How to correctly calculate max rents that can be charged in an affordable asset?
A broker presented an opportunity to acquire an affordable asset. I only have experience in market rate housing and will be partnering with an equity partner who is familiar with affordable housing if this deal has legs but I want to learn some of the basics of affordable housing, please help me understand:
1) Based on the number of bedrooms, I see there are HUD max rents, utility allowance and then allowable tenant rent which is the HUD max rent minus the utility allowance. So what is the max rent we can underwrite/charge the tenant? The HUD max rent or the allowable tenant rent?
2) If current in place rents are well below the max rents allowed, is a common value add play in the affordable space just wait till lease renewal and bring those rents up to the max allowed rents? Or do we have to still invest capex like we do for market rate housing, renovate interiors, exteriors, improve amenities and thus justify an increase in rents?
3) Related to #2, why would the in place rents be well below the max rents allowed at an affordable asset? I dont see why the current owner would not want to maximize their NOI. I find it particularly strange because even the max rents allowed by HUD are lower than market rate housing in the area, shouldn't that mean renters should not have a problem paying higher rents or atleast the max rents allowed? Are there any red flags that you would want to understand that may be the reason in place rents to be lower than the max rents allowed?
Thank you!
The rent you can underwrite/charge generally would be gross LIHTC - UA = net LIHTC rents. I'm assuming you're referring to the HUD max rents by county. If rents are below max LIHTC rents then yes, you could bring those rents up to the limit as long as the market can support it (i.e. there is still a discount to market rents and other affordable housing comps support the increase).
One possible reason why in-place rents haven't moved up to the max may be due to the lag time between recent increases in the market and turnovers. Most leases are required to have an initial 12-month period, and LIHTC rent increases also occur annually.
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