The student housing market is robust, generating strong market data that tax assessors are using to support increasingly aggressive property tax assessments. Thus, student housing owners must monitor their property values and arm themselves with the tools to fight excessive valuations.
Forecasters expect the student housing market to grow for the next several years, primarily because of its stability. Healthy investor interest led to a 71 percent year-over-year increase in student housing sales volume at the end of the third quarter of 2015, according to Real Capital Analytics. In addition, the market’s average overall cap rate was down 37 basis points from the first quarter of 2015 to the first quarter of 2016.
Combined with increased demand for beds that accompanies accelerating enrollment at the largest universities, these healthy fundamentals will encourage assessors to boost property tax assessments. In many cases, assessors will produce inflated valuations that cannot be supported by market data or realistic operating scenarios.
Student housing owners should consider the following issues to combat aggressive assessments:
Evaluate the approach
Assessors commonly derive a market value using one or more of the three classic approaches to value: cost, income or sales comparison.
The cost approach is arguably the least reliable method if the property is more than a few years old, especially given the difficulties of estimating depreciation and obsolescence factors for older properties. An assessor will most likely rely on an income and/or sales comparison approach when valuing student housing. Taxpayers can achieve lower assessments by disputing how the assessor has applied a valuation methodology to a specific property.
Challenge sales data
Assessors are using the sales comparison approach more frequently, given the huge sale volumes previously mentioned. Student housing owners should remind assessors that a sale price does not necessarily equate to market value.
While discussing comparable-sales data with the assessor, the taxpayer can sometimes discredit a sale’s relevance by outlining the physical and economic differences between the property sold and the assessed property. Point out to the assessor the factors influencing a buyer’s decision to purchase a property, which may make the sale incomparable to the taxpayer’s property.
Did the assessor reference any portfolio purchases in the sales comparison? Point out that properties in a portfolio are typically priced as a group, and may not reflect market value.
Finally, emphasize buyer motivations such as time constraints or income tax consequences that affected the price of the comparable property. Owners should consider a tax appeal even if the recent purchase price of their complex is higher than the current property tax assessment. Buyers pay for properties based on factors beyond real estate, so a purchase price should provide no more than a touchstone for an assessor.
Taxpayers should outline the factors they considered in purchasing the property, such as special financing considerations. Show how the property’s performance differs from projections made at the time of purchase.
Sharing the purchase price may lead to a higher assessment, but student housing owners can mitigate the amount of the increase with a meaningful purchase price discussion with the assessor.
Beware incompatible income comparisons
Properties built and/or operated specifically as student housing projects are often referred to as purpose-built properties. An alternative student housing solution in college areas is conventional, market-rate apartments, also known as student competitive apartments.
On the surface, purpose-built and student competitive projects are similar in use and function. When an assessor is using an income approach to value, however, the properties’ differences become significant.
Competitive properties usually include more studio and one- or two-bedroom apartments, while purpose-built properties have more three- and four-bedroom units. Competitive complexes rent by the apartment, while purpose-built properties rent by the bed. Rental rates and amenities also can differ dramatically between the two property types.
In an income approach, assessors typically use market-driven rent, vacancy, and expense factors to arrive at a net operating income figure that is then capitalized using a market-driven capitalization rate. The most common mistake assessors make using this approach is applying competitive market data in their analysis rather than purpose-built market factors.
Student housing owners should be quick to point out the differences between these two property types: For example, competitive apartments are valued per square foot, while purpose-built housing is valued by unit or bed.
Owners should emphasize occupancy fluctuation differences between competitive apartments and a purpose-built property, which may have low occupancy during the summer. Also point out the influence of the on-campus housing supply on the performance of an off-campus, purpose-built project.
Finally, be mindful of how a property’s distance from campus affects rental rates. There is typically a direct correlation between proximity to campus and higher rent levels, leasing velocity and occupancy for purpose-built properties. The correlation isn’t as strong at student competitive properties.
Even if an assessor is using appropriate data from comparable purpose-built properties, owners should challenge the market factors in the assessor’s analysis with data taken directly from the property’s current and previous year’s operating statements, if such data is in the property owner’s favor. An operating statement can help distinguish the owner’s property from projects that lead to higher assessments. Pointing out specific income and expense items can show trends in rental rates, occupancy and expenses that differ from the market trends alleged by the assessor.
Even in a strong market, student housing owners should constantly monitor their property tax assessments, and have the courage to combat assessments derived from sales or income data.