Student housing valuation is often saddled by two common units of comparison that multiply the opportunities for confusion and disagreement in appraising value for property taxation. For a more convincing property tax appeal, it is important for the taxpayer to ensure their property's valuations line up on both a per-square-foot and a per-bed basis.
This article will discuss the importance of a proper unit mix and rent roll analysis to reconcile values between these units of comparison. We will also discuss current trends in student housing, including free services and concessions designed to boost occupancy, that should be accounted for in an income analysis to make sure appraisal districts do not overvalue the real estate.
Price Per Square Foot vs. Price Per Bed
Although student housing owners typically lease their properties by the bed and calculate investment value by that metric, many appraisal districts value student housing on a price per-square-foot basis. This can lead to errors in an assessor's potential gross income assumptions. Further exacerbating overvaluations, many appraisal districts do not distinguish lease-per-bed student housing from traditional, lease-per-unit multifamily apartments. This failure to differentiate leads to erroneous assumptions of market rents and cap rates.
Student housing properties often have different rental rates and occupancy rates for various lease tiers. One-bedroom units, for example, typically garner the highest rents; the more beds in a unit, the lower the per-bed rental rate is likely to be. These variations make it imperative that an assessment accounts for occupancy in relation to the lease tiers in which those occupancies or vacancies occur. In reviewing an assessment or building a case for revaluation, make sure the more expensive, one-bedroom rental rates are not grossed up against cheaper, four-bedroom vacancy rates.
The taxpayer can factor rental rates and occupancy by unit type into mirrored, weighted-average analyses to establish two parallel income calculations with matching indications of value. Showing a similar value result on both a per-square-foot basis and on a per-bed basis makes for a persuasive property tax appeal.
Other Income and Intangibles
Within these mirrored, weighted-average analyses, it is also important to consider other income and any intangible property that may not belong in the calculation of taxable real estate income. Market definitions may vary by jurisdiction, so be sure to follow local practices in determining what income is attributable to the real estate.
Common examples of other income and intangibles include free internet, valet trash collection, utility allowances, pet fees, free shuttle service to campus, meal plans, premiums for unit add-ons (view, balcony, high floor), in-unit washer/dryer vs. appliances rental fees, furnished units, and free vs. paid parking. There are sure to be other examples of "freebies" and "perks" that a property provides to entice occupancy.
Because many assessors will include an assumed 8 percent to 12 percent of other income on top of the potential gross income gleaned from the rent roll and income statement, it is easy for an assessor to accidentally double dip on other income or accidentally include as taxable some intangibles baked into the achieved or scheduled rent.
Likewise, when performing a comparative analysis or determining market rents, it is also important to adjust for these sources of other income and intangibles. Not every competing property within the same market will offer an identical set of perks, amenities, or concessions to drive up occupancy.
Since COVID-19 and the return to campus, many student housing properties are providing substantial concessions to stabilize occupancy. At some properties, these concessions equate to as much as 25 percent of potential gross income for the 2022/2023 academic year.
It is hard to know whether this trend will continue in coming academic years, but it is important to realize that many assessors do not automatically adjust for concessions when using asking rents in their calculations of potential gross income. When discussing the property with an assessor, be sure to distinguish between asking rents (often labeled "market rents" on a rent roll) and actual achieved or scheduled rents after concessions.
Because assessors frequently lump together student housing with traditional multifamily properties in their market surveys, they often use cap rates driven by traditional, multifamily transactions when they value student housing. Given that student housing cap rates are typically 50 to 100 basis points higher than conventional multifamily cap rates, it is important to make sure assessors are using appropriate cap rates in their analyses.
When preparing property tax appeals for student housing properties, it is important to keep in mind how much these properties differ from traditional multifamily real estate. The differences in leasing structure, units of comparison, higher rates of other income, numerous intangibles, required concessions and higher cap rates all contribute to a unique model that is distinct from traditional multifamily apartments.
Providing a reconciled approach that combines price per square foot with price per bed is a great place to start discussions with the assessor and to make sure you are talking "apples-to-apples." Additionally, differentiating asking/market rents from achieved/scheduled rents – while adjusting for intangibles, other income, and concessions – will smooth out most differences with the assessor's income-based assessment.