Maintenace and Repair Allowance Percentage on Income and Expense Statement

[Jonathan Bowen]

I am currently listing an eight unit building which includes seven residential units and one commercial unit and have provided the seller of that building a pro forma income and expense statement with a 5% of effective gross income allowance for maintenance and repair expenses. The building is a completely rehabilitated brick building from the studs out; it looks really nice and the builder did a top notch job. The seller insists that a 2% of effective gross income allowance for maintenance and repair expenses is accurate because the building is "brand new". As you know, the capitalization rate is paramount and this seller is trying to show that the building's expenses are low. I've done the pro forma income and expense statement the correct way which shows a capitalization rate of 5.8% and I've done the the income and expense statement the incorrect way, for the seller's benefit, and it shows a capitalization rate of 6.85%. The building is overpriced but this seller just doesn't want to see it. I know that the capitalization rate needs to be at or above 7% for this building to sell. I suspect that the seller is woefully ignorant. What are your thoughts on allowances for maintenance and repair expenses on income and expense statements?