Many major assessment jurisdictions are experiencing severe financial challenges due to decreased commercial tax revenue from increased office vacancies and declining property values, primarily caused by the ongoing remote work trend. To tackle these issues, cities should reduce unnecessary spending, implement AI to boost efficiency, and identify new revenue sources to maintain stable assessment rolls. With this rapidly changing financial landscape, assessment departments should consider using the income approach to evaluate single-family homes owned and operated by institutional investors like Blackstone, Innovation Homes, and Progress Residential, recognizing that these properties are purchased in bulk and utilized as income-producing assets (“SFR Rental”), unlike the primary residences of individual owners. This approach would lead to a more just and equitable distribution of the tax burden.
The income approach to property valuation is commonly used for
income-producing properties like rental units, commercial buildings, and
multi-family apartment complexes. When it comes to single-family homes owned by
institutional investors, since these properties are being used as rental units
and generating income, it may be appropriate to consider using the income
approach for valuation. This method allows assessors to determine the value of
a property based on the income it generates, which can provide a more accurate
assessment than traditional methods based solely on property value.
Using the income approach for these properties, these municipalities can ensure a fair and equitable distribution of the tax base, as it considers the property's income potential rather than just its
market value. This approach could help offset some of the challenges municipalities
face with shrinking commercial tax bases and falling property prices.
However, it's
important to note that implementing the income approach for single-family homes
owned by institutional investors may require additional resources and expertise
from assessment departments. To accurately assess the value of these
properties, they would need to collect data on rental income, vacancy rates,
operating expenses, and market trends.
Using the income approach to value single-family homes owned by institutional
investors could be a viable option for municipalities looking to stabilize
their tax base and ensure fair assessments. Still, it would require careful
consideration and resources to implement effectively.
Modeling the Income Data
Using multiple regression
analysis (MRA) to model data collected from institutional investors operating
single-family homes in a municipality could provide valuable insights for
assessment departments. MRA is a statistical technique that helps analyze
relationships between multiple variables, which can help assessors identify
statistically significant metrics impacting property values.
By gathering raw data
on rental income, vacancy rates, operating expenses, management fees,
capitalization rates, and other relevant factors from institutional investors
in their jurisdictions, assessment departments can use MRA to analyze this data
and develop models that accurately estimate these properties' value. This
approach can help create more objective and data-driven assessment rolls, ensuring
fairness and accuracy in property valuations.
Incorporating MRA
into the assessment process along with traditional Computer-Assisted Mass
Appraisal (CAMA) models can lead to a more comprehensive and robust valuation
methodology. By leveraging statistical analysis techniques like MRA, assessment
departments can better understand the factors influencing property values in
their jurisdiction and make more informed decisions when assessing
single-family homes owned by institutional investors.
Benefits of Using
MRA
· Consistency: MRA can help ensure that property
valuations are consistent and based on objective criteria.
· Accuracy: By analyzing a large dataset, MRA
can identify relationships between variables that may not be apparent through
casual observation.
· Efficiency: Once the model is developed, it
can assess the SFR Rental population quickly and efficiently.
Key
Considerations for MRA
1. Data Quality: The accuracy of the MRA model
depends on the quality of the data collected, so the departments must ensure
that the data is reliable, consistent, and representative of the market.
2. Variable Selection: The modeling team must
choose variables relevant to the valuation of income-producing properties.
These may include factors such as property size, location, age, condition,
rental income, vacancy rates, operating expenses, cap rates, and market trends.
3. Model Validation: The modeling team must
validate the MRA model to ensure that it accurately predicts property values.
This can be done by comparing the model's predictions to time-adjusted sale
prices.
4. Regular Updates: Given the dynamic nature of
the real estate market, updating the MRA model regularly is imperative. This
ensures the model accurately reflects the latest trends and conditions, maintaining its relevance and reliability.
Overall, utilizing MRA to analyze and incorporate data from institutional investors into the assessment process can lead to more stable and reliable assessment rolls. This approach can help assessment departments adapt to the changing real estate landscape, ensuring that the process remains relevant and responsive to the evolving market conditions.
Promoting Income Approach to SFR Rental Landlords
To
justify and promote the income approach to institutional landlords who own
single-family homes in a municipality, the assessment department can emphasize
its unique selling points and reasons for using this method:
1. Fair
and Accurate Valuations: The income approach considers the income generated by
a property, providing a more accurate valuation based on its potential income
stream. This method ensures that properties are assessed based on their
income-producing capabilities, which can lead to fair and equitable tax
assessments.
2. Transparency
and Consistency: Assessment departments can use the income approach to provide
a transparent and consistent valuation method based on objective financial data
and market trends. This can help build trust with institutional landlords and
demonstrate the reliability of the assessment process.
3. Alignment
with Market Value: The income approach aligns property valuations with market
value by considering rental income, vacancy rates, operating expenses, and
other financial factors. This method reflects the actual value of
income-producing properties in the current market conditions.
4. Customized
Analysis: The income approach allows for a more customized and detailed
analysis of individual properties, considering specific factors that impact
their income potential. This personalized approach can result in more accurate
valuations tailored to each property's unique characteristics.
5. Financial
Benefits: The income approach can lead to a more stable and predictable tax
assessment for institutional landlords, providing a clear rationale for
property value determination. This can significantly aid landlords in planning
their financial obligations and budgeting effectively.
Assessment
departments can engage in proactive communication and outreach efforts to
effectively sell the income approach to SFR rental landlords. They can organize
informational sessions, provide educational materials, and support landlords seeking
clarification on the valuation process. Building strong relationships and
fostering open communication can help demonstrate the benefits of the income
approach and gain buy-in from institutional landlords.
SFR Rentals as a Separate Tax Sub-Class
Separating SFR Rentals from traditional multifamily rental
properties as a distinct tax subclass is a decision that would depend on
various factors, including the local tax regulations, market conditions, and
the specific characteristics of these properties. Here are some considerations
to keep in mind regarding this potential separation:
1.
Property Characteristics:
SFR rentals owned and operated by institutional landlords may have different
characteristics than traditional multifamily properties, such as size, location, amenities, and target tenant demographics. These
differences could justify treating them as a distinct tax subclass to ensure
they are assessed appropriately based on their unique features.
2.
Income-Producing Properties:
Given that SFR Rentals are typically operated as rental properties generating
income, separating them as a distinct tax subclass could allow for a more
targeted approach to assessing these properties based on their income
potential, as discussed earlier.
3.
Equity and Fairness:
Creating a separate tax subclass for these properties could lead to a more
equitable distribution of the tax burden, ensuring that they are assessed
fairly and equitably relative to other types of rental properties in the
market.
4.
Administrative Challenges:
Separating SFR Rentals as a distinct tax subclass could, on the other hand,
introduce administrative complexities for the assessment department, requiring
additional resources to manage and implement this classification effectively.
5.
Legal and Regulatory
Considerations: It's essential to consider any legal or regulatory implications
of creating a separate tax subclass for these properties and ensure compliance
with local tax laws and assessment guidelines.
In conclusion, the decision to separate SFR Rentals owned and
operated by institutional landlords into a distinct tax subclass should be made
after carefully considering the municipality's specific circumstances and
objectives. While a separate subclass may be beneficial in some cases to ensure
a more accurate and equitable assessment of these properties, evaluating the
potential impacts and feasibility of such a separation before implementation is
essential.
Conclusion
Given the current challenges large municipalities face with
declining commercial tax bases due to heightened vacancies and falling property
values, the income approach offers a way for assessment departments to ensure
fair and equitable tax assessments and arrive at stable and reliable property
valuations for SFR Rentals-owned and operated by institutional landlords.
Utilizing the income approach provides a valuable method for
assessing SFR Rentals. It takes into account the properties' income-generating potential, leading to more accurate valuations based on their highest
and best use as income-producing assets.
Implementing the income approach aligns property valuations with
market value by considering rental income, vacancy rates,
operating expenses, and market trends. It provides transparency, consistency,
and customization in the assessment process. It offers a tailored analysis of
these properties, accurately reflecting their unique characteristics and income
potential.
Overall, with the changing real estate landscape and financial
challenges municipalities are encountering, the income approach is a valuable
tool for assessing SFR Rentals owned by institutional landlords. It can help
municipalities adapt to market conditions, ensure fair tax assessments, and
address the impact of declining commercial tax bases in a structured and
data-driven manner.
Sid's Bookshelf: Elevate Your Personal and Business Potential
No comments:
Post a Comment