With demand for senior housing accelerating, many owners and developers are seeing strong operating performance – but also rapidly rising property assessments.
As Baby Boomers age, the U.S. population age 80+ is projected to reach 15.2 million by the end of 2026, and nearly 23 million by 2035. In some cases, developers and investors of senior housing are seeing improved occupancy rates and climbing rents. However, favorable market conditions and high performance often translate into higher assessed property values – and higher taxes. In other cases, facilities are still suffering from vacancies and cost escalation that occurred following the pandemic and the assessments are not aligned with the declining value of the properties.
That makes valuation strategy critical.
The Key Valuation Challenge: Going Concern vs. Property Value
Unlike traditional multifamily properties, senior housing facilities are typically bought and sold in terms of the Market Value of the Going Concern (MVGC or “going concern”), which includes:
- The real estate
- Tangible personal property (FF&E)
- Intangible assets, or business enterprise value (BEV)
BEV includes the value of operations, work force, licenses, contracts, and reputation, among other things. These components may increase profitability, but they are not real estate and in many jurisdictions are not taxable.
For property tax purposes, the central question is: How do you separate the business value from the bricks and sticks?
Allocating Value to BEV: Common Approaches
There are a variety of methods that can be used to allocate the value of the BEV, which include:
- Cost Residual Method
Often used for specialized properties, the cost approach is applied to determine the depreciated value of the tangible assets and the land. When these costs are less than the overall value of the going concern, the residual value is allocated to the intangible assets (BEV). Assessors may overlook the significance of external and functional obsolescence, which can artificially inflate property values.
- Lease Coverage Method
This method estimates the value of the real estate based on lease agreements of similar senior housing developments, allocating income between the leased fee and operating business. - Management Fee Capitalization Method
This method capitalizes the management income, which is the income received by the management company for operating the facility.
The Bottom Line
While the demand for senior housing bodes well for the performance of this property type in the near term, increased assessments result in increased tax burdens. Property owners seeking to reduce assessed values need to be aware of the importance of effectively allocating each component of the going concern: real property, tangible personal property, and intangible assets (BEV). Moreover, property owners should be mindful of assessors relying solely on the cost approach and failing to properly account for external and functional obsolescence.
If you have questions about whether your multifamily or senior living facility is over assessed, Jones Pyatt Law can provide a property-specific analysis and advise whether appealing the property’s valuation is likely to result in tax savings. We represent commercial real estate owners and operators to reduce and mitigate property tax burdens in OH, MD, PA, IN, MI, MO, TN, and KY.