Scott Rathbun
Consultant, Apartment Appraisers & Consultants Inc.
A strong, well-supported market study prepared by a Colorado Housing and Finance Authority-approved analyst is one of the most critical aspects of all tax credit applications. The market study analyzes numerous aspects of a proposed project to determine if there is a need for the number, size and type of rental housing proposed. Among other things, the market study will analyze income-qualified demand in the form of a capture rate, whether the project’s proposed rents appear to be achievable, and if the proposed project will negatively impact existing low-income housing tax credit projects. Because of the current favorable market conditions and the significant gap between market rents and maximum affordable rents in Denver, most projects can achieve their maximum rents, although this is not always the case. Regarding capture rates, put simply, the lower, the better. And while a high capture rate does not immediately disqualify a project from consideration, the Qualified Allocation Plan issued by CHFA states, “CHFA will look more favorably on a project that does not require high capture rates …”
While the final market study is submitted at time of application, the applicant must submit a letter of engagement with an approved market analyst with the letter of intent that is submitted at least one month before the CHFA tax credit application. CHFA requires that the engagement letter include the proposed primary market area, as well as a list of census tracts within the primary market area. However, the analyst must contact CHFA to get approval of the proposed primary market area prior to submitting the letter of intent. As such, selection of the market analyst should begin relatively early in the planning process.
In addition to a general description of the planned project prior to engagement, the market analyst should provide a request listing everything necessary to complete the market study. The request will include information about the planned unit mix and unit sizes, pro forma rents, planned utility allowances and planned rent restrictions. The market analyst also will request whatever preliminary architectural documents are available, as well as a description of planned unit and community amenities, parking and building systems. It is imperative that the information in the market study match the final application, so it is important to keep your market analyst up to date about changes as they occur. In addition, while a market analyst will be engaged early in the process, it is better to wait to commence the actual market analysis until the plans are relatively final and there won’t be significant changes to the design moving forward.
CHFA requirements state that the market study must be completed by a CHFA-approved market analyst. Among other qualifications, in order to be approved by CHFA, market analysts must have a minimum of five years of experience completing market studies for multifamily rental projects. In our experience, it is important to choose a local firm that is experienced in Colorado multifamily markets. It also is important to select a firm that is respected by CHFA, which will lend credibility to the results of the market study. Finally, due to recent changes, it is important to select a firm that understands the income averaging process and is prepared to complete a market study using income averaging should that be the direction you choose to go with your project. A list of approved analysts can be found on the CHFA website, www.chfainfo.com.
As with any appraisal product, there is a wide range of pricing for a market study. Based on our knowledge, tax credit market studies currently tend to range from approximately $6,000 to $10,000, depending on the size, target population, location and complexity of the project. And while it might be tempting to simply select the cheapest option, we urge developers to exercise caution and remember the age-old adage, you get what you pay for. On a percentage basis, a 25% increase may seem like a big difference, but we believe that a higher fee is well worth getting a quality product from a highly respected firm that can help developers successfully navigate the application process when there are millions of dollars in tax credits at stake.
Turnaround times for market studies will vary depending on how busy the market analyst is, although you generally should expect turnaround times of approximately two to four weeks. The timing also is impacted by the type of project you are submitting. Because there are specific deadlines for 9% projects, market analysts tend to be backlogged several weeks prior to these application due dates, requiring more lead time. Developers submitting 4% projects without state credits have a bit more flexibility and are less likely to bump into backlogs because applications for 4% credits are accepted by CHFA on a rolling basis.
