I wanted to reach out to the board here to get some input on how others (especially lenders) U/W multifamily deals. I work for a boutique capital markets brokerage and I’ll copy how we u/w deals below. I’m told that these best practices match even our most conservative correspondent lenders.
These best practices apply to properties in the greater SF Bay Area and greater Los Angeles area that are 10 - 200 units. While I know that many of you do not primarily focus on this region please share your best practices anyways so I can compare.
Annual Expenses
RE Taxes - (1.15% - 1.25%) of purchase price if acquisition. If refi, look up tax bill in county website.
Insurance - (0.30 - 0.50 per sq. ft.) All else being equal, the older the property the higher the insurance.
Utilities - borrowers actual in prior year plus 3%. If not data, roughly $1,000 per unit. (gas, electric, water/sewer and trash).
Repair & Maintenance – u/w greater of prior years’ actual + 3% or 750 per unit. (includes R&M, supplies, landscaping, etc.)
Management (Off-site) – (4% - 5%) of EGI.
Management (On-site) – (2%) CA state law required for buildings greater than 16 units.
General & Admin – u/w greater of prior years’ actual + 3% or 150 per unit.
Capital Reserves – 250 per unit
1) Yes CA is a disclosure state. I wasn't even familiar with a non disclosure state but I found that every state is a disclosure state except for the ones listed below.
Alaska Idaho Indiana Kansas Louisiana Maine Mississippi Missouri Montana New Mexico North Dakota Texas Utah Wyoming
2 & 3. I find using a 5% AM fee over the top as well. Do you normally combine both mgmt fees and call it 6%?
That’s good to know, I should probably save this list somewhere b/c I waste way too much time underwriting property taxes. Its difficult because the assessment ratios, mill rates, reassessment years, all vary dramatically state by state. If any professionals intend to use this list above, I would proceed with caution b/c we have bought an asset in Indiana and the assessors did find the purchase price despite our efforts to hide it (I'd recommend entity level purchase here, if you can pull it off).
I've never seen anyone combine a property management and Asset Management fee. Most companies consider asset management a corporate G&A (overhead) where as an property management fee is a property level expense.
replacement reserve usually depends on how old the building is and the quality of the previous owner - a public reit owner is probably gonna take better care of a building than a private one.
Regarding RE Taxes, for a refi I look up historical bills as you mentioned; however, for an acquisition I look into the specific jurisdiction's method of assessment and calculate the taxes myself based on the purchase price, etc. This is typically how you will see it done in the appraisal, so we do our best to be thorough to avoid questions later from the lender.
Insurance: we work with a lot of experienced borrower's who simply get an insurance quote from their agent and that is the value we underwrite too.
All operating expenses we pick through line by line and sometimes make an adjustment but a 3% escalation is pretty common.
This all depends of course on what type of lender you are shopping it to. For GSE's they all have their own underwriting standards, so everything changes.
Agreed with tsingle on the RE taxes. Have a note card in my desk with all the local counties and state property tax rates.
We also try and break out individual utility/repair&maintenance expenses as much as possible. Main one being snow removal. If you're just doing a general 3% increase and the year before was a tame or extreme winter...
Right, it is important to review the historical trend for each account on the past statements. We tend to look at the past three years in search of any anomalies and make adjustments when necessary. Snow removal is a great example, but there can be oddities with any line item. Another common one is legal where you may come across a large expense one month due to an uncommon lawsuit. This expense should not be trended at 3% as it is not reoccurring.
Put another way:
1 Multifamily Underwriting Best Practice - Attention to DetailI have been increasingly seeing T3 being used for revenue. I think its so bankers can give more credit to the properties. I do personally like T12 as you get a bigger picture.
Taxes: Competent lenders will look at taxes in CA on a refinance as greater of the millage rate * loan proceeds and the current bill trended up, typically by 3%. If the property gets foreclosed then taxes will be adjusted up based upon the loan amount as the purchase price.
The lender's basic UW is this - Rental Income T-3, Other Income T-12, Expenses T-12+3%. That works if it is a standard stabilized deal for the most part.
Underwriting Retail/Multi-Family Portfolio (Originally Posted: 12/19/2017)
Currently reviewing a 20 property portfolio and each property has a seperate tab that lists rent role, noi, and assigned cap rate provided from seller (so 20 seperate tabs). How do I go about underwriting this as a whole to gauge debt potential for a incoming buyer?
bump
I encourage you to take an Excel modeling course.
If you are trying to sell a 20 property portfolio and can't give a rough estimate of debt capacity by using rates, amortization, and a minimum DSCR you're gonna have a bad time.
As you may or may not know, a 20 property portfolio has a bunch of moving pieces. Modeling to reflect this isnt the most straight forward. Seller may want to separate certain assets and sell individually while bundling others vs selling portfolio as a whole at a discount. Then comes the question of valuing some properties that have significant value add/ development potential with corresponding air rights etccc and modeling to reflect that. If it was summing up the total noi and assigning a cap rate to entire portfolio then i wouldn't have asked for advice. thank you though.
Your post said you had three things, a rent roll, NOI and assigned cap rates. Nothing about air rights or parceling properties out of the portfolio. Once you have an in place and/or stabilized NOI, then sizing debt should be simple
You said debt potential... not value.
Value each individual property based on the cap rate in their respective market and cash flow from ops. Use a comfortable LTV and bingo.
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