Income Restructuring – Section 42 Housing Issues

1. Income Restructuring – Section 42 Housing Issues Ken Joyner, RES, AAS School of Government

2. Income Issues • Legislative Intent • To LIMIT the amount of property taxes paid by these properties • Statute limits our income considerations • Must consider the income limits placed on the property by their agreements • No tax credits • 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

3. Expense Issues • Legislative Intent • To LIMIT the amount of property taxes paid by these properties • These properties are more costly to maintain than similar complexes

4. Capitalization Rate Considerations • Due to the tax credits these properties have less risk • This infusion of cash gives developers income that other similar complexes do not have • Thus they would require a lower capitalization rate • More income/Less risk would attract investors that require a smaller return on/of their investments • 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 • That leaves us to consider the typical relationship between Income and Value (capitalization rate) of all apartment complexes in your jurisdiction • Must compare the Section 42 with other market driven complexes, NOT other Section 42 properties

5. Different Statements • If you ask for the income statement WHAT will you get? Answer: IT DEPENDS • Multiple forms and terms for those forms • Income Statement • Statement of Operations • Statement of Earnings • Operating Statement • Statement of Cash Flow • Consolidated Statement • Different levels of details • Might be good to ask what statements of income and expenses do you have available for my inspection

6. Typical Expenses-Allowable • Administrative • Advertising/Marketing • Office expenses (postage, criminal reports, credit reports, bad debts, eviction fees, collection fees, bank service charges, etc.) • Maintenance/Repairs (equipment, apartment, computers, miscellaneous, HVAC) • Supplies • Payroll & Benefits

7. Typical Expenses-Allowable (cont.) • Utilities (may be grouped or broken out into individual categories) • Management/Leasing Agent • Professional fees (accounting, CPA, bookkeeping, legal, etc.) • Insurance (property, workers compensation, and bond) • Bad debts/eviction fees/collection/credit reports/ bank service charges • Grounds/Landscaping

8. Typical Expenses- Non-Allowable • Depreciation • Mortgage, Mortgage Interest, Mortgage Principle • Loan Payment (including construction) • Amortization • Property Taxes • Real Estate Taxes • Income Taxes

9. Typical Expenses- Pro-rated • Painting • Decorating • Carpet/Flooring • Refrigerators • Ranges • Microwaves • Hot Water Heater • Roof • HVAC