Condo Experience

youngunner's picture
Rank: Orangutan | banana points 326

Hey - currently developing a condo project model. Does anyone have experience building one?

Main questions are: how many units are you typically expecting to sell per year? Or does it even work like that; are you looking at income at a more granular level (ie. units/month)?

As you're winding the units down, how are you paying taxes, and what part of operations (ratio, standard % estimate?) is the project owner still paying, or is all of this supposed to be paid out of a reserve?

To confirm, owner is looking at the project on a 1-3 year time horizon... right? Ideally, all units sell ASAP to pay back investors, collect fee, and pay back any debt.

Any other points to take into consideration? Appreciate any insight.

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Comments (35)

Oct 21, 2015

Usually you will have a condo broker run an analysis on the market to determine what your sellout will look like e.g. 18 months, 24 months. Use that number as well as the psf they give. If you do not have the luxury of paying for the study, then ask the developer, or simply make the model dynamic enough to change the sales velocity as an input. You can also look at market analytics to determine the psf you are selling out.

I would model it out to include monthly sellout. Also, are you pre-selling the units or waiting to sell them upon completion? In a less favorable market pre-sales will result in fewer units being sold per month.

I am not 100% sure of this so please double check the following. I believe for a financing model you should put in the total building RE taxes, but for an investor model perhaps would could lessen the taxes base on annualized sellout's pro-rata share of the tax burden to reflect the transfer of taxes payed by condo owners..

Also make sure that you will either model the equity return at the end of the projects horizon(90% of the time) or if the equity will be payed back year-by-year to the equity investors.

Oct 22, 2015

[EDIT: This was in response to the OP. Not sure why it replied to someone else.]

I've actually built quite a few condo/TH models since I've been the point man on disposition of our residential land.

In principal it is not complicated, but when you start getting down into the details, it can be mind-numbing. But as you build it, keep it simple--go step by step.

1) On your left hand side of your model, set up your titles for your cash inflow and cash outflow lines. Annual cash flows are super simple but not very precise. From what I've seen, most builders are using quarterly cash flows since monthly cash flows is too granular. But I'm sure it varies.
2) At the top or bottom, input your sales/time period.
3) In a separate table, create a space for all of your inputs. Land development costs, amenities costs, sales prices, selling costs, tap fees, etc. You want to make sure your model is dynamic so that you can use it to analyze.
4) Remember that you aren't really supposed to escalate costs or revenues. The idea is that you're trying to understand what the value of the project or property is TODAY with today's costs and today's re-sale prices.
5) Real estate taxes are paid pro rata. A homebuilder will create a site plan and have lots subdivided. If a builder owns a lot for, say, 3 months in the year and then sells it to a homebuyer then the builder pays for 3 months of taxes. This calculation is absurdly complicated and is likely the least accurate of all of your inputs because it's impossible to say how the government jurisdiction will assess your property as you're building it. Fortunately, it is unlikely to materially impact your final answer.
6) Your discount rate is absolutely critical. It will vary wildly based on your specific location. With a little bit of experience, however, your discount rate should be pretty intuitive (it's not really something you look up in an index).

I built out a recent model that I can share with you. Basically, we interviewed the homebuilder/land developer who was bidding on the property to determine their inputs. Once we got their inputs we modeled out the NPV of the land to see if their offer was legitimate or BS.

Oct 22, 2015

If there is debt you'll Definitely want to factor in release provisions issued by the lender.

If your average debt per unit is $100k a door, the lender may want 110 - 125% of that sum to accelerate the payoff of the debt. Your big pops come at then end when you own the last bulk of units with no debt.

Additionally, HOA fees are a huge expense. The day you record your first sale the developer must now fund each and every units HOA fees monthly until sold.

Oct 22, 2015
PacNumber:

The day you record your first sale the developer must now fund each and every units HOA fees monthly until sold.

Interesting - I didn't know that. What happens if the building is transitioning from apartments to condos but isn't waiting until the building is empty to do so?

Oct 22, 2015

In a condo conversion it's only a condo project once the first unit sells. You can get your subdivision done, evict renters, map it, put deals in escrow and so on but it is not a condo project with obligations to pay HOA until the very first unit sells.

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Oct 22, 2015
PacNumber:

In a condo conversion it's only a condo project once the first unit sells. You can get your subdivision done, evict renters, map it, put deals in escrow and so on but it is not a condo project with obligations to pay HOA until the very first unit sells.

I don't understand this. My organization runs an HOA because we developed the project. From what I understand, we had no obligation to pay condo fees--our obligation was to collect fees, manage the property during construction, and maintain the facilities during construction. Condo documents are created by the developer and stipulate how things run during construction and sell-out. I'm pretty sure we wouldn't throw a stipulation in there that would require us to pay condo fees (routine, monthly payments) during construction.

Oct 22, 2015
Virginia Tech 4ever:

PacNumber:In a condo conversion it's only a condo project once the first unit sells. You can get your subdivision done, evict renters, map it, put deals in escrow and so on but it is not a condo project with obligations to pay HOA until the very first unit sells.

I don't understand this. My organization runs an HOA because we developed the project. From what I understand, we had no obligation to pay condo fees--our obligation was to collect fees, manage the property during construction, and maintain the facilities during construction. Condo documents are created by the developer and stipulate how things run during construction and sell-out. I'm pretty sure we wouldn't throw a stipulation in there that would require us to pay condo fees (routine, monthly payments) during construction.

I had never heard of it either, which is why it surprised me.

PacNumber, was that a local ordinance or something for your community?

Oct 22, 2015

If you condo 100 units, sell 1 of those units with an attached the HOA fee, who else would be responsible for paying the other 99 HOA fees? It would be the developer. You can't just pretend the HOA fees don't exist because you are the original developer of the condos. You have to pay the 99 HOA fees just like the 1 sold apartment has to pay his/her 1 HOA fee. Otherwise the building would fall into disrepair and then why would that 1 unit even pay their HOA fee if no one else is? As the units get sold, the developer is responsible for fewer and fewer HOA fees

Oct 22, 2015
cre123:

If you condo 100 units, sell 1 of those units with an attached the HOA fee, who else would be responsible for paying the other 99 HOA fees? It would be the developer. You can't just pretend the HOA fees don't exist because you are the original developer of the condos. You have to pay the 99 HOA fees just like the 1 sold apartment has to pay his/her 1 HOA fee. Otherwise the building would fall into disrepair and then why would that 1 unit even pay their HOA fee if no one else is? As the units get sold, the developer is responsible for fewer and fewer HOA fees

Uh, no, that's not how it works. The builder is responsible for maintenance and management of the building during construction and sale. The builder is not going to be responsible for making regular condo fee payments. In your model you set aside money for regular maintenance of the property/building. You don't set aside a line item that has you making 99 condo fee payments in January, 95 in February, 91 in March.

Oct 22, 2015
Virginia Tech 4ever:

You don't set aside a line item that has you making 99 condo fee payments in January, 95 in February, 91 in March.

Actually, this is exactly what I have seen.

Oct 22, 2015
prospie:

Virginia Tech 4ever: You don't set aside a line item that has you making 99 condo fee payments in January, 95 in February, 91 in March.

Actually, this is exactly what I have seen.

That's funny because I just interviewed 20 condo and TH builders in the last 9 months and none of them model it like that.

Best Response
Oct 23, 2015

All developers have their own modeling nuances. There is no set way to get to where you want to be. I think it is worth noting that the OP asked about modeling / projecting a condo model. Yes, in theory you would like to model as close to reality as possible, but as mentioned above, you can really go down a rabbit hole if you try to get too granular.

I think the best condo models I have seen / built / "sold the dream" to capital partners are ones that are simple, yet defensible. I think it's important to point out that a condo model vs. apartment model is essentially the same thing, except for the fact that there are additional costs for condo (more $ for building interiors, on site maintenance, warranty reserve, sales / marketing commissions, additional insurance, etc.), and when you sell, instead of capping NOI you are selling on a PSF. When my company underwrites deals, we almost always underwrite both apartment & condo, and even if we think we are going to do apartment, we will still get a tract map in place to provide flexibility down the road should we or the next buyer want to switch plans. So, as we are running this duel modeling tract, we extrapolate certain things from the apartment model to the condo model. Apartment expenses are a % of revenue one would collect, typically 25% - 35% depending on the size of the building (think economies of scale) or pricing point of the building (here in LA 8500 Burton way is crushing it on rents with avg. rent over $7psf., so from an operational standpoint they are operating at the lower end of the spectrum).

So, given the above, once I create an apartment model, I then take the estimated OPEX and assume that PSF is roughly the amount of what condo version will operate at. It's important to note that these operating expenses are once the building is stabilized. Given this, I have an input that shows % fixed while vacant to account for the costs of operating the building during lease up, say, 60 - 80%, depending on how much fixed expenses you will have (think RET, insurance, etc.). Regarding sales, for us we assume a stabilization period (say 12 - 24 months depending on market, etc.), and for simplicity we assume all condo sales happen at the last month of stabilization.

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Oct 22, 2015

Precisely. This isn't about during development or conversion. This is about when the 1st unit is sold. Someone has to fund the the HOA. It's the developer.

Edit - In California the DRE (Dept of RE) now BRE (Bureau of RE) approves initial HOA budgets. Once the HOA is established and existing (1st unit sold), that's it. It's not about the developer maintaining the building. It's about the developer maintaining payments to the HOA.

Maybe other states allow other things. But in CA, what the BRE says goes.

When all those broken condo deals hit the market in 2008-2011, units bought up by cash flow buyers were seeing nearly bankrupt HOA's. If there was an institutional seller, like on deals where I had buyers, we saw the PE/JV company in conjunction with the developer pay up 6mo past due HOA fees on 15 units, 20 and 30 unit sales. On the 30 unit sale I want to say it was $250k paid current to the HOA at COE.

Jul 27, 2018
PacNumber:

If there is debt you'll Definitely want to factor in release provisions issued by the lender.

If your average debt per unit is $100k a door, the lender may want 110 - 125% of that sum to accelerate the payoff of the debt. Your big pops come at then end when you own the last bulk of units with no debt.

Additionally, HOA fees are a huge expense. The day you record your first sale the developer must now fund each and every units HOA fees monthly until sold.

Likewise with taxes, depending on the project it can be a multi-million dollar expense (between HOA and tax carry)

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Oct 22, 2015

Depending on the size of this condo project you should have a healthy amount of capital set aside for soft costs (model unit, marketing, etc.). Also, the first set of tenants in a condo development have a notoriously bad history of suing the condo developer so brace yourself for that.

Oct 22, 2015

I spoke with a TH/condo builder that is purchasing our property and he said, basically, that we're all right, sort of. Basically, builders do it different ways. Some builders budget for maintenance and/or condo fees as a general soft cost in land development budgets, while others might have a separate line item where they assume they will pay the balance of dues for un-sold units. He--my contact--told me that they (the builder) simply maintain and manage until 2/3 of units are sold, at which point they relinquish control of the HOA and then pay condo dues monthly on un-sold units (the remaining 1/3).

So we're all kind of right, partially.

Feb 22, 2017

What does your builder mean when they "simply maintain and manage until 2/3 of units are sold".

What is happening here financially and how do I account for this in my model?

Oct 26, 2015

Also - so can HOA be structured to be part of Opex, and paid for from a reserve already built into the construction budget, sized to be burned down pro rata with unit sales? Is that a thing you've seen, or does it not make sense?

Oct 30, 2015

Sales velocity is probably the most important assumption you'll have in a condo build-to-sell development model, and the number is generally quite hard to estimate and is very market and project specific. Pricing is also obviously critical, but I'd argue that your pricing is easier to estimate. You'll want to look at recent comps, talk to local brokers, and talk to local research people and consultants.

One thing to consider is whether or not you're using presales / deposit proceeds to finance a portion of the development. If so, you should be more conservative on your sales assumptions because you don't want to run out of cash...

Another thing to consider, on pricing, is that once you have the design completed and know the breakdown of unit types and layouts you should use different PSF prices for the different unit types. Sometimes this isn't a big issue but other times the PSF prices can vary widely if some units have views, some are much larger than others and so forth. The model can assume that you sell x number of "type A 2-bedroom" units per month, and x number of "type B studios" per month and so on. This is more relevant for larger developments.

Oct 26, 2015

Awesome. I think it's pretty much come together, although its rough. Hate to bring this thread up again, and it's been a HUGE help, but can you provide any info on debt terms?

I'm playing with the LTV to see what level of equity fits our goals best, but I was wondering what a typical loan would look like.... how are the terms and ammort. periods negotiated? Like how long would a standard loan be, etc? Am I completely off-base thinking something like a 15 year term perm loan due in 2 years, where its paid off as units are sold off leaving a big lump of cash for the developer at the end of the period?

Thanks again.

Oct 22, 2015

Release provisions on a lot of condo/for sale product require accelerated paydown. If you have $100k per unit borrowed, the lender may want up to $125k per unit upon resale to pay down the loan quickly.

Terms are up to two years or more depending on scale. Interest only terms for sure with built in interest reserve. Lots of construction loans are still tied to prime at the retail banking level. But some are prob tied to LIBOR because of its recent popularity the last 10 years. Prime + 1 or 2 has been a standard spread on construction for 20 years or so on all kinds of deals I've seen done. Prob 70LTC is appropriate.

Feb 22, 2017

I have a Condo Inventory model which I can release where we went from rented condos to sellout. A bit more complicated as we were paying common costs to the all of the units but essentially it comes down to sellout assumptions and release pricing. On this deal I only looked at Whole dollar return and Investment Multiple as Irr isn't so applicable on such a short and risky deal.

Jul 27, 2018

Condos are the real name of housing. I have experience condos and customs of condos. Recently I have seen 'the one condos' at Toronto which remarkable and provide sumptuous lifestyle.

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