A sample value-add apartment deal - how (un)realistic is this porforma?

[Nick B.]

Hello BP,

I put together a proforma for a fictitious 100-unit C-class apartment deal located in DFW, Texas.

Here is the link:

https://docs.google.com/spreadsheets/d/1_Dui4Fly69...

I used rents and expenses from the deals that I reviewed and from the one I am currently in.

I also used rather small assumptions for future rent and expenses growth (2% for rents and 1% for expenses).

Please tell me if these numbers are attainable or if I am totally off my rocker :-)

BTW, if someone wants to copy my spreadsheet, you are welcome to do so but use it at your own risk. There is no warranty implied or explicit that it works. The yellow areas are meant for the user input, the rest is calculated.

Thanks
Nick

[Brian Burke]

There's a big difference between physical vacancy and economic vacancy. The deal I'm buying is 99% occupied right now. I'll bump gross potential rent day 1, which just means that I'm setting a new asking rent.  None of the leases will be at the new asking rent so I've immediately created economic vacancy by manufacturing loss to lease (the difference between gross potential and actual lease rates).  When increases are implemented at lease renewals, some folks will move, so I've created physical vacancy.  I'll have a lot of turnover and will need to lease a lot of units so I might have to offer two weeks free, which creates concession losses.  I want the property to shine for the prospective tenants so I'll create a decorated and furnished model unit, creating a non-revenue loss. Some tenants won't be happy with rent increases so they'll stop paying rent and wait to get evicted,  this creates collection losses. 

All of those components are elements of economic vacancy.  The national average for physical vacancy might be 8% (is it?) but there's no way that the national average for economic vacancy is 8%. Most of the time owners, brokers and syndicators talk about physical vacancy and try to sweep the other components of economic vacancy under the rug.  Don't do that or you'll come to regret it later.

As to your second question, the current owner's economic vacancy doesn't tell me if it's a deal or no deal, it just provides clues to the real story behind the deal.  It confirms what the broker is telling me, disputes what the broker is telling me, or tells me something that the broker isn't telling me.

As to the FNMA refi...you are correct, they want 90% occupancy for 90 days trailing, but that's referring to physical vacancy, not economic.  You can run a deal with 8% physical vacancy, 2% loss to lease, 3% for concessions, 2% for credit loss, and 1% for non-revenue units and you meet the 90% physical target but have 16% economic vacancy.