Secrets to combating an assessor's valuation

In this era of excessive capacity in many senior housing markets, in particular assisted living facilities, owners and developers are increasingly faced with over-optimistic tax assessors. This attitude stems from the assessment community's non-critical reading of trade publications and the like, which suggests that gobs of money can be had from these properties.

As a result, assessors may frequently be tempted to adopt a stabilized income and expense valuation methodology toward an assisted living or congregate care facility. This temptation does not seem to be ameliorated despite the difficulty owners have experienced in filling thesefacilities in an increasingly saturated market.

The assessor may compound his optimistic appraisal of your senior living asset by ignoring current occupancy or, even worse, suggesting that your poor management - and not the market - is responsible. Dealing with this challenge is complicated by the fact that the senior housing industry is so new that there are very few market sales.

If there are sales, they tend to be part of corporate stock acquisitions with purchase prices not always reliably allocated across a number of facilities for property transfer tax purposes. Of course, the cost approach remains available. However, many new facilities consumed large resources to build and have not been around long enough for convincing depreciation and obsolescence arguments to be made.

I recommend a proactive approach. That is to say, when you know that you are going to be faced with an assessor's excessive valuation, do your homework. Develop detailed information showing the number of units which have been rented since opening. Obtain occupancy information from other facilities in your market area including, if possible, their fill-up history to show that your experience is not atypical.

Review the projections that got you into trouble in the first place. Specifically, attempt to demonstrate how your anticipated rate of market penetration fell short and why. If too many other senior housing units came on line, thereby increasing competition for a limited number of potential clients, develop that information. If your construction costs were out of line, driving you to seek unrealistic rents, which in turn drove clients away, show the assessor how even with lower rents, you are not attracting occupants.

Demonstrate to the assessor that you are not operating an apartment house. Your project is a sophisticated service operation more akin to a hotel than multifamily residential living. Show the assessor how the service demands of your project and the self-imposed limitations on the type of occupants reduce the available pool of clients both in terms of age bracket and financial profile.

Once, hopefully, you have educated your assessor, it is not enough to argue that her proposed value is too high; you must take a position. I suggest trying to implement a valuation phase-in which would be linked to occupancy. Try this approach.

Stabilize occupancy at 95% using a standard 5% vacancy and collection loss reserve. (If area conditions are truly terrible, try 10%). Agree with the assessor on the value of your property if full occupancy had been achieved on her valuation date. Endeavor to link your value to the percentage of occupancy achieved on each annual valuation date.

In this way, you will not have to go through a laborious discussion about income and expenses each year. You may prefer to work with the assessor's office on a simple occupancy reporting basis. Agree that the established value will be subject to reopening if your monthly occupancy rates increase or decrease more than 10%. This avoids any hardship and shows the assessor that you want to be fair to the town or county.

One final point. Although not regulated to the degree that nursing homes are, many senior housing models have their own governmental limitations. For example, Connecticut's assisted living regulations prohibit shared occupancy apartments unless a resident consents. A full bath and kitchenette, or common kitchen available to several units, is also required.

These code and square footage related issues, if applicable to certain senior living formats and not to others, will tend to drive up costs and asking rentals.

By expanding the concept of simple apartment living to congregate and assisted living formats, senior housing represents an entirely new industry, practically unknown in most markets 10 years ago. Strong market-linked knowledge is required to address ad valorem assessment concerns in this new industry.

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