. Properties with twenty (20) units or less, also referred to as Land Use Code 4209, are also valued using the cost approach method. HCAD’S cost model is based on information received from Marshall & Swift and AIA documentation ascertained during the appeals process.
    Jim Robinson, Chief Appraiser
  • 4. Structure Code/Land Use Code
    4211 4212 4221
     
    Typical Market Rent Range
    $0.84/sf to $1.89/sf and higher
     
    Building Features
    Typically built to or near investment grade standards and at the most desirable location
    Complex Amenities
     
     
     
     
    Typically top of the line:
     
     
      
    Age Range
    No limit on high-rise
    Typically 1983 to present on low to mid-rise styles
    GENERAL GUIDELINES FOR APARTMENT BUILDINGS CLASS “A”
     
    Jim Robinson, Chief Appraiser
  • 24. Structure Code/
    Land Use Code
    4211 4212 4221 4222
     
    Typical Market Rent Range
    $0.69/sf to $0.97/sf and higher
     
    Building Features
    Typically
    • Fireplaces W/D Connections
    • 25. Private Entrances
    • 26. Private Balcony/Patio
     
    Complex Amenities
     
     
     
     
    Typically
     
     
     
     
    Age Range
    Typically 1970 to present
     
    GENERAL GUIDELINES FOR APARTMENT BUILDINGS CLASS “B”
    Jim Robinson, Chief Appraiser
  • 36. Structure Code/
    Land Use Code
    4211 4221 4222
     
    Typical Market Rent Range
    $0.57/sf to $0.78/sf and higher
     
    Building Features
    Typically
    • Courtyard Style
    • 37. Common walkway for several units
    • 38. Some decorative enhancements
    • 39. Many have been renovated
     
    Complex Amenities
     
     
     
     
    Typically
    • Laundry Facilities
    • 40. Security Patrols
    • 41. Clubhouse/Leasing in one bldg
    or apartment unit
    • Playground or Picnic Area
     
     
    Age Range
    Typically 1970 to present
     
    GENERAL GUIDELINES FOR APARTMENT BUILDINGS CLASS “C”
    Jim Robinson, Chief Appraiser
  • 42. Structure Code/
    Land Use Code
    4211 4221 4222
     
    Typical Market Rent Range
    $0.46/sf to $0.72/sf and higher
     
    Building Features
    Typically minimal special features generally
    • Window Air Conditioning
    • 43. Master Cooling System
     
     
    Complex Amenities
     
     
     
     
    Typically minimum if any amenities
    • Complex sizes range from 50-500 units
     
     
    Age Range
    Typically 1945 to 1980
     
    GENERAL GUIDELINES FOR APARTMENT BUILDINGS CLASS “D”
    Jim Robinson, Chief Appraiser
  • 44. HCAD delineates Harris County into twenty-eight (28) geographical economic areas. These areas allow us to view market trends and income information based on its location within the county. Apartment Data Services (ADS) uses similar economic boundaries.
    Jim Robinson, Chief Appraiser
  • 45. TYPE
    SIZE
    Efficiency
    Less than 550 sq. ft.
    1 Bedroom
    550 – 820 sq. ft.
    2 Bedrooms
    821 – 1100 sq. ft.
    3 Bedrooms
    1101 – 1500 sq. ft.
    and over
    In apartment valuation, HCAD takes into consideration the average unit size and the total number of bedrooms. This chart below is published by ADS. HCAD also follows these guidelines.
     
    Several vendors are utilized to assist in accurate property valuation. To develop income models, information is gathered from various sources which include Apartment Data Services (ADS), REIS Services, Korpacz Investor’s Survey, actual income and expense statements ascertained during the appeals process, as well as other vendors that provide economic information.
    Jim Robinson, Chief Appraiser
  • 46. Jim Robinson, Chief Appraiser
  • 47. Jim Robinson, Chief Appraiser
  • 48. The appropriate market rents are applied after determining the proper economic area and class. HCAD’s income model takes into consideration whether concessions are given, the stabilized occupancy, and ancillary income if applicable. When this calculation is completed, it generates an effective gross income. The next step is a deduction of market expenses. The income model separates market expenses into the categories of fixed expenses; which include property insurance, and variable expenses; which include but are not limited to payroll, utilities, repairs and maintenance, and marketing. The model then accounts for management fees, franchise taxes, and reserves for replacements. After all of these factors have been considered, the net operating income remains. HCAD’s model utilizes a loaded capitalization rate that uses a component for the effective tax rate.
     
    At the conclusion of the appeals process, the income and expense statements received are keyed into the database to be used for future analysis and valuation. This information is vital because of the constant changes in the local market.
     
    We are then able to generate reports to analyze market trends for each area, type and class. This allows us to easily determine rental rates and market expenses.
     
    HCAD receives the best and most current information available from various sources. This information allows us to accurately place a market value on each property as of January 1 of any given year, according to the State Property Tax Code and USPAP standards.
    Jim Robinson, Chief Appraiser
  • 49. Jim Robinson, Chief Appraiser
  • 50. Inpreparation for the 2010 tax year and analyzing current market trends, HCAD has recognized a further decline in occupancies and rental rates in the fourth quarter of 2009. This is due to a combination of factors. First, financial markets have frozen across the country, making it difficult to obtain loans to purchase or refinance apartments. Secondly, lenders are requiring a substantially larger equity portion upfront from the investors. Also, the lack of financing and a decrease in demand for apartments have contributed to a decline in new apartment construction locally. Many projects have been put on hold or scaled back. Although Harris County has witnessed an economic downturn, it still remains relatively stable in comparison to the national level.
     
    Per the Real Estate Center at Texas A & M University, from December 2008 and December 2009 the statewide unemployment rate increased from 5.7% to 8.0%. Locally, the Houston area witnessed an increase of 3.5%, leaving Houston’s unemployment rate 8.3% during the same time frame. The construction sector witnessed the highest loss of jobs at a rate of 15.4%, or 99,500 total jobs. Although Houston is experiencing record unemployment rates, it still has not seen the vast amount of job losses the nation is witnessing. Per Texas A & M, the U. S. unemployment rate rose from 7.4% in December 2008 to 10% in December 2009. Many local economists anticipate seeing an improvement in employment rates beginning mid-2010, and reaching near normal levels in 2011.
    Jim Robinson, Chief Appraiser
  • 51. Houston’s economy relies heavily on international trade. The Houston job market is dominated by oilfield service companies, and companies that provide support service for this industry. For Houston to replenish jobs, the international trade level must first be revived. With some foreign countries witnessing economic growth in late 2009, as well as gains in imports and exports, Houston is expected to regain a portion of the jobs lost in this field.
     
    As Houston’s employment rates begin to upswing around the middle of 2010, it is expected to see increases in population. This influx of population will increase demand for apartments. The apartment market may well be one of the first segments to rise from the economic downturn. As these influences work through the local economy, apartment demand is expected to rise.
    Jim Robinson, Chief Appraiser
  • 52. Rental Rates
    During the third and fourth quarters of 2009 rental rates fell as apartment occupancies dropped. Most communities are now forced to offer free rent or other concessions to maximize occupancy. Per Apartment Data Services (ADS), 67% of apartment communities are now offering concessions. Consequently, Class “A” apartments are providing the largest concessions of 10.2%.
     
    Of the 41 sub-markets analyzed by ADS, only 4 have had a rental rate increase in the fourth quarter of 2009. The Northwestern region had the largest increase at 25.9%, having a current rental rate of 89.4 cents per square foot. The remaining submarkets saw declines, ranging from a very slight decrease to double digits. Throughout the metro area, ADS reports that vacancies rose from 11.9% to 15.1% between late 2008 and late 2009. This number includes properties newly opened that have not reached stabilized occupancies. During calendar year 2009, rents declined from an average of 83.8 to 81.6 cents per square foot for the overall market.
     
    Hurricane Ike damaged or destroyed many apartment units in late 2008. This temporarily increased the demand for undamaged apartments in some submarkets. Currently, the majority of damaged complexes have either already began or have finished all necessary repairs caused by the storm.
    Jim Robinson, Chief Appraiser
  • 53.  
     
    CLS
     
    NUMBER
    OF
    PROPERTIES
     
    AVERAGE
    RATE
    CENTS/SF/MO
     
     
    OCCUPANCY
     
     
     
    CONCESSIONS
     
    A
     
    358
     
    117.2
     
    82.6%
     
    10.2%
     
    B
     
    1,003
     
    84.2
     
    86.8%
     
    7.1%
     
    C
     
    1,017
     
    66.9
     
    82.7%
     
    5.7%
     
    D
     
    474
     
    45.5
     
    82.1%
     
    4.0%
     
     
    OVERALL
     
     
    2852
     
     
    81.6
     
     
    84.3%
     
     
    7.4%
    Jim Robinson, Chief Appraiser
  • 54.  
    2009
    2010
    Rent
    Per ADS
    Per ADS
    Concessions
    4% of potential rent
    8% of potential rent
    Occupancy
    93%
    91%
    Variable Expenses
    25% of effective gross
    26% of effective gross
    Cap Rate
    7.50% base
    7.75% base
     
    2009
    2010
    Rent
    Per ADS
    Per ADS
    Concessions
    0% of potential rent
    6% of potential rent
    Occupancy
    90%
    88%
    Variable Expenses
    33% of effective gross
    34% of effective gross
    Cap Rate
    8.00% base
    8.50% base
    2010 INCOME MODEL ADJUSTMENTS
    CLASS A
     
     
    CLASS B
    Jim Robinson, Chief Appraiser
     
  • 55.  
    2009
    2010
    Rent
    Per ADS
    Per ADS
    Concessions
    0% of potential rent
    4% of potential rent
    Occupancy
    88%
    86%
    Variable Expenses
    40% of effective gross
    41% of effective gross
    Cap Rate
    8.50% base
    9.50% base
     
    2009
    2010
    Rent
    Per ADS
    Per ADS
    Concessions
    0% of potential rent
    4% of potential rent
    Occupancy
    86%
    84%
    Variable Expenses
    50% of effective gross
    52% of effective gross
    Cap Rate
    9.50% base
    10.50% base
    CLASS C
    CLASS D
    Jim Robinson, Chief Appraiser
  • 56.  
    2009
    2010
    Class A
    8.50% base
    9.00% base
    Class B
    9.00% base
    9.50% base
    Class C
    9.50% base
    10.00% base
    Class D
    10.50% base
    11.00% base
     
    2009
    2010
    Class A
    9.50% base
    10.00% base
    Class B
    9.50% base
    10.00% base
    Class C
    9.50% base
    10.00% base
    Class D
    9.50% base
    10.50% base
    SUBSIDIZED CAP RATES
     
    TAX CREDIT (LIHTC) CAP RATES
    Jim Robinson, Chief Appraiser
  • 57.  
    2008
    Certified
    2009
    Certified
    Less New Construction
    Percent
    Change
    4209
    $734,802,867
    $749,980,791
    $747,528,305
    1.7%
    4211
    $14,604,999,510
    $15,101,166,780
    $14,423,647,144
    -1.3%
    4212
    $420,313,849
    $616,371,694
    $419,360,254
    -0.03%
    4221
    $497,426,925
    $512,427,698
    $489,336,064
    -1.6%
    4222
    $672,515,262
    $791,909,068
    $753,003,048
    11%
    TOTAL
    $16,482,374,180
    $17,771,856,032
    $16,832,874,815
    2.0%
    Market Trends
    For many years, there was a consistent increase in market values across the board in all property types. This trend has changed during the recent economic downturn. Because of the uncertainty in the economy and apartment market, most investors are choosing a longer holding period as opposed to selling now for a loss. Per Real Capital Analytic’s (RCA) data, the average apartment cap rate is 7.1% for the third quarter of 2009. Per Korpacz, cap rates increased to 7.84% in the third quarter of 2009 nationally. REIS indicates a 12-month rolling cap rate of 8.5% for the local Houston market.
     
    Real Capital Analytics has identified forty-three (43) investor grade transactions in Houston. The estimated sales volume totaled $400 million in the first 3 quarters of 2009.
     
    2008 and 2009 Certified Value Comparisons
    Jim Robinson, Chief Appraiser
  • 58. New Construction:
    The new construction activity for apartments is declining as expected due to equilibrium, the difficulty to find financing for new projects, and the consumer’s ability to spend money.
     
    During calendar year 2009, forty-five new complexes totaling 13,426 units were added to the Houston market. Per ADS, there are 12 complexes under construction at this time, consisting of 2,523 proposed units, which is a downward trend from 2008’s proposed rate of 17,613. Of the new apartment complexes entering the market, four are tax credits and four are senior housing.
     
    Due to population growth, the northwest portion of the county, as well as Katy and the far western edge of the county leads in the number of new apartments being constructed.
     
    Jim Robinson, Chief Appraiser
  • 59.  
     
     
    AKA
    ADDRESS
    UNITS
    KMAP
    Sheldon Ranch
    930 Dell Dale St - Residential
    40
    498A
    Cypress Creek at Reed
    2910 Reed Rd
    132
    573B
    Villas at Shaver
    3271 S Shaver
    240
    576D
    Preserve at Baywood
    Red Bluff/Genoa Red Bluff
    336
    578M
    Sierra Meadows **
     
    90
    375T
    Fountains at Memorial City (Condo)
    9870 Gaylord
    114
    490B
    La Maison on River Oaks
    2727 Revere St
    423
    492U
    Gables West Ave
    2800 Kirby
    389
    492U
    Golden Bamboo Village Ph1
    12010 Dashwood
    57
    529E
    City Place
    306 McGowen
    185
    493P
    Space Center Plaza
    Space Center Blvd/Crenshaw
    313
    618V
    The Lynn at Country Club Apartments
    Baker Rd/Emmett Hutto
    204
    501K
    TOTAL
     
    2523
     
    Apartments currently under construction as of December “09:
    * Tax Credit
    ** Senior Housing
    Jim Robinson, Chief Appraiser
  • 60. Summary
    The economy in Houston is expected to remain slow during first 2 quarters of 2010 due to the lack of funding and investor uncertainty. Houston’s apartment rental rates have declined and increasing amounts of concessions are being offered, thus lowering market rents. With unemployment rates steadily increasing, occupancy rates are decreasing. This trend is expected to continue through mid-2010. Many investors have delayed their purchases of apartment properties.
     
    New apartment construction has seen a drastic decrease due to the current over-supply of units and lack of funding. This will help the Houston apartment market reach equilibrium when the units begin experiencing positive absorption.
     
    As a result of current economic trends, HCAD has addressed changes in the four critical variables in the income model used to value properties. The first component addressed is the market rents, which are carefully researched. As indicated by the market, we have populated the base model for each property segment with a minimum 2% concessions. HCAD has adjusted stabilized occupancies downward by 200 basis points for all property segments. The variable expense category under market expenses has also been indexed upwards. For all income producing properties appraised by HCAD, the capitalization rate has been adjusted upward between 25 and 100 basis points.
    Jim Robinson, Chief Appraiser

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