Construction/Capex Cost, Operating Expense, and Other Income Sizings

There are a number of readily available resources out there to pull from for rent/sales assumptions, leasing assumptions, and capital markets assumptions. Real estate taxes, insurance, and management fee assumptions are either standardized, or fairly easy to determine as well. I am curious as to how those of you with operators and developers go about formulating some other key assumptions that are more difficult to size up. In particular, it would be great to hear some thoughts on the following:

  1. Cost sizing, whether it be for ground-up construction, redevelopments, and/or major capex programs. How do you go about your initial sizing and how and when in the deal process does the assumption typically get refined? (i.e. (i) initial sizing based on _ with _% owner's contingency, (ii) first refined at _ stage based on _ with a reduction in owner's contingency to _% as costs firm up, etc.).

  2. Controllable operating expense assumptions (non-RET, management fee, insurance expenses). How do you go about sizing these expenses for deals where you do not have historicals to piggyback off of (in cases where the business plan is ground-up development or adaptive reuse)? Please leave out answers related to expense margins, as I do not find these all that accurate for sizing.

  3. Other income sizing. Some brokers provide solid other income surveys, but curious if there are other good ways to size these up.

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The simple answer is you vet these assumptions through third party experts in each discipline (unless you work for a group that vertically integrates construction and prop management). Unless I am misunderstanding your question:

  1. Hard cost assumptions: estimates from third party GCs, may require precon fee. Hold 5% design cost contingency, make sure you understand who is carrying hard cost inflation, insurance policies (builder's risk, OCIP/CCIP), design contingency, etc. Unless you may a significant pre-con fee, most GCs will just use in-house estimating/quantity take-offs based on comps to price your deal based on available info on total size, wall areas, windows/materials shown on renderings, etc. You will not get real "bid" numbers from subs.
  2. OPEX--talk to property managers who work in similar product type or for direct comps and ask for their feedback. Most managers are willing to do this for free if you give them a look at the business once the deal is completed.
 

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