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John Stark and Kirk Garza: Assessors Often Overvalue Student Housing

With competition from a growing supply of purpose-built student housing (PBSH) and student renters' ever-evolving preferences driving costs, property owners in the sector must guard against excessive tax assessments.

Assessors often treat this special asset class as a traditional multifamily development, while PBSH is designed specifically for university students. As such, the properties have distinct lease structures, design layouts, amenities, and services that differ from traditional multifamily properties and on-campus dormitories. This misclassification often leads assessors to select valuation metrics through mass appraisal that ignore the unique characteristics of this class of real property, resulting in inflated assessments.

Taxpayer teaching guide

Student housing owners should promptly review notices of taxable property value for fairness and decide whether to contest their assessment. If they choose to file a protest, the taxpayer must file their request by the deadline in their jurisdiction.

Whether a property owner is simply reviewing their tax assessment or preparing arguments to have an assessment lowered, it will ease the taxpayer's task to know the most common mistakes assessors make in valuing PBSH properties. Many of these problem areas relate to assessor assumptions based on market-rate multifamily properties, and how those properties, features and revenue models differ from dedicated student housing.

What follows are essential factors involved in calculating taxable value for a student housing project. The property owner should understand these points and be prepared to educate their assessor about how each affects market value.

Rent and revenue

PBSH rental-rate drivers that an assessor often overlooks include lease terms, unfurnished vs. furnished units, and amenity packages. The most notable difference from traditional multifamily apartments is that PBSH properties lease by the bed. Separate leases and deposits for each resident provide students and their parents with financial security in the event that a roommate transfers colleges, unenrolls, moves away, or does not pay their rent on time.

Leases also run parallel to the academic calendar. This makes cash flow seasonal and creates an expensive make-ready period right before the fall term, when all leases expire or start concurrently. Lease terms tied to semesters or school years rather than 12-month calendar years are among the main characteristics that make student housing rental rates and revenue streams incompatible with market-rate apartment properties.

Counting costs

On the expense side, student housing units and bedrooms may be unfurnished or fully furnished, with the latter often including a wide variety of smart appliances and furniture packages catering to the latest student preferences. The property owner should ensure certain furnishings are not doubly taxed by inclusion in both the overall property assessment and a separate business personal property account.

In addition to charging higher rent for fully furnished options to offset their higher cost, student housing landlords may include charges for certain amenities in the stated rental amount. Examples of these rent inclusions range from high-speed Wi-Fi throughout the building to cable TV, trash valet services, transportation, and utilities. Understanding these differences when analyzing the subject property and comparables is critical to arrive at an appropriate market rental rate and expense structure for an income-based valuation.

Like on-campus dormitory managers, PBSH property teams strive to promote socialization and a sense of community through the built unit mix, common area amenities and budgeting for social and academic events. While traditional apartments are typically comprised of mostly one-bedroom and studio units, developers build student housing primarily as multibedroom units.

This design difference, along with student expectations for 1:1 bedroom/bathroom parity, often make multifamily-to-PBSH conversions unfeasible. The inability to pursue conventional, market-rate multifamily renters represents additional risk for student housing owners in the event that occupancy decreases. Moreover, because one-bedrooms typically garner higher rents per square foot and achieve higher occupancies than three- and four-bedroom units, comparisons of PBSH rents to traditional multifamily rental rates are often inappropriate.

PBSH intangibles

The PBSH market is experiencing numerous emerging trends that impact an asset's overall value. While some of these considerations tie directly to the tangible real estate, other aspects are intangible – meaning they cannot be held – and are typically untaxable.

Intangible assets in student housing can relate to an associated school campus and can be more or less valuable depending on the institution. In addition, properties adjacent to a college campus typically command higher rents and property values than those where residents might require transportation to reach campus. Access to neighborhood amenities, property services, attractions, and public transit can also boost a property's rental demand.

Additionally, PBSH properties historically trade at capitalization rates approximately 50 basis points higher than traditional apartment complexes due to various risks not seen in traditional multifamily assets. Property values drop as cap rates increase.

Similarly, U.S. student housing properties at Power 5 schools can achieve significantly higher rents and sales than properties near non-Power 5 schools. (Power 5 refers to the major football conferences: Atlantic Coast, Big Ten, Big 12, Pacific 12 and Southeastern.)

Because traditional apartment valuations rarely need or include business value adjustments, assessors seldom adjust for the business value of intangibles not directly tied to the real estate during the initial assessment of a purpose-built student housing property. Yet, as we have presented, intangible benefits can be a factor in PBSH business models and may influence market valuations in the sector.

Finally, it is important to realize that various jurisdictions may have nuanced definitions of taxable value, tangible real estate, business personal property, and intangible business value. A local expert can provide valuable insight in forming and presenting arguments for an assessment reduction, and help to mitigate intangible business value in PBSH real estate assessments. 

Kirk Garza
John Stark
John Stark is a manager and Kirk Garza is a director at the Texas law firm Popp Hutcheson PLLC, which focuses its practice on property tax disputes. The firm is the Texas member of the American Property Tax Counsel, a national affiliation of property tax attorneys. Both John and Kirk are licensed property tax consultants in Texas.
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