Case study model
Hi all,
Posting in this forum for obvious reasons and hoping this isn't too stupid a question. I'm currently working my way through a real estate case study and I have been tasked with modelling a multi-family apartment asset. Amongst the criteria for the asset is the following statements:
- Capital: assume USD1,000 per unit for deferred maintenance capex items (resurfacing, roofs, railings, landscape, rehabilitation, plumbing).
- Make your own assumptions in regards to any additional value‐add/renovation capital needed
to execute the proposed business plan for the asset. - Taxes will be equal to 1.0% of acquisition price in Year One.
In regards to the Capital point above - could someone explain how this fits within a relatively simplistic cash flow model? I.e. Are these the criteria for capex requirements? My assumption was that USD2,000 should be budgeted per year for capex items.
In regards to the point about Taxes, should I assume this 1% charge only in Year 1 and revert to ordinary tax levels beyond this?
Any insight or help would be greatly appreciated.
The additional capital for renovation would be included in your total Acquisition Cost. If you purchase the asset for $10M but plan to do $1M in renovations, your total loan would increase beyond just the purchase price and your acq cost (excluding fees and such, keeping it simple) would be $11M. You would then draw from that $1M over a period of time to renovate the property.
For taxes, pretty straightforward: in the example above, 1% of $11MM is $110,000. You would then grow taxes by some % each year from here on out. This would vary depending on the county/state in which your asset is located. For a simple case study model, you could probably just grow taxes at 2-3% per year and be fine.
bd.charles - thank you for such a prompt response. That makes a lot of sense - replacement reserves aren't mentioned elsewhere in the case study. If I may ask - are 'replacement reserves' synonymous with capex in this context? i.e. they fall outside operating expenses as a line item?
Also, do you have any comment on the query regarding tax?
I guess in the context of your case study you don't have to label it replacement reserves, but this is where we put major DM items/CAPEX items we know we're going to need to replace. We usually have a specific $ amount per unit as a baseline for our replacement reserves number, and then we alter this number depending on what we uncover during due diligence. Lenders will often require a certain number for replacement reserves depending on the age/condition of the asset. Whatever you call it, it needs to be below NOI.
Great response. Quick correction: I believe the case study is asking that ad Valorem taxes be 1% of purchase price, not total cost. So it would be $10MM * 1% = $100,000.
Just making sure the OP doesn't fudge that one up.
You're right! Purchase Price =/= Total Acq Cost. So 1% of $10MM, or $100,000.
Hi, I Have a newbie question- in your example, CF for year 1 is $844, 212. If I am a lender, would I even care what the CF is? or Would the NOI after deducting non operating expenses (2M) be the most important metric for a lender? My reasoning was that it is from that amount debt service will be paid and that amount will be used to calculate dscr and debt yield.
Secondly, is that example a typical example of a multi family model? Would you have ten sheets of that detailing cash flows for ten years and a summary sheet for main points such as irr and npv? Seems pretty basic, is office and retail modeling much more complicated due to non homogenous leases, expense stops, reimbursables etc? Thank you for your help!
It really depends but most lenders will look at DY and DSCR thresholds before lending, with an upfront reserve for CapEx / Interest / TIs whatever.
To your second point, this is just a small snapshot of a much larger model.
Thank you to all for your responses which have been very helpful. I have two more queries which you are more than welcome to ignore (after all the case study was assigned to me and not WSO!):
Firstly, following up your comments on Capital costs, should my Uses (in Sources & Uses) therefore include: Acquisition price, Fees (etc.) and CapEx and Tenancy Improvements?
Secondly, what would you approximate the interest rate for a senior loan to this property? (Californian, multifamily, US$30M asset value, 60% LTV). I'm based in Europe and finding it difficult to get an estimate - currently assuming 4-5%.
You'd have initial CapEx as your construction/rehab in your uses and the TI to get your initial tenants in place should be in your uses. After that, you should have a replacement reserve line item setting aside money for future capex.
It's hard to say what the interest rate would be. That's dependent on how likely the project is to pay the lender back, the financial position of the borrower, and if it's consider a construction loan or not. It might be as low as 4% but could go as high as 7%. If you need to do some sensitivity analysis for this, that could be one thing to check.
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