Projecting Op-ex for Value-add

BBA18's picture
Rank: King Kong | 1,207

Obviously, this will vary for product type, but I'd love to hear how other monkeys who are w/ value-add funds go about projecting stabilization over several years, if for example, you're looking at a property that is currently 50% occupied.

My thought is that items like property tax, insurance, and management fees are pretty easy to quantify, but the rest is somewhat trickier. WIthout knowing a particular market/property type w/in that market well enough to solve for a reasonable expense ratio, what's the most sensible way to fatten the margins as lease-up occurs?

ETA: Excel examples greatly appreciated, I have some good REIT and corp-fin material and models from Staiger's book that I can trade.

Comments (20)

Jun 29, 2018

If you are using a property manager, chat with the PM company. They should be able to assist with this. At many companies, the property management company helps underwrite expenses.

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Jun 29, 2018

That makes sense and would be ideal.

The practical issue that I have w/ that for my current role is that there's usually a conflict of interest. I'm at private debt fund right now and the majority of what we do is lend against properties pre-stabilization; however, a lot of our borrowers are smaller operators who do their own property management so I wouldn't be able to suss out any BS that way.

Also, it may be disingenuous that I'm objecting on practical grounds because, more than anything else, I'm just frustrated w/ myself that I haven't figured out a good way of doing it.

I come from down in the Valley, where Mr. when you're young, they bring you up to do like your daddy done.

Jun 30, 2018

Many debt funds will work with appraisers to get comps. Reach out to an appraiser who you will give the business to (assuming you need an appraisal to lend) and ask for comps. Eventually, after doing this enough, you will get a feel for what expenses in a market should be and can benchmark to that.

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Jul 1, 2018

The person above(somewhere) said to talk to your PM's, and I agree. This is where I get a majority of my opex budgets.

I don't think property tax is so simple, we always higher outside companies to give us projections, and have different tax value from period 0 to construciton to lease up and then stabilization.

Your utilities should probably be in proportion to occupancy..

Jul 2, 2018

1.) Ask for broker OM's and packages
2.) Download crowdfunding oms
3.) Ask appraisers
4.) Get 3rd party opinion from LP
5.) Don't ask for quote from prop manager that does so on 3rd party basis. Just asking for B's numbers.

Keep enough of database from 1-3 and you'll be good to go.

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Jul 2, 2018

I disagree on not asking for numbers with your quote from your property manager. Your PM should/will tell you where they think they can operate the property. If they lie / get it wrong all the time, they will be out of business. You may not agree with all their numbers, but the PMs numbers are still a strong reference, and usually better than looking at many different OMs from brokers attempting to sell a property. Appraisers will have good numbers as well, but properties operate slightly differently, and a PM is in a position to help determine this. It's great to know, for example, utilities in your market run at .30 cents per foot on average, but you won't get the nuances from knowing the average. It's just that an average. The PM should be in a position to assess if you will be above or below that number.

Jul 3, 2018

I think this is theoretically right, but from my experience not how it plays out in reality. That's like asking an investment sales broker for a BOV and saying they don't like or inflate numbers. 3rd party PM is a tough business and requires stretching from a business development role and the first opportunity to get foot in the door are from owners asking for quotes.

Jul 3, 2018

The PM is your best bet or look for comparable assets in your portfolio to underwrite expenses and make assumptions about OP EX per SF or per unit to come up with OP EX assumptions. Based on your market or product type, there should be an average expense weight (usually 30 to 45% based on the market and product type meaning garden, mid rise, etc or OLD vs NEW....) to revenue.

Even though I want to be a broker, my suggestion is to never trust a word out of a broker's mouth apart from the deal they are showing you and deal info/logic on a precedent deal. Majority of brokers represent sellers which means they will have an optimistic view which means you can cut taxes and insurance (despite a higher sales price which means both are GOING UP!), property management fee on the lower end, salary for staff is going to be low (over the last couple of years, you have seen salaries for leasing and property managers on the rise), etc. Any way you look at it, a broker's OP EX in an OM is going to be on the lower end to historical trends.

Jul 9, 2018
1901Monkey:

1.) Ask for broker OM's and packages

Could not disagree with this more. Asking a broker for information is about the worst possible means of underwriting a property. If you are a buyer, the broker is not your friend. Brokers are not doing their diligence on operating expenses, are not experts on the needed repairs to the physical plant of the building, and in general are trying to move a product for the highest possible price. Their incentives align with the Seller, not the Purchaser. Even if they aren't actively depressing expenses to show a higher NOI, I can almost guarantee they aren't doing the digging necessary to validate those numbers.

Jul 12, 2018

You should have read my responses. I agree no value in broker numbers, but oms have financials embedded in them from seller that is very valuable.

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Jul 12, 2018

Yeah, brokers usually have a few BS assumptions in their pro-formas and they generally aren't hard to spot. Think that 1901 was talking about being able to get LTM numbers in most OMs, though.

I come from down in the Valley, where Mr. when you're young, they bring you up to do like your daddy done.

Jul 13, 2018
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