64 unit complex under contract

[Chris Winterhalter]

I posted on the multi-family forum a month or so ago regarding the multi-family 50+ unit market heating up. We've lost out on many offers from buildings ranging from 20-150 units. I've been mainly focused on Cincinnati where I was born and raised after investing in St. Louis for 4 years. However I had a deal come across my plate near several of my other buildings in St. Louis that just made sense. It's a stabilized building with several years of occupancy around 90%. It has some deferred maintenance that we will handle in phases as my construction crews have time. The good part of the deal lies in this...

We negotiated a deal with a 10% seller carry at 5% interest rate. I have two really good relationships with local banks that are willing to go to 80% LTV along with bundling in rehab costs. They will also allow the seller 2nd bearing that we still make debt service. Our primary lenders are quoting rates around 4.25-4.5%. If everything goes well we could be in the deal with only 10% down plus all other associated costs and capital needs. The banks don't even require a phase 1 or property condition report (which we will still get). Unless we need to come up with more capital we will take down the property on our own not bringing in other equity investors. This is a very unique situation (in my opinion) and is probably only possible because of our previous relationship (and their current appetite). I remember when they wouldn't even finance a 12 unit building for us (2009). However I kept fighting and eventually broke into the relationship.

The lead came from a broker that I met when buying a complex a year and a half ago. He knew this complex was near my other properties and knew I was interested in buying more buildings (probably from my Linkedin updates). I've been trying to break into the Cincinnati market, meeting the key players however this shows you nothing is better than a proven track record and established relationships. I will keep pounding the pavement in my homeland of Cincy but I'm definitely not going to pass on a good deal in a market where I own properties. I'm not going to get into the deal specifics since I just got the project under contract however here are a few details:

Purchase price - 1.55MM w/ 10% seller second at 5%

Rehab - 100-150k - mainly windows, plumbing stacks and misc cosmetic

Gross rents are around 30k/month

Tenants pay for everything but water/sewer

Instantly appealing the taxes right at closing. I've had great success with this in the past. I use a lawyer that specializes in this and works off of a contingency fee (we pay her 50% of the reduction).

Hopefully everything goes well with due diligence!

[Stephen Masek]

Originally posted by @Account Closed:

Thanks Chris for sharing the info. The Phase I sounds so cheap. I used to work for an environmental company and we charge close to $5k for a Phase I. Of course, it's CA price so it might be a little inflated. Hope the appraisal would come in so there's no more hiccups.

It must have been a large company. Many years ago I worked for a large multi-national consulting company, and the lowest price they could charge for anything to break even was, in today's money, $5,300. Of course, the clients were paying mostly for overhead, as their multiplier on labor was almost 4! Some clients just want the big name, never thinking that the big companies often must send their junior-most people just to try to come closer to competing with the small and medium-sized companies.

In this 1960 building being discussed, any of the paint could be lead-based, and all must be assumed to be lead-based. That is a very expensive, and very incorrect assumption. In half the buildings built 1960 to 1978, none is present, and just a little is present in the other half. In a 64-unit building, just the cost of the two booklets and the paper work quickly exceeds the cost of the inspection (the inspection cost is much lower for a 1960 building than for one built before 1960, as the required number of units to inspect is far lower). All of the plastic sheeting, HEPA vacuums, and so forth required by EPA's Renovation, Repair, and Painting (RRP) regulation add far more cost, and are a waste when lead-based paint is not actually present. Look at how Lowes was hit with a $500,000 fine. A restoration contractor in Missouri, Ritchie Enterprises (dba PuroClean Emergency Restoration Services) was hit with a $30,000 fine for work on one house. The EPA has a special focus on window and door replacement in RRP.

Have you at least read all of the asbestos and lead regulations, both federal and state? All of the laws and regulations have been building since EPA and OSHA started in the early 1970s.

Asbestos could be in the drywall mud or plaster, flooring materials, ceiling texture, window putty and many other things which will surely need to be disturbed to perform the renovation and repair work. The inspectors are federal, so it is better to think of them as being more like the IRS, not like cops issuing speeding tickets.

I'm happy to read that another restoration contractor is considering obtaining the asbestos and lead training, certifications, and licenses. It seems silly to give that work away to abatement contractor subs. Have you seen my articles in Cleaning & Restoration magazine? You can also find some of my magazine article in the News section of my company's web site.

A few months ago my company performed lead surveys for a guy in Beverly Hills who bought four apartment buildings in the San Fernando Valley. A few weeks ago I was in Las Vegas inspecting some grocery stores when he called in a panic. A SCAQMD inspector (they have a contract with EPA to enforce the asbestos NESHAP in the area) had apparently driven past and noticed they were renovating a building (or received a tip from a tenant or contractor who did not get the job). We preformed a rush asbestos survey. The owner had hired a "contractor" without a license, thus making the workers his employee. They had illegally scraped asbestos ceiling texture, asbestos floor tile and asbestos sheet vinyl flooring and put it in the trash dumpster, and at least one load had already been hauled by the trash company. I had to explain to the owner that, worse case, they could require him to have part of the landfill excavated, fine him hundreds of thousands of dollars, and put him in federal prison. I have seen it happen to others who ignored the laws and regulations. Look up Charles Yi, a guy who owned a 204-unit apartment complex, then lost it all and went to federal prison for ignoring asbestos. I'm not saying you plan to ignore asbestos, but how could you possibly handle it properly if you do not know where it is? Assuming everything which might contain asbestos (anything not wood, plastic, or metal) does is very expensive, so nobody does that. My company does not operate in Missouri, so I'm not trying to make work for us, but to help you and the others reading this.