Commercial Multifamily Valuation

[Jason Xue]

Question on commercial multifamily valuation...

When I analyze deals, I include Reserves (10%, set aside for CapEx) in the Operating Expenses, which means it is a part of my NOI calculation. That's how I do it internally to account for CapEx that will happen down the line. Is that the general way to do it? When it comes time for me to sell or refinance, are the potential buyers, bankers, etc. calculating the property value including that Reserve line in OpEx or leaving it out?

Thanks!

[Greg Scott]

Most NOI analysis I have seen includes Cap Reserves and therefore affects valuation.

From your post, it is not clear what you are using to calculate the 10%.  If revenue, that is high.   I would say industry standard is about $300/unit per year.  You might bump that higher for an older property or drop it down a little for a newer property.  

When we buy a property we come in with a large budget for CapEx so don't really tap the reserves until later in the ownership cycle. It really becomes just extra cushion.