market research toolbox
The following is a list of tools that can be used to evaluate a tax-exempt bond multifamily development. These tools can be used for an existing or new construction properties.
- maximum allowable rents
- anticipated market area
- competition
- perception of value
- demographic profiles
- share of households required to support tax-exempt bond project
Maximum Allowable Rents
Typically, tax-exempt bond projects are structured with maximum allowable rents under the Section 42 program. A good sources used to identify maximum allowable rent levels are:
Anticipated Market Area
The most accurate method of establishing the market area for a multifamily site is to evaluate the market area established by competing Tax Credit developments. Additional evaluations should be conducted using established mobility patterns, changes in socioeconomic boundaries and natural and manmade boundaries.
For very preliminary evaluations, a radius of 3.0 to 5.0 miles around the proposed site is acceptable.
Competition
Now that the Section 42 Program is over 15 years old, nearly every urban market and most rural markets currently have a Tax Credit development or some other government-subsidized project that might impact your development. A source to identify these properties is:
This is a link to all state housing finance agencies that typically have lists of allocated properties by year of allocation. Properties in your market area can be contacted to identify market areas, rent levels, occupancies and absorption rates.
A source for all Section 8 properties administered by HUD in the U.S. follows:
Perception Of Value
Because of the income limitations placed on tenants of Section 42 properties, tax-exempt bond properties should rent for at least 10% below comparable market-rate property. Generally, the greater the share below market, the faster the initial absorption of the property, lower turnover rates and better occupancies.
Sources of comparable properties can be identified in area leasing guides and online at:
Comparison and adjustments to rent levels should be made based on unit type, unit size, amenities and age of property.
Demographic Profiles
A key to success of a tax-exempt bond project (or any Tax Credit property) is to establish the number of income-qualified households compared to existing Tax Credit units within the market area. Two sources of this information include:
These sites provide demographics to establish the number of income-qualified households and will require some manipulation to get them to fit your market area. Other for-fee sources will match your market area precisely. A common source is:
Share Of Households Required To Support Tax-exempt Bond Project
The Tax Credit program will establish the upper household income limit based on the number of persons per households (see sources in Item 1 above for income limits). The minimum income requirement is determined by multiplying the lowest proposed rent at the subject property by the anticipated rent to income ratio (typically between 30% and 45%) the developer or management chooses to qualify prospective tenants. For example, if the lowest gross income is $400 per month, and assuming a rent to income ratio of 40%, the minimum income required to live at the project is $12,000 per year. If the maximum allowable income for a family of four (assuming three-bedrooms are built) is $35,000, the appropriate range is $12,000 to $35,000.
Use demographic sources in Item 4 to help identify the number of income-qualified households. Compare the share of households in the market required to support Tax Exempt bond property. This ratio should be below 10% to 20% of income-qualified households, depending upon other market factors.
Additional analysis should be conducted among all Tax Credit properties and other properties with income restrictions to determine if a saturation of units has occurred.
