I can't defend my reserve number on a 12-unit that's 70 percent voucher
Working through an underwriting problem on a 12-unit that a seller describes as 70 percent voucher occupied. Contract rents average 1,180, HAP portion averages 790 of that, so roughly 6,600 a month arriving from the authority across 8 units and 3,150 in tenant shares plus 4 market units at 1,290.
Where I keep failing is the reserve. On a market building I'd carry vacancy at 7 percent and credit loss at 2. On this one the credit loss on the HAP portion should be near zero, but I've got two exposures I can't put a number on. First, HQS abatement risk, which is occupied vacancy, no rent and no turnover opportunity. Second, the payment standard freeze problem, where contract rents sit above a standard that stops moving and my top line goes flat for years while expenses don't.
The second one is what actually kills the model at a 10 year hold. If I assume 2 percent rent growth on the voucher units I get a deal. If I assume zero growth on those 8 units for years 3 through 7 I don't. I've got no principled basis for choosing between those, and the seller's proforma obviously uses the first one.
Has anyone found a defensible way to model payment standard growth over a hold period? Historic schedules from a single authority feel like too small a sample, and I'd rather know I'm guessing than pretend I'm not.