Because affordable assets are subject to non-market restrictions and limitations, a more nuanced understanding of income capitalization is fundamental to the aggressive pursuit of equitable tax treatment.

Section 42’s Impact on Gross Potential Income

Section 42 limits how much can be charged for a given rental unit, so knowing what portion of a property was built with Section 42 tax credits and is governed by the corresponding rent restrictions is necessary to properly calculate the gross potential income.

**Section 8’s Impact on the Expense Ratio
**Knowing which units qualify for Section 8 subsidies remains important because, under Section 8, there are

  • annual inspections of every Section 8 unit, and
  • turnover inspections whenever a Section 8 tenant leaves and is replaced with a new Section 8 tenant.

Inspections and the associated repairs drive up the cost of operating the property and give us a basis for requesting a higher expense ratio than might be normal for a given area. In comparison with apartments of comparable size, Low-Income Housing Tax Credit buildings might be entitled to a substantially higher expense ratio depending on what percentage is impacted by Section 8.

The Critical Effect of a Precise Breakout

Affordable multi-family assets can be divided between portions that are limited by Section 42 and portions that aren’t. If a property was built or assembled in stages, Section 42 may pertain to some portions but not others. To ensure equitable tax treatment, it’s critical to achieve clarity on this issue to show how the building is divided by PIN, by building, or by unit. The same issue pertains to Section 8. If some parts of the property qualify under Section 8, but others don’t, a precise breakout is essential so that two different expense ratios are applied, one for the portion of the property that is Section 8 and another for the portion of the property that isn’t. Our rigorous and thorough treatment of affordable multi-family can mean the difference between simply achieving nominal relief and truly fair tax treatment.

Recently Built Property

For properties that were built recently, knowing what portion of the property is under Section 42 and what portion isn’t can be crucial to prevent the assessor or the Board of Review from chasing construction costs. Because the rents are controlled under Section 42, construction costs don’t play a large role in determining value. This fundamental shift in analysis, if overlooked, can result in assessments that are unrealistically skewed. We keep assessments fair by maintaining the focus on the income that the property actually generates, and not on how much it cost to build.

Let the combined experience and collaborative focus of our lawyers and real estate professionals show you how effective thorough and rigorous treatment of your affordable property can be obtaining the tax savings that are critical to the success of your enterprise.