APTC: Get fair property tax assessments for student housing

It is important that assessments of student accommodation properties match both the square foot and the bed. Pictured is a rendering of Hub Fullerton, a 1,047-bed student housing project near California State University – Fullerton that Core Spaces is developing.

By John Stark, Popp Hutcheson

The assessment of student housing is often tied to two common units of comparison which increases the possibility of confusion and disagreement in the assessment of property tax value. For a more persuasive property tax appeal, it is important for the taxpayer to ensure that their property assessments match both the square foot and the bed.

This article will discuss the importance of a good analysis of the composition of the units and the rent register in order to reconcile the values ​​between these units of comparison. We will also discuss current trends in student housing, including free services and concessions designed to boost occupancy, which should be considered in an income analysis to ensure that assessment districts do not overvalue not real estate.

John Stark, Pop Hutcheson

Price per square foot vs price per bed

Although student housing owners typically rent out their properties per bed and calculate investment value by this metric, many assessment districts assess student housing based on a price per square foot. This can lead to errors in an appraiser’s potential gross income assumptions. Further exacerbating over-ratings, many rating districts do not distinguish between lease-per-bed student housing and traditional lease-per-unit multifamily apartments. This lack of differentiation leads to erroneous assumptions about market rents and capitalization rates.

Student residences often have different rental rates and occupancy rates for different lease levels. One-bedroom units, for example, typically command the highest rents; the more beds in a unit, the lower the rental rate per bed is likely to be. These variations make it imperative that a valuation consider occupancy against the lease levels in which those occupancies or vacancies occur. When reviewing an appraisal or filing a case for re-appraisal, ensure that more expensive one bedroom rental rates are not marked up over cheaper four bedroom vacancy rates .

The taxpayer can consider rental rates and occupancy by unit type in mirror weighted average analyzes to establish two parallel income calculations with corresponding value indications. Showing a similar value result both per square foot and per bed is a compelling property tax appeal.

Other income and intangible assets

In these mirror-weighted average analyses, it is also important to take into account other income and any intangible property that does not enter into the calculation of taxable property income. Market definitions may vary by jurisdiction, so be sure to follow local practices in determining what income is attributable to real estate.

Common examples of other income and intangible assets include free internet access, garbage collection, utility allowances, pet fees, free shuttle service to campus, meal plans, bonuses for unit additions (view, balcony, high floor), washer/dryer or appliance rental fees, furnished units, and free or paid parking. There are certainly other examples of “freebies” and “benefits” that a property offers to incentivize occupancy.

Since many appraisers will include between 8% and 12% of other income in addition to the potential gross income from the rent book and income statement, it is easy for an appraiser to accidentally double other income or to accidentally include as taxable certain intangibles incorporated in the realized or expected rent.

Similarly, when performing benchmarking or determining market rents, it is also important to consider these sources of other income and intangibles. Not all competing properties within the same market will offer an identical set of benefits, amenities or concessions to increase occupancy.

Market trends

Since COVID-19 and the return to campus, many student accommodations are offering substantial concessions to stabilize occupancy. At some properties, these concessions represent up to 25% of potential gross income for the 2022/2023 academic year.

Whether this trend will continue over the next few academic years is unclear, but it is important to realize that many appraisers do not automatically adjust concessions when using asking rents in their potential gross income calculations. When discussing the property with an appraiser, be sure to distinguish between asking rents (often labeled “market rents” on a rent book) and actual rents realized or expected after concessions.

Because appraisers frequently group student housing with traditional multifamily properties in their market research, they often use capitalization rates determined by traditional multifamily transactions when appraising student housing. Since student housing cap rates are typically 50 to 100 basis points higher than conventional multi-family cap rates, it is important to ensure that appraisers use appropriate cap rates in their analyses.

When preparing property tax appeals for student housing, it is important to keep in mind how much these properties differ from traditional multi-family real estate. Differences in rental structure, comparator units, higher rates of other income, many intangible assets, required concessions and higher capitalization rates all contribute to a unique model that stands apart from traditional multi-family apartments .

Providing a reconciled approach that combines price per square foot with price per bed is a great starting point to start discussions with the appraiser and ensure you are talking “apples to apples”. Additionally, differentiating asking/market rents from actual/expected rents – while adjusting for intangibles, other income and concessions – will smooth out most of the differences with the appraiser’s income-based valuation.

John Stark is a tax consultant with the Austin, Texas-based law firm Popp Hutcheson PLLC, which focuses his practice on property tax litigation. The firm is the Texas member of the American Property Tax Counsel, the national affiliate of property tax attorneys.

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