Modeling Apartment Downtime

Question

I am a first year analyst that most focuses on office/retail but have been asked to model a value-add apartment deal. The business plan involves renovating units upon lease expiration by replacing kitchen/bathroom appliances, sanding/staining floors and upgrading electrical fixtures.

My question is what do you think would be a reasonable downtime assumption? I was think something along the lines of 2 months, but wanted the take of someone more experienced in these types of deals. Also, should downtime vary by apartment size? This particular building has Studios, 1 BR and 2 BR units.

pudding · Accepted Answer

"hard assets"
Do you go through all leases to determine you can raise them as much as you want/have the ability not to renew?  or do you sample select a few?

Also, how do you determine how long it takes for it to get to the point of stabilization?

If you're doing a loan with a cap-ex budget, how do you structure it so that you're not continuing to fund cap-ex dollars without them achieving their projected rents and then being over-levered?

Answering your questions one by one. 
1) You generally get access to all the leases in DD, occasionally before.

pudding · Answer

"pudding"
"hard assets"
Do you go through all leases to determine you can raise them as much as you want/have the ability not to renew?  or do you sample select a few?

Also, how do you determine how long it takes for it to get to the point of stabilization?

If you're doing a loan with a cap-ex budget, how do you structure it so that you're not continuing to fund cap-ex dollars without them achieving their projected rents and then being over-levered?

Answering your questions one by one. 
1) You generally get access to all the leases in DD, occasionally before.

Mogul Khan · Answer

It really depends on your SOW. Based on what you're mentioning, i'd give it 2 weeks for reno work to be conservative for any of the units, size isn't really the issue. Any additional time to get it leased out are assumptions you can grab from management.

It really depends on your crews, material supply, and required measurements. Paint, sanding/staining, electrical fixtures, and kitchen/bathroom replacements can all be performed within 1 week depending on extents of work.

pudding · Answer

Downtown depends on the scope of work. You should talk to the contractors / PM who will be managing the renovations. If it is a 3 day quick Reno, 1 month might make sense. A 3 week Reno, you might want 2 months of downtown.

In regards to the above comment about assuming a set number of renovations per month. I think that way works, however, it is better suited to large complexes with a staggered rent roll. With 15 units, you are better off doing it on a month by month basis as the leases are probably not as evenly staggered.

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Modeling Apartment Downtime

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