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Income Restructuring – Section 42 Housing Issues. Ken Joyner, RES, AAS School of Government. Income Issues. Legislative Intent To LIMIT the amount of property taxes paid by these properties Statute limits our income considerations

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income restructuring section 42 housing issues

Income Restructuring – Section 42 Housing Issues

Ken Joyner, RES, AAS

School of Government

income issues
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
expense issues
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
capitalization rate considerations
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
different statements
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
typical expenses allowable
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
typical expenses allowable cont
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
typical expenses non allowable
Typical Expenses- Non-Allowable
  • Depreciation
  • Mortgage, Mortgage Interest, Mortgage Principle
  • Loan Payment (including construction)
  • Amortization
  • Property Taxes
  • Real Estate Taxes
  • Income Taxes
typical expenses pro rated
Typical Expenses- Pro-rated
  • Painting
  • Decorating
  • Carpet/Flooring
  • Refrigerators
  • Ranges
  • Microwaves
  • Hot Water Heater
  • Roof
  • HVAC