Analyzing a Bulk (Fractured) Condo Deal vs Apartment Complex

[Kurt Bender]

I wanted to get some feedback from other members on the analysis of a purchasing a fractured condo deal vs a full apartment complex. Just to make sure everyone is understanding me, this is an example:

Purchasing 20 units as a bulk (fractured) condo sale out of a 100 unit condominium building.

vs.

Purchasing a full apartment complex, of let's say 16 units, where you own the land, structure of the building, common elements, and all the units inside.  

Let's assume that by underwriting both of these deals the NOI is the same, and they share the same upside in rents.

My question is how would you value these deals differently, if at all? Would you assign a different CAP rate to offset additional risk?

[Kurt Bender]

@David Goings - That's a good place to start. During DD I would not only be analyzing the financials of the fractured units you are purchasing, but also taking a deep dive into the HOA financials to examine their budget, determine reserves, etc. Ask for a reserve study from the HOA to see the expected remaining life of some of the larger cap ex items, such as roof, parking lots, central heating/cooling systems, or hot water heater systems if applicable to that complex. The idea here is to collect as much information as possible to determine the risk of association dues to go up, or the potential for a special assessment.

The added risk here is not having the control, however getting a board seat or two helps quite a bit.  How much ownership percentage in the overall condo complex would you be controlling with your purchase? 

Happy to help out if you have any other questions. I've done a few of these deals in the past 6-7 years. 

-Kurt