New Construction - 36 Unit Apartment Complex

[Edward Yoo]

Hi all, brand new on this forum. Wanted to share a potential deal I am looking at where we would purchase a 24,000 sq ft lot and develop 36 units (4 stories). Here are general details:

-1st floor needs to accommodate approximate 55 parking stall for the 36 units

-Parking will take up around 20,000sf of space

-The remaining square footage of about 4,000sf can house elevator lobby, stairs, trash, electrical transform, commercial space etc.

-36 allowed units at 850sf average size require about 30,000sf of building. adding the circulation and non-residential square footage pushes this number up to a total building of about 40,000sf. This amount of building can easily be accommodated on 3 or 4 floors, therefore, the building can be a Type V construction which means that the first floor has to be constructed in concrete and the residential floors above in wood. This is the least expensive construction type for housing with parking and commercial on the first floor with residential on top

Analysis:

- Land acquisition / closing costs: $1.1mm 

- Construction/architect costs: $225/sq feet x 45,000 sq ft = $10.125mm

- Total Cost: $11.145mm

- Average unit 850 sq ft x 32 units x $2.5 gross rent per sf = $918k gross rents

- 50% expenses = $459k annual profit

- ROI: 4.12%

This is for a project in the Bay Area (where I assume construction costs are higher). Do you see any glaring holes in my analysis? The 50% in expenses was a bit arbitrary. The rent per sf is in-line with comparables in the area. The $225/sq foot was a conservative estimate in construction/architect all-in cost. 

Based on this analysis, I do not see this as a good project - what are your thoughts? 

[Seth Borman]

Expenses sound high. So does parking.

[Edward Yoo]

The parking numbers / figures are directly from the architect (and based on what the city is requiring). 

What do you think is a better figure for expenses? Perhaps around 40%? 

Based on this study: http://www.naahq.org/sites/default/files/naa-docum...

[Percy N.]

Edward Yoo what is the new construction experience level of the principals?

Why would you do a high risk project for only 4.5% return?

Personally, I would seek better investment options. PM me if you are looking - I have nothing to sell but invest in many projects.

[Seth Borman]

@Edward Yoo that is a good example of industry standards.

Can you charge for parking?

[Edward Yoo]

@Seth Borman - Yes, we could charge for parking. Good point - we can build that into our pro forma.

@Percy N. - We've done full top-down rehabs, but no new building projects. I don't have any interest in pursuing this project for 4.5% - I just wanted to make sure my figures were in-line with reality to ensure my pro forma was not off. 

We just got done with meetings with some architectural firms. Looks like build-out costs are at an all time high (in the Bay Area) so we're looking at about $275 to $300 sq ft for total build out costs / soft costs, which makes this a project we won't be pursuing. 

Thanks for the feedback! Incredibly helpful.

[Ken Buck]

@Edward Yoo pm me about modular,  doing an 8 unit modular project now at about $100/sf construction costs,  nice finish out w/ all hard surfaces. 

[Rashad Mammadov]

Hey Edward, 

Did you guys end up building the project? 220$ per sq ft sounds pretty reasonable, but in the east bay not near the Silicon Valley. 

Does the land purchase include entitlements costs and permitting? I didn’t see that on your cost analysis. 

Rashad 

[Miles Millstone]

@Ken Buck

What company modular company are you using, is the building one or two story’s? 

[Jaysen Medhurst]

@Edward Yoo, I'd expect closer to 40% expenses, which puts you at a NOI of $551k and a 5.4% cap rate (assuming $225/sq ft build price). What's the cap rate on similar size and class properties? I could imagine in the 3s for A-class new construction in the Bay Area. That may be the play here. Build it at 5.4%, sell at 3.5%. That's a ~$17.5MM valuation and potential profit of $4.6MM.

[Kam T.]

What city is this in ($2.5 rent per square foot is low for most of the bay area)? $225 per foot (even if this was hard cost alone) is low for type V over podium construction for the Bay Area from my sources. Also need to factor financing/holding cost, soft costs like impact fees (which are up to ~$25K per unit in Oakland, depending on zone), lease up cost/time, etc. All-in yield on cost (NOI/all-In cost) should be at least 100, ideally 200 basis points over market cap rate to have a decent deal.

[Ken Buck]

@Miles Millstone just getting these...the alerts can be overwhelming.

We have 5 different factories we like and it depends on what we're doing. All in the Midwest. Would love to learn more about SoCal market... curious as to whether we're building for less than resales?

[Christie Duffy]

@Ken Buck Would love to hear what modular company you ended up using? I’m about to construct an 8 unit in upstate New York.