Income Restructuring
– Section 42 Housing
Issues
Ken Joyner, RES, AAS
School of Government
Income Issues
I. Legislative Intent
① To LIMIT the amount of property taxes paid by
these properties
② Statute limits our income considerations
③ Must consider the income limits placed on the
property by their agreements
④ No tax credits
i.
Although there is a large amount of income tied to these
credits we are not allowed to include them in our
restructured income and expense statements
Expense Issues
I. Legislative Intent
① To LIMIT the amount of property taxes paid by
these properties
② These properties are more costly to maintain than
similar complexes
Capitalization Rate
Considerations
I.
Due to the tax credits these properties have less risk
①
II.
This infusion of cash gives developers income that other similar
complexes do not have
Thus they would require a lower capitalization rate
①
More income/Less risk would attract investors that require a
smaller return on/of their investments
III. BUT…..due to the statute and legislative intent we are unable to
consider the tax credits which means we can not use the lower
capitalization rate
①
That leaves us to consider the typical relationship between Income
and Value (capitalization rate) of all apartment complexes in your
jurisdiction
②
Must compare the Section 42 with other market driven complexes,
NOT other Section 42 properties
Different Statements
I.
If you ask for the income statement WHAT will you get? Answer:
IT DEPENDS
II.
Multiple forms and terms for those forms
①
Income Statement
②
Statement of Operations
③
Statement of Earnings
④
Operating Statement
⑤
Statement of Cash Flow
⑥
Consolidated Statement
III. Different levels of details
①
Might be good to ask what statements of income and expenses do you
have available for my inspection
Typical ExpensesAllowable
I.
II.
Administrative
Advertising/Marketing
III. Office expenses (postage, criminal reports, credit reports, bad
debts, eviction fees, collection fees, bank service
charges, etc.)
IV. Maintenance/Repairs (equipment, apartment, computers,
miscellaneous, HVAC)
V. Supplies
VI. Payroll & Benefits
Typical ExpensesAllowable (cont.)
VII. Utilities (may be grouped or broken out into
individual categories)
VIII.Management/Leasing Agent
IX. Professional fees (accounting, CPA, bookkeeping,
legal, etc.)
X. Insurance (property, workers compensation, and
bond)
XI. Bad debts/eviction fees/collection/credit reports/
bank service charges
XII. Grounds/Landscaping
Typical ExpensesNon-Allowable
I.
Depreciation
II.
Mortgage, Mortgage Interest, Mortgage Principle
III. Loan Payment (including construction)
IV. Amortization
V.
Property Taxes
VI. Real Estate Taxes
VII. Income Taxes
I.
Typical ExpensesPro-rated
Painting
II.
Decorating
III. Carpet/Flooring
IV. Refrigerators
V.
Ranges
VI. Microwaves
VII. Hot Water Heater
VIII.Roof
IX. HVAC