Board of Equalization Meeting   12/5/2023

We call this meeting of the Board of Equalization to order.

We have a quorum.

Four of our five members are present.

We will wait on the approval minutes later in the meeting.

Let's go ahead and call the first case, our first and only case.

This is application number 95, PID 55879.

The applicants continue, apartments LLC.

Before we get started, I'm going to just go through like this opening spiel.

We're the Board of Equalization.

The Board is comprised of five citizens of Albemarle County.

We're appointed by the Board of Supervisors.

We're an independent board.

Here's how the hearing will work.

You'll have ten minutes to select your case.

The assessor will have seven minutes to present theirs, and you'll have three minutes for rebuttal.

During the hearing, we may stop to ask you to assess your questions.

Please note that for Virginia law, there is a presumption of correctness, so the burden of proof is on the evidence.

What was it again?

I'm going to square in the witnesses.

If you're going to testify, please raise your right hand.

Do you solemnly swear or refer to the Testament with oral and documentary which are about to give will be the truth and the whole truth and nothing but the truth?

I do.

All right, appreciate it.

All right.

So my name is Phil Krebs.

I work with Newcastle Development Group.

The case is regarding all the new apartments for CCLC is that we want the newly built apartments off Peter Jefferson Parkway across from Martha Jefferson.

You've probably seen the enormous retaining walls if you drive it on 64.

So as of really yesterday, it's about 80% leased up and it's doing well.

The assessor reassessed the property effective November 1st from I believe 48 million to 71.1 million.

Feel free to correct me if I misstate anything.

And I really just wanted to bring up two points, two contentions regarding that assessment.

So if you have my packet,

which is just two pages and some exhibits.

It's really regarding existing vacancy and how that would impact its

value on an open market valuation, and then two capitalization rates.

So that first part, I missed the assessment form.

I can say certainty, that 4.6 million in revenue, which the assessor applied, and then he applied a 4.25% cap rate.

So you can kind of skip that assessment part.

But the points that I wanted to make

are one that on an open market, a third party buyer would discount the price paid for this property for the remaining 15 to 20 percent occupancy that would be needed to achieve stabilization.

Right.

So

We contested, or we mentioned that point when we received notice of the reappraisal.

And Peter said, a prospective buyer would not consider the vacancy as an issue, but would buy the property based on its potential.

We agree entirely.

You know, if I were a third party buyer, I'd go and I'd say, okay, here are the rents you're getting.

Here's what I think is a stabilized income.

Here's the market cap rate.

And that's the valuation.

of the property wants to achieve stabilization.

But I would also lower my purchase price for the revenue that I missed out on.

You know, for those, I think our property managers expect this property will be leased mid next year.

So this would then be eight months of reduced occupancy relative to that stabilized value, right?

So

doing some quick math, I thought it was about 300 to $500,000 in lost revenue.

Plus in talking to brokers, I know that a buyer would apply a discount as there is risk involved with taking that property from 80% lease to 100.

And obviously that's not like, this isn't going from 0% lease, this isn't nothing to 95, it's 80 to 95.

So I didn't apply anything significant on that, but I'll get to that later.

But that's to say that a third-party buyer would discount that purchase price for the existing vacancy.

Now, the second point is on the market capitalization rates.

The cap rate applied to the stabilized revenue here was 4.25%.

If you go to page three of my packet, I pulled some data from CoStar, which tracks transactions, prices, and cap rates.

And you can see that there's in that blue line, there's Charlottesville Port of Livestock.

This is a brand new product.

It's very good.

Is it the best in Charlottesville?

Probably not.

I mean, 600 plus man is demanding rents that are twice what ours are, but we, you know, it's new build.

It's very nice.

So I went to that blue line.

You can see that the cap rates bottomed out kind of the end of 21, beginning of 22, around 5%.

And as the chart indicates, currently that's all the way up at 6% and projected to go upwards.

I don't want to go too deep into the macroeconomic environment, but interest rates have gone way up, cap rates have gone way up, and there's no transaction volume.

You know you might argue that what is truly a market cap rate is actually well in excess of the six percent indicated.

So I'll also add that

We have other properties in Albemarle County, which we believe are in general fairly assessed.

And those cap rates, I believe, are more in the range of 67%.

And we think that is a more fair assessment for this burn assessment.

So in conclusion, I came up with my own valuation.

I used a

Quite aggressive, stabilized future NLI for year end 24.

So this is 13 months from now.

3.75 million, that's conversations with our property management team who are kind of

Optimistic, but once you staple on a market cap rate of six and a half percent, my opinion of a fair year-end valuation was $57.7 million.

And then I applied an additional discount of $1 million, which consists of the $300,000, $500,000 in loss revenue as we achieve stabilization, plus an additional approximately 1%

to get to 1 million.

And that's for the retroactive assessment for 23.

So that's all I have.

No, we appreciate it.

But yeah.

There was a

Was there a request by the board, by the assessor's office for operating data for Archer and Brookhill and Albemarle?

And was the data provided?

Yes, I believe the data was provided.

I think so we have been switching our property management company.

So there may have been delays on that if that shows up in minutes or something.

Any other questions?

One quick question first.

So as of 11-1, were all the units, I know all the units were not occupied, but were they all reasonable?

Were they all complete?

They are complete, yes.

Actually, I'll have one slight addition, which is that remaining 20%, especially going into winter,

It's hard to lease up.

Typically the best units lease first, you know, the high floors with the mountain views.

And then it's kind of the remaining not so great ones that take a while and they lease for less.

So our property managers hope to lease that up on the next year.

It could be longer, it could be shorter, but it'll certainly be for lower rates than our existing units.

Good morning.

How are you guys?

So this is a 250-unit Class A apartment.

We have our Pantops, beautiful location.

It's got a good amount of amenities.

It commands a very good rental rate.

As of January 1st, 2023, we had estimated the property was 65% complete and the partial assessment for the property at that time was $48.2 million as of January 1.

And just to clarify that, we calculated in January that the property was worth $71 million, but took 65% of that because we have to pick up whatever percentage is complete as January.

So it's not that they're saying the value is different now, we're just saying more of the value, the property is complete.

That's okay.

So a request for reduction in the assessment estimated that the value of the property was only $59 million because of the lease up that did not commence until April of 2023.

The property owner did use two properties for proof of inequity.

That's Archer, Brookhill, and Avemore.

For the 2023 assessment, we did not receive any data from actual data or statements.

The assessments represent for those properties represent the assessor's best estimate without having actual operating data.

In addition to that, we

The owner requested at the first level review that said that the newly constructed properties are based on partial income of the property during the lease up period.

We don't address the lease up period for these properties.

It's considered a cost of development.

It's not considered in the scenario of our direct cap analysis.

And it's done that way for all properties.

The property rent roll dated September 30th had an occupancy of 76.31%.

We estimated based on costar absorption in our market over the past 12 months has been 258 units or approximately 21.5 units per month.

So the current lease off would be expected to be complete fairly quickly.

We have

fairly strong and stable market with a current vacancy rate of 4.1% for apartment communities and an annual growth rate of 4.3%.

So we don't have an economic imbalance in this market for this property type.

As of November 1st, we estimated that approximately 14 more units would have been absorbed.

We were a little conservative.

We just said, let's do it less than the 21.5 that CoStar is reporting.

And that would have resulted in an occupancy of approximately 82% as of the effective date of the assessment on November 1.

I note that the package that was provided to us this morning indicated that their, I believe their occupancy in November was 79.1%.

So it was fairly close.

The worksheet is included on page 5 of your packet and we provided a worksheet to Mr. Prebs as well.

We estimated income per unit at 18.401 based on the properties initially reported asking rents.

and we calculated the projected potential gross income on the basis of those rents and unit types using a 5% market vacancy and came to 18.401 per unit.

That is less than what is being reported on the performance as of the rent roll on September 30th

which indicated $21,824 per unit based on the current rents collected of $363,754 per month.

And I do want to point out while we're at that point that that indicates, actually share this with you.

Sure.

So they can see that page right there.

There's a information that was provided by that.

But if you look on page six, that $363,754, that was included for the monthly income for the property in September.

And that already shows 4.3, I mean times 12 there.

So since that's a monthly amount is $4.3 million annualized, which is based on the current vacancy.

based on the current vacancy exactly at that time.

It's slightly less than the number we used as stabilized.

And it's far above the amount that the applicant used on his analysis.

So I'm not sure.

Can I interrupt?

That's not operating income, not revenue.

so I think so we applied we grossed up the revenue to potential gross of five million seven twenty applied a five percent market vacancy and got an estimated effective gross income at five million four three four we used a estimated operating expense of six thousand per unit which is a million five based on 250 units that gave us an operating expense ratio of thirty two point six before the deduction for reserves

The replacement reserves were, based on our schedule, were $300 per unit.

And after deducting further reserves, our operating expense ratio is 34.2, which is in line with the rest of the market.

Through the 2023 assessment, we had cap rates for Grade 1 properties established at 4.25%.

The cap rate schedule is included on page 7.

of The Practic, and we developed these cap rates based on survey data, based on comparable sales, and the cap rate used at 4.25% is supported by the survey data as well as the sales.

We had local sales.

We had one local sale that reported, the cap rate we used was a 4.5.

It was a grade 1A, not a 1,

and actually the reporting cap rate on that sale was a 4.3.

The remainder of the sales are regional and they range from the low to threes to six and a half based on the properties.

and they're all over, they're Richmond, they're Virginia Beach, Enrico, Chesterfield, throughout the market area.

So we had support for this cap rate that we used for our grade one properties based on the data that we had established as well as the PWC forecast data.

And at this point, Anna and Zatz,

The assessments that we're doing for these supplementals are really, it's time during the year for when it's completed, but it's really based on the assessment of January 1st for the data that's available before that.

That Deb just shared with you that interest

Capra, the interest rates were higher, Capra, in 2023, 2022, we're not seeing that cap rates are actually going, that doesn't really apply to this, because of the timing of the damage.

As you were saying, and you did not pressure tap,

We would establish new cap rates as of January 1, 2020 to use the 2023 cap rates that were established.

Any questions for you?

As of year end 2022,

My financing rates have risen from 0% to 5.3.

So what is a true market cap?

I would argue that cap rates at that time had already.

I will say if we're retroactively applying about

At that point, the property was not completed.

And I know that that's what the initial assessment was.

65%, but as of.

It's been delivered.

It was 0% occupied.

at the very least should fully account for the fact it would be.

And that's what the 48 does.

And that's why I think 48, I don't understand 1 million as of November.

And just so we're clear, back and forth within our office.

Are you saying that the last six months are at 71.1 or the last two months?

I just wanted to confirm that.

That's what I thought.

But anyway, that's all to say that if we're going retroactively based on data and our assumptions, our project wasn't delivered, there's 0% occupancy, and I think that should also be back to them.

Otherwise, I understand your logic.

Anything further on the revenue disruptions?

We have this 364.

You have a couple of figures in terms of what it is until November.

Yeah.

That's just suggesting that the 4.6 actually, if you're 100% occupied and then they take off the 5% market vacancy, it would actually, based on the number you're giving, it would actually be higher than 4.6.

Is that accurate?

So correct me if I'm wrong.

I think the 4.6 was based on kind of

pre-lease rental estimates, right?

Their math in general for the 5.4 makes sense.

Okay, application number 95.

Based on what I understand, the scope of the January 1 assessment to be in the supplemental assessment, I don't think we can revisit the question on the cap, right?

Yeah and we were consistent with that and we have the sale from December and that's been I think with our purpose of equalization I think that's correct.

I think we have to if we're not looking at November 1st cap rates then

That's our 4.25 is what we've been at for the last one.

So then the question is, any issues with revenue and the idea of assessing this property at 100%, which is 95%, I guess, when it's only being at least at 82%.

The one thing I did note in dimensions, the NOI he's giving us is a much higher number than

And actual revenues are higher to the extent that we have it, right?

Right.

It's persuasive to me that we evaluate the unit based on its potential rates.

That's what he's saying that potential buyers will do.

It's the way we've done the other assessments on monthly family properties.

I don't think we really want to be wading into the vacancy rates in any particular year and adjusting based on that.

It makes sense to me to use kind of the 5% vacancy estimate.

And in fact, that will inure to the benefit of the property owner on some years, right?

I mean, some years they'll leave that estimate.

That's an average.

I'll just calculate this real quick based on his stabilized future NOI.

And if we use the 4.25 cap rate, it will be my end.

So obviously it will be a lot more.

Any other discussion?

I move to affirm the assessment that $5,750,000 land $65,432,400 worth of improvements and a total valuation of, or total assessment of $71,182,400.

Do I have a second?

I second.

Aye.

I think that's all we have for today.

I have a motion to adjourn.

Move to adjourn.

Second.

All in favor?

Aye.

All right.

So I just wanted to mention if you all, whether you plan to stay on the board for next year or not, if you would let your board member know so they