Real Estate Taxes for LIHTC Properties Grew Significantly in 2017

Published by H. Blair Kincer on Thursday, May 30, 2019 - 12:00am

As noted in this space last month, overall expenses for low-income housing tax credit (LIHTC) properties in 2017 grew by 2.3 percent, a return to previous norms. However, while the overall LIHTC operating expense growth was more in line with the trend previous years, the Novogradac 2019 Multifamily Rental Housing Operating Expense Report-Survey and Analysis of LIHTC Properties found that one category of expenses for LIHTC properties saw a sizable increase in 2017: real estate taxes.

Properties in Novogradac’s dataset saw a 39.5 percent increase in real estate taxes from 2016 to 2017. This is the largest increase in real estate taxes seen since Novogradac began publishing its annual operating expense report in 2014. Previously, compounded annual growth for real estate taxes had actually seen a 0.2 percent decrease from 2010 to 2016. The remarkable year-over-year growth in real estate taxes between 2016 and 2017 brings the compounded annual growth rate to a 4.7 percent increase from 2010 to 2017–the largest of any expense category in this year's report.

 

Blog Graph Real Estate Taxes See Major Year-Over-Year Change
Click to Enlarge

 

About the Novogradac 2019 Operating Expense Report

Novogradac’s 2019 operating expense report analyzes expense data on nearly 1,700 properties, with more than 190,000 affordable rental homes, from across the country. Each year, more properties and units are added to Novogradac’s database of multifamily properties and a survey is conducted to derive expense trends. While this dataset does not represent the entire LIHTC universe of properties, the expense trends described therein are largely representative of the industry as a whole.

The Novogradac operating expense report examines multifamily rental housing properties over time, as well as by type, location and property size.  Overall operating expenses were also broken down and analyzed by the different expense categories.

What’s Behind the Increase?

The significant increase in real estate taxes from 2016 to 2017 warrants a closer look. Several factors may explain the record rise:

  • increased assessed values in states like Washington, which saw a significant increase in real estate taxes because rising local property values, can increase the sample’s real estate tax expenses;
  • a change in the dataset–in 2017 Novogradac added a significant number of new records to the dataset from Maryland and Virginia, two states with high real estate taxes; and,
  • a change in how properties are assessed.

Regarding the third factor, Novogradac’s appraisal work has shown that in certain states, LIHTC properties in metro areas are seeing rising property values because they are increasingly being compared to market-rate properties. In Texas, for example, the assessor’s office now uses market- rate comparables instead of tax credit properties, as used in the past. In Ohio, many properties in the dataset saw their tax abatements lapse. State discussions also presented in the Novogradac 2019 Multifamily Rental Housing Operating Expense Report-Survey and Analysis of LIHTC Properties examine those states where real estate taxes increased significantly from 2016 to 2017.

Regarding the first and second points above, because differences in state and local property tax rates and assessments can affect the real estate taxes reported by LIHTC properties in this dataset, Novogradac removed various states to determine the affect each had on the overall year-over-year change in real estate taxes.

The combined effect of removing LIHTC properties from a handful of states – Washington, Texas, Maryland, Virginia and Ohio – from the calculation decreases the amount that real estate taxes grew between 2016 and 2017 by more than 20 percentage points: from 39.5 percent to 19.3 percent. This is still a significant increase.

As such, the real estate tax category of LIHTC property operating expenses is clearly an area for stakeholders to watch as other states consider changes in assessment methodologies. It’s worth nothing that even with the significant increase in real estate taxes, the three largest expense categories for LIHTC properties in 2017 remain payroll (26.4 percent of total expenses), utilities (16.9 percent), and repairs and maintenance (16.8 percent).

Learn More

Read more about the cost of operating LIHTC properties and learn what to expect in different situations with the Novogradac 2019 Multifamily Rental Housing Operating Expense Report-Survey and Analysis of LIHTC Properties.