I am a first year analyst that most focuses on office/retail but have been asked to model a value-add apartment deal. The business plan involves renovating units upon lease expiration by replacing kitchen/bathroom appliances, sanding/staining floors and upgrading electrical fixtures.
My question is what do you think would be a reasonable downtime assumption? I was think something along the lines of 2 months, but wanted the take of someone more experienced in these types of deals. Also, should downtime vary by apartment size? This particular building has Studios, 1 BR and 2 BR units. I feel like 2 BR units might take a bit longer to renovate than studios and was thinking of adding an additional month of downtime for these.
is this a 4 unit walk up or a 300 unit tower?
There are a total of 15 units -I am underwriting this for a friend who doesn't have any real estate background.
I would usually do unit-level assumptions. The idea is that if you have longer leases, your downtime won't kick till year 2. That said, assumption is usually 1~2mo based on the scope,
really depends on the degree of renovations, to state the obvious...I think you can model it two ways, both of which I've used with success.
First is like you outlined, show your T12 rent roll with expiration dates. Input your downtime, rent bump per type of unit, and growth rates. This does involve some tricky modelling -- it sounds simple, but I had to step back and use the KISS principle a few times when I was getting lost in the forest through the trees.
The second way, which I think is simpler and just as realistic...is to not view it as a downtime in months input, but rather as a # of units renovated per month. What's normal? Again depends on the scope.
But I just looked at a rehab not too long ago, which I considered average...and here were the terms: - 240 unit complex - 10 units renovated every month - $6,000/unit in reno costs - 4.5% CM Fee on top of that...so all in would be $6,270/unit - Rent Bumps (exclusive of % rent growth) = $60/unit - Return on Cost = 12% -- now this is pretty average I think...but have certainly seen deals fetch better than this, around the 16%-20% mark - Scope of Work: Backsplash, Flooring, Countertops, Sinks, Light fixtures, then factor in basic % for cleaning, labor, misc., etc....we didn't mess with contingency here as the plan was prepackaged from a vendor type partner and costs were set.
Downtown depends on the scope of work. You should talk to the contractors / PM who will be managing the renovations. If it is a 3 day quick Reno, 1 month might make sense. A 3 week Reno, you might want 2 months of downtown.
In regards to the above comment about assuming a set number of renovations per month. I think that way works, however, it is better suited to large complexes with a staggered rent roll. With 15 units, you are better off doing it on a month by month basis as the leases are probably not as evenly staggered. With that said, if you had one lease expiration per month with 3 months having 2 expirations, you could model it based upon a smoothed out renovation per month number. I would recommend in this instance, modeling them individually.
Is "downtime" here referring to vacancy (%)?
This is definitely helpful, might have to make some calls to reach out to PMs/contractors. It seems like 2-3 weeks of work per unit is a reasonable assumption, or in other words 2 months of downtime to be conservative.
if you have 100 units, and the building is currently 95% occupied, how do you determine that people actually leave the units upon lease expiration?
Is it really as simple as saying "x units per month, which over y months means the entire building will be stabilized under market rents by year z"?
You can make the assumption that you know 60% of tenants renew (or whatever that number might be). Plus you can say (assuming all units are free market and you can raise rents as much as you want / have the ability to not renew people), if you raise someone’s rent large enough, they should vacate. If they pay the large raise, great, because you get a premium with doing no work.
Do you go through all leases to determine you can raise them as much as you want/have the ability not to renew? or do you sample select a few?
Also, how do you determine how long it takes for it to get to the point of stabilization?
If you're doing a loan with a cap-ex budget, how do you structure it so that you're not continuing to fund cap-ex dollars without them achieving their projected rents and then being over-levered?
Answering your questions one by one. 1) You generally get access to all the leases in DD, occasionally before. Up until that point you see the rent roll and when the leases expire. You also should understand, and the broker or seller should let you know if these are rent stabilized tenants or in a program with some form of stabilization. If they are free market / the municipality has no rent regulation laws, you can raise people whatever you want. Once in DD, you go through the leases or if they are a form lease, review the form. Still, you should always go through every lease anyway to double check.
I’m terms of stabilization, it depends on how long it’s going to take you to renovate all units and release them. It depends on the size of the property and speed you operate / release.
I would do it by renewal percentage. I'll PM you a screenshot of how our model handles it. Don't have time right now to fully explain for everyone's benefit, but happy to later if requested.
Could you PM me the screenshot too? Would love to see how your model does it.
2 months is pretty standard for a large property.
It really depends on your SOW. Based on what you're mentioning, i'd give it 2 weeks for reno work to be conservative for any of the units, size isn't really the issue. Any additional time to get it leased out are assumptions you can grab from management.
It really depends on your crews, material supply, and required measurements. Paint, sanding/staining, electrical fixtures, and kitchen/bathroom replacements can all be performed within 1 week depending on extents of work. What will run longer lead times include non-standard fixtures, non-standard appliances, and made-2-measure cabinets, lack of availability for countertop materials, etc. Typically with CapX jobs, if you have enough volume, you can request an X amount stock of material for your contractors in order to perform the work more timely.
It also depends on the flow. If you have large volumes for turnover, your contractors are more willing to throw manpower = faster unit turnovers.
I was given an rehab/value-add model test for a 300 unit building and am having trouble renovating the cash flows. 8 units a month can be renovated at $40,000 piece, all units are below market and will bump up nearly 75% after renovation. There are five unit types. I feel like I'm overthinking the cash flow projections. Renovations take 1 month, and marketing takes 1 month, so each unit is down 2 months. Would one simply do take GPR and subtract 8 units rent, then add them back at the 'market' rate 2 months later? anyone have a sample apartment renovation model?
Check your PMs for a loss-to-lease calc page
Consequatur nisi totam voluptate consectetur consequatur et quia. Delectus consequatur repudiandae odit amet veritatis quia est. Vitae assumenda consectetur nam fugit quo maxime.
Consequatur omnis in laborum vero maxime. Deleniti et quaerat iusto sit corporis atque. Quidem non rerum molestias aliquam mollitia in. Voluptate delectus harum qui est.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...