NCHMA Guidelines for a Rent Comparability Study

Introduction

Purpose of a Rent Comparability Study

A rent comparability study is often required as part of a market study for affordable and mixed-income rental developments. The rent analysis may be used to evaluate or establish Section 8 rents, ascertain the rent advantage for LIHTC and workforce units, or to determine the achievable market rents for unrestricted units. Depending on the type of project, the determination of the market rent potential can be an important first step in assessing the feasibility of a development.

Selecting Comparables

The first step in any rent analysis is the selection of the comparable properties (see NCHMA white paper) and gathering detailed information on the rents, unit sizes, unit and property amenities and utilities. Ideally the properties would be similar in location, age, condition, design, bedroom and bathroom count, however this is not always possible, particularly in rural locations, or in locations that have limited rental stock. Therefore, after selecting the best comparables available, adjustments are typically necessary in order to fully compare them to the subject property.

Rent Adjustment Grids

The HUD 99273-S8 and HUD 92273 are two standard rent adjustment grids used by appraisers. The HUD 99273-S8 is used for HUD Rent Comp Studies for Section 8 renewals. HUD provides detailed instructions on how to complete the grid for this particular purpose in its Section 8 Renewal Guidebook. However, this grid is also commonly used in multifamily appraisals and market studies and in some cases is specifically requested by a lender. This rent grid has 39 line items for adjustments, items that a tenant may consider when making their housing choice and the analyst should estimate a value that a typical renter would place on that item.

Factors to Consider for Rent Adjustments

There are a significant number of factors that influence rent, and each one should be carefully considered and supported by market evidence where available, or by discussions with leasing agents and apartment owners. It is important to consider the perspective of a tenant in applying these adjustments. Adjustments should be market specific – and not generic or applied universally. For example, an outdoor swimming pool may command a much greater premium in a warmer climate compared to one where it can only be used a few months of the year.

Some of the main items to consider are as follows:

  1. Initial Rent. Sometimes properties have a range of rents for a single unit type, that may vary based on size, lease term, floor, level of renovation, etc. Where possible, use the rent for the unit that is most like the subject and requires the fewest adjustments. Furthermore, rents can vary depending on the term of the lease. The rents for a ten-, 12- or 15-month lease could vary significantly so it is important to confirm and adjust accordingly.
  2. Concessions – Is the property offering concessions? Is it during the initial lease-up, how long have they been offering concessions and how long are they expected to continue? Are the concessions for all unit types? Should the full concession amount be deducted or a partial amount?
  3. Structure/Stories—Typically elevator buildings are more desirable—however the level of adjustment could vary by market and by tenant. For elderly residents it is not only a desirable feature but an essential one. A townhouse unit may be considered superior to a walk-up or elevator building. The third-floor units in a three-story walk-up could command a premium.
  4. Condition – This can be a significant determinant in a tenant’s choice of rental properties and the value associated with individual apartments. Tenants often value the condition of a renovated or newly constructed property as compared to one that exhibits signs of physical deterioration due to age. This includes type of cabinets, countertops (quartz/granite/laminate), flooring, appliances (stainless steel vs. black/white), backsplash and type of faucets.
  5. Location – Some items to consider include average rents in the immediate area, home prices, median household income, school rankings, walk scores, proximity to public transportation, ease of access to highways, proximity to major employers, schools & colleges, views and crime levels. Sometimes the locational characteristics only become evident upon inspection.
  6. Number of Bedrooms/Bathrooms – In some cases there may be a limited stock of single room occupancy, studio or three-plus  bedroom units in a market, and it is therefore necessary to adjust for the lack of, or the additional, bedrooms. The discount for a studio unit compared to a one-bedroom unit may be different than the premium between a two- and three-bedroom unit. Sources of data for the adjustment could include the difference in Fair Market Rent between unit types (adjusted for utilities) and/or differences at properties that offer both unit types. Supplemental data may be provided by apartment listings.
  7. Unit Size – Adjustments for square footage can be estimated by comparing the same unit type with different unit sizes at the same property, also known as a paired rent analysis. The analyst should keep in mind that unit size reported by management at the comparable could be over- or understated as they are typically referring to marketing material as opposed to actual architectural floor plans. Unit size adjustments may also be impacted by the type of unit. For example, units in renovated mill buildings can often have much larger unit sizes compared to new construction. While renters do value the additional space, the extra amount they are willing to pay often diminishes as the size increases. Further, due to their large size and ceiling height, the heating and cooling expenses can be much higher. In this case, a size adjustment may need to be capped.
  8. Unit Amenities – (microwave/dishwasher/in-unit washer/dryer vs. laundry or hook-up)It is important to consider the value of the amenity based on the tenant and unit type. For example, a dishwasher and in-unit laundry may be worth more in a three-bedroom unit compared to a studio unit. In a new development, certain amenities may be considered standard and without them the property may not be able to compete. The location of the common area laundry should also be considered. Is it within the building and easily accessible? Or does a tenant have to go outside of the building to access.
  9. Site Amenities – Parking (garage/surface/gated/fee/availability of street parking), Fitness Center (size/equipment), swimming pool (indoor/outdoor/seasonal), pet park, Media Center, grilling stations, clubhouse, Business Center, storage. Is there a fee to use the facilities? Is it mandatory? Is it an annual fee or a one-time fee?
  10. Utilities – What utilities are included in the rent and what are the responsibility of the tenant? Is it gas, oil, or lectric? You can consider the utility allowances published by HUD and/or speak with the local leasing agents and property managers regarding a reasonable estimate of what tenants could expect to pay for utilities.

Concluding at a Market Rent Estimate After Adjustments

  1. Is the range in rents reduced after the adjustments? If the range is greater, then it may indicate that some of the adjustments are over- or understated. If the range is less, then that may indicate support for the adjustments completed.
  2. What are the most comparable properties and which properties have the fewest adjustments?
  3. Is there an outlier? If so, why? What is the range of rent without it?
  4. Are all of the adjustments supported by market evidence presented in the report and in the summary sheets of the rent comparables selected.