810-4-1-.06 Valuation of Low-Income Housing Tax Credit Multifamily Housing (New Rule)

(1) PURPOSE – This Rule is issued pursuant to authority contained in § 70-7- 49, Code of Ala. 1975, for the purpose of establishing guidelines and procedures for the mass appraisal valuation of multifamily housing developments subject to binding provisions of law, such as those land use restrictive covenants which restrict the rents that may be charged in respect thereof (Rent Restricted ), including Low- Income Housing Tax Credit (LIHTC) and HOME Investment Partnership Program (HOME) multifamily housing developments, for tax purposes.

(2) The following components are used in the mass appraisal calculation of market value when using the standard income approach to value for Rent Restricted Properties:

(a) Potential Gross Income – The annual economic rent for a property at one hundred percent . Potential gross income for a Rent Restricted Property is based on the unit mix of the property (1 bedroom, 2 bedroom, 3 bedroom, 4 bedroom) and calculated using the average of the 50% and 60% HOME rent schedule published annually by the Alabama Housing Finance Authority (AHFA) less a one hundred-dollar ($100) utility allowance (which amount may be adjusted from year to year for changes in the consumer price index from base year 2021 in $5 minimum increments). Potential gross income for Rent Restricted Properties where more than a majority of units have project based rental assistance under a “Housing Assistance Payment” contract with the U.S. Department of Housing and Urban Development (HUD) is based on the unit mix of the property (1 bedroom, 2 bedroom, 3 bedroom, 4 bedroom) and calculated using the HUD Fair Market Rent schedule for the applicable year and jurisdiction.

(b) Vacancy and Collection Loss – The vacancy and collection loss rate is based on the “5-year Underwriting” assumptions published annually by the AHFA and is applied to all properties.

(c) Effective Gross Income – Potential Gross Income less Vacancy and Collection Loss.

(d) Operating Expenses – Ordinary and typical expenses that are necessary to keep the property functional and rented competitively with other properties. Operating expenses is based on the unit mix of the property (1 bedroom, 2 bedroom, 3 bedroom, 4 bedroom) and calculated based on the 5-year Underwriting Assumptions published annually by the AHFA. The “Maximum Expense Per Unit” amount published is used for a 4-bedroom unit, 95% of the “Maximum Expense Per Unit” is used for a 3-bedroom unit, 90% of the “Maximum Expense Per Unit” is used for a 2-bedroom unit, and 85% of the “Maximum Expense Per Unit” is used for a 1-bedroom unit.

(e) Net Operating Income – Effective Gross Income less Operating Expenses.

(f) – The capitalization rate is developed by gathering all available sales data of multi-family properties located in Alabama for the prior three years and determining the median capitalization rate from all usable sales. In counties having a population, determined under the most recent Decennial Census, of 150,000 or less the median capitalization rate is increased by 1.75% and for counties having a population greater than 150,000 the median capitalization rate is increase by 2.25%. In 2022-2023 such amounts are 7.75% and 8.25%, respectively.

(g) Effective Tax Rate – The tax rate of the taxing jurisdiction multiplied by the property’s assessment ratio.

(h) Loaded Capitalization Rate – The Capitalization Rate plus the Effective Tax Rate.

(3) Rent Restricted Properties must be valued for ad valorem tax mass appraisal purposes using the standard income approach to value. The formula for the calculation of market value utilizing the standard income approach to value is as follows:

Potential Gross Income - Vacancy and Collection Loss =Effective Gross Income - Expenses = Net Operating Income / Loaded Capitalization Rate = Market Value for mass appraisal purposes

(4) The use of this standardized mass appraisal approach does not limit or restrict the rights of protest and appeal provided by law to owners of Rent Restricted Properties, nor does it limit the data and evidence that county boards of equalization and state courts can consider and take into account in those protest or appeal proceedings when determining the fair and reasonable market value of Rent Restricted Properties utilizing the standard income approach to value.

Author: Derrick Coleman Authority: §§40-2A-7-(a)(5), and 70-7- 49, Code of Ala. 1975. History: New Rule: Filed August 20, 2021; effective