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Federal rent subsidy impacts rental property valuation.

Notestine owned an eleven-unit residential rental property developed as low-income housing under Section 202 of the Housing Act of 1959. Section 202 provides assistance in the form of a capital advance from the US Department of Housing and Urban Development (HUD) to build rental housing for very low-income elderly individuals and also provides for a "project rental assistance" contract (PRAC). The rent to be paid by eligible tenants is strictly limited and based upon income. As such, Notestine's tenants pay up to thirty percent of their adjusted gross income on rent, with HUD subsidizing any difference.

The auditor valued the property at $811,120 for tax year 2013, but Notestine sought a reduction to $165,000 based on an income approach that used actual rent and expenses. At the tax hearing, Notestine presented an appraisal report and testimony.

Because of the restrictions on the property, Notestine's appraiser rejected the cost approach. She also rejected the sales comparison method, due to a lack of sales. Notestine's appraiser conducted the appraisal using an income capitalization approach based on the actual restricted rents, and actual and market comparable expenses. Notestine's appraiser derived a capitalization rate by using the direct comparison, band of investment, and debt coverage formula techniques, and applied that rate to a net operating income figure. Thus, under the appraiser's income approach, Notestine's appraiser concluded that the value of the property was $75,000 as of January 1, 2013, reflecting a value of $6,818 for each of the eleven units.

The tax board rejected the argument that the actual restricted rents should not be used as nothing in the record indicated that "the contract rents exceed those generally available in the market or that the property benefits from additional tax incentives." The tax board adopted the appraiser's valuation of $75,000. The County appealed.

The court noted that the preference for market rent over contract rent was presumptive, not conclusive. With Section 8 rent subsidies, using market rent removes the affirmative value of government subsidies because the subsidies tend to inflate rents to above-market rates. However, the property at issue here, which is in the Section 202 program, presents a different situation. The rents appear to be minimal, and any federal subsidization is strictly controlled by rigorous HUD-imposed restrictions on the accumulation of surpluses. There is no evidence that adjustments from contract rent to market rent would eliminate the affirmative value of government subsidies. Thus, the Supreme Court of Ohio, affirmed the tax board's adoption of the $75,000 value reported in Notestine's appraisal.

by Scott B. Mueller, JD

Notestine Manor, Inc. v. Logan County Board of Revision

Supreme Court of Ohio

January 02, 2018

2018 WL 321568

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Title Annotation:Recent Court Decisions on Real Estate and Valuation
Author:Mueller, Scott B.
Publication:Appraisal Journal
Geographic Code:1U3OH
Date:Mar 22, 2018
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