Modeling multifamily concessions and renewals
Hi guys so I’ve tried searching online without the best results. I’m working on a multifamily real estate model right now and need help modeling concessions and renewals.
I’m creating a 12 month cash flow statement
If I’m given assumptions $50k in concessions, renewal conversion of 60% and renewal increase of 6%, how would I model that??
I can’t find a great answer online so some pro guidance would be much appreciated. Im learning right now. Thanks
What type of firm is this for or what city is the position in? Also doing a multi modeling test and wondering if we are doing it for the same position lol (unlikely though).
Gotcha. I’m interviewing for texas position. I would reference the adventures in CRE value add model. I believe they have the functionality built in to accommodate what you are referring to. It is either their value add model or multifamily renovation model if I remember correctly.
I would probably have the top line as gross potential rent if all units were leased up and rent bumped and then discount from there using if(and statements. Downtime, concessions etc.
There are many directions to take this so I’ll try to distill this as best I can.
First, it’s important to know if you model rental income off of the rent roll or unit mix. You asked about “processing the rent roll” so let’s take it from here.
Second, your questions are very specific so I’ll assume you have the other key inputs like Gross Potential Rent to drive calculations for things like Vacancy & Credit Loss and Concessions, Loss to Lease if you model potential rent off of market rents instead of in-place rents and the like.
(1) We have a 60% renewal conversion which we’ll treat as the renewal probability assumption. For the units expiring within the 12 month period we will assume a 60% probability of renewal and therefore find the expected value of the pro forma rent by multiplying the in-place monthly rent x 60% x 1.06, which accounts for the 6% increase in the renewal rent. Since in this step we’re essentially forming our market leasing assumptions, the speculative leases for your units will drive your Gross Potential Rent.
Note: while it’s more common to model commercial leases in Argus using “New/Renew” probabilities, it’s more common for multifamily to model a % growth on your potential rent which is then offset by a General Vacancy %.
(2) You have $50,000 in Concessions which you can either amortize over the 12 months or key in as a % of Gross Potential Rent. Also keep in mind that it’s more common to find concessions offered to new prospective residents and uncommon to renewing residents so if you’re assuming new lease up (and Turnover Vacancy) your concessions should show up in the months with new lease up activity.
(3) Lastly, as someone else suggested, I also encourage you to look at the models on Adventures in CRE. The Excel models are free, the “Accelerator” course is not. While your questions on their own are clear enough to answer, you’re likely having a tough time finding the answers online because the conventional approach to MF pro forma modeling for things like concessions begins with creating the unit mix and then making assumptions for Absorption & Turnover Vacancy.
Hope this helps.
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