How to derive a subsidy amount for Apartment Development?

Associate 1 in RE - Comm

Working on a deal now where were trying something a little pioneering in the sense that we want to deliver a wrapped deal into basically an up and coming area where there's really been no apartment development in the sub-market in over 40 years. Closest deal was built in the early 2000s and is getting rents around $1.30 a ft. I'm southeast based so those of you who play in these markets know that delivering a wrapped deal just wouldn't make sense unless you were able to get some incentives from some of the local community groups. If your LP's want to see a project IRR of 20% how do you go about figuring out what that subsidy gap is?

Also were thinking of combining traditional sized units, with micros, and a mixture of co-living units as well? Anyone have experience trying to get this type of deal financed and anything special to include in your operating and capital budget expenses for such a unique unit mix?

Comments (5)

Dec 3, 2019

Walk away from the deal. It won't work. You're trying to force a square peg into a round hole.

On the low side...a 350 vehicle deck in the SE will cost you around $6MM. And if your wrap will be 5 stories...probably will be an additional cost of 15-20% per sq/ft over 4 story construction.

Micro units or co-living units aren't going to reduce your parking needs. I also suspect you would have difficulty attracting capital for such units in a sub-market.

Given the rents you mentioned...and the fact it's a secondary market...you would need the dirt to be almost free...surface park the development...and have a low overall construction basis to have a chance for the deal to work.

Unless there's more to this story...I don't understand why you are seemingly so interested in finding a magic bullet to make this deal happen.

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  • Associate 1 in RE - Comm
Dec 3, 2019

Trust me, I'm not and would have never gone down this road if I wasn't taking orders from a senior colleague. Not a deal I think makes any sense.

Dec 3, 2019

Nobody is going to give you a subsidy so you can hit your hurdle.

Dec 3, 2019

Get to the 20% project IRR by manipulating the construction cost curve, rental rate escalation, hold period, and exit cap-rate.

    • 1
Dec 4, 2019
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