CREJ

August 2019 — Multifamily Properties Quarterly — Page 19 www.crej.com *As of 12/31/2018. © 2019 PGIM is the primary asset management business of Prudential Financial, Inc. (PFI). PGIM Real Estate Finance is PGIM’s real estate finance business. Prudential, PGIM, their respective logos as well as the Rock symbol are service marks of PFI and its related entities, registered in many jurisdictions worldwide. PFI of the United States is not affiliated with Prudential plc, a company headquartered in the United Kingdom. THE FUTURE OF REAL ESTATE FINANCING IN COLORADO: PGIM REAL ESTATE FINANCE. PGIM Real Estate Finance combines one of the industry’s most experienced teams with extensive lending capabilities and consistent performance in the Colorado market. We originated $8.9 billion* in multifamily loans in 2018 and focused on a variety of specialized property types including: market rate housing, affordable housing, student housing, senior housing and health care senior living. Partner with our experts a t PGIMREF.com o r contact: Jay Porterfield (214) 777-4533, Jay.Porterfield@pgim.com PGIMREF.com/LinkedIn T:10.25” T:7.25” D evelopers from out of state, namely Texas, where real estate taxes are much higher, typically are pleased to see how low taxes are in Colorado. As a result, they often overlook the impact of differing mill levies on their proposed develop- ments. That is, until they talk to a real estate broker about selling their completed property and realize too late just how much of an impact a high mill levy can have on value. Interestingly, land sales data indi- cate that the full impact of mill lev- ies, high or low, are rarely reflected in the price a buyer pays for a site. In fairness, systems for calculating real estate taxes differ across the country and Colorado has one of the more complicated methods. In addition, the range of mill levies here is enor- mous, varying by more than a fac- tor of three across the large number of municipalities and metropolitan districts, which can impose a sig- nificant financial burden on unwary land buyers. Astute developers familiarize themselves with the local assessment process and consider the impact of mill levies when select- ing sites. Provided below is a simple rule of thumb to help developers quickly analyze that impact. We have seen mill levies across Colorado range from the upper 50s to more than 180 mills. For purposes of this example, and to keep the math simple, we have analyzed two identical sites, one with a mill levy of 80 and the other with a mill levy of 150, representing a difference of 70 mills. Further, in order to calculate the tax impact, we have assumed a $300,000 per unit apartment value, which is approximately the average price of garden product in the seven- county metro area sold over the last 18 months. The new assessment ratio for 2019 in Colorado will reportedly be 7.15%, which yields an assessed value of $21,450 per unit (calculated by multiplying the $300,000 per unit value by the assess- ment ratio). We then calculate the per-unit impact of the higher taxes by multiplying the assessed value of $21,450 per unit by the 70-mill differ- ence (0.070 as one mill is one-tenth of 1%), which equals $1,502 in taxes per unit. Finally, to calculate the overall per-unit impact on value, we divide the per-unit tax impact by the assumed capitalization rate. Recent sales of newer properties completed since 2015 have yielded cap rates ranging from approximately 4% to slightly above 5%. For ease of analysis, we have assumed a 5% cap rate, although a lower cap rate would result in a larger impact on value as noted at the end of this article. Divid- ing $1,502 by a 5% cap rate indicates an impact on value of approximately $30,000 per unit. Put another way, a $300,000 per unit community may only be worth $270,000 because of a high mill levy, a hit of 10% due to this often-overlooked factor. It is worth noting that the average price paid for apartment sites over the last 18 months was approxi- mately $20,000 per unit, $10,000 less than the impact on value in the above example. Stated differently, it only takes a difference of 45 mills to equate to the $20,000 average land price. One could argue that an aver- age priced site should be free with a levy that is 45 mills above average, or, in reality, purchased at a significant discount. As a rule of thumb using the above figures, each mill has a $430 per unit impact. So, a 10-mill difference has an impact of approximately $4,300 per unit. Using a 4% cap rate, the impact increases to $536 per mill, or $5,400 for every 10 mills. It should be noted that homeown- ers’ association fees paid by an apart- ment community have a similar impact on value, which can be calcu- lated by dividing the annual per unit HOA fee by the assumed cap rate. And properties that have both high mill levies and HOA fees are impact- ed even more significantly. We have seen savvy developers try to get creative in their attempts to reduce the mill levies imposed on their sites. For example, because tenants will have access to self-con- tained amenities within the apart- ment community, it may be possible to exclude a multifamily site in a master-planned development from the portion of a mill levy that grants access to neighborhood recreation centers. Developers also should try to carve their sites out of HOA boundar- ies for the same reason. In summary, developers would be well served by noting the mill levy early in the due diligence process, and negotiating a lower land price to offset the eventual effect on the sale price of the proposed apart- ment community. ▲ The impact of mill levies on property value Appraisal Cary Bruteig, MAI Principal, Apartment Appraisers & Consultants Inc. Scott Rathbun Consultant, Apartment Appraisers & Consultants Inc. The range of mill levies here is enormous, varying by more than a factor of three across the large number of municipalities and metropolitan districts, which can impose a significant financial burden on unwary land buyers.