"How do you project expenses?"

How do you guys decide on what the expense numbers actually are when given an OM? Naturally, brokers tend to be "optimistic" so how would you answer that question in an interview on the acquisitions side?

If there are comps that the firm owns, you could underwrite expense lines on a per-unit basis generally or just take what the broker gives you and add a margin of error like 10-15%?

Let me know your thoughts guys

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Comments (14)

Oct 29, 2020 - 4:53pm

CTLax45

How do you guys decide on what the expense numbers actually are when given an OM? Naturally, brokers tend to be "optimistic" so how would you answer that question in an interview on the acquisitions side?

That brokers are not acting in your best interest and aside from something that can be independently verified (e.g. taxes) you should assume the broker is lying.

If there are comps that the firm owns, you could underwrite expense lines on a per-unit basis generally or just take what the broker gives you and add a margin of error like 10-15%?

Talk to other owners about what their expenses look like.  Especially on utilities, finding out about delivery charges or water/sewer rates isn't too tough.  Ask what kind of work has been done on the asset recently - if it's been years since a major capital program was carried out, you're going to have higher R&M going forward.  Or need to budget for all that.  It's obviously impossible to say exactly without seeing a building, but never trust what a broker tells you.  Maybe double those numbers and you'll be in the ballpark.

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Oct 30, 2020 - 9:48am

Depends on the deal. If it's an institutionally managed asset, look at the T12, and discuss with your property manager how they would run the asset. 

if it's not institutionally managed, be wary line items could be missing, or there could be extra. Figure out how you/your firm would run the asset. Have conversations with your property management company. Compare it to the historical. And go from there. 
 

For instance, your PM may say, they have one leasing person on staff, but we are doing renovations and will have higher vacancy doing so, so we need 4 leasing people. And if their logic makes sense, underwrite 4 people. But you might say, that's ridiculous, for this type of work, across the rest of our portfolio, we use 2 people. So you guys tell your PM you're doing it with 2 people (maybe settle on 3) and go from there. Or say fine, we will do 3, but we will capitalize the expense of the third person, who will get let go when the renovations and leasing is done. It's all asset dependent. 

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Oct 30, 2020 - 1:19pm

Thank you for asking a great question and not "rank these 3 things" or "is REPE more prestigious than development?"

SBs all around. 

Commercial Real Estate Developer

Oct 30, 2020 - 3:54pm

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