Deal analysis

[Jonathan G.]

So here is a deal I’m putting together. A 36 units, 40 years old, performing C building located in a nice B area in Fort Worth, TX. The complex comprised of 4 buildings. Was wondering how much will you offer for this complex:

Last 2 years info. indicates as follows:

Total Gross actual rent income $244k (reflecting 12%-13% vacancy). I'll take over with 95% occupancy though.

OPEX (All utilities paid by owner):
Tax - 24k
Insurance - $3k
Water - $29k
PG&E - $45k
trash - $6k
Maintenance person - $20k
Maintenance Supplies - $13k
Management - $19k

NOI - $78k

Will start by assuming existing note, 18 years at 7% 5 yr adjustable until I refinance into 25 years at 5% 5 yr adjustable with WF.

Debt Service - $54k

Operating expenses run at the 68% (nice upside here), actual Cap rate 9.32%. Capital Improvements last 3 years have been around $15-20k/year.

Thanks,

[David Beard]

Your NOI has Maint Supplies, but likely does not have an appropriate capital reserve to replace depreciating components: roof, HVAC, etc.

Also, the utilities at 30% of gross potential rent are off-the-charts ridiculous. We all know that landlord-paid utilities are patently a bad idea, as tenants have zero incentive to conserve anything. Water at $67/mth/unit sounds extremely high, but may be normal in your market. Is electric not separated? Can a RUBS utilities chargeback process be implemented in your market?

Big question: how much of an investment to bring the C property to B area standard and achieve commensurate increase in rents? Will you have capital to make these improvements?

Don't pay the owner for a 95% occupancy rate. He has run it at 87-88% economic occupancy for the last two years, and failed to achieve 95% occupancy. To juice occupancy for selling purposes, were concessions made in tenant screening criteria, or "1st month free" or "free cable and internet" or "$200 deposit" ? Quite common in this market.

However, the C building in B market looks good, if the B assessment is truly accurate.

I agree that the 1.1mm contract means squat. If that party failed to close, they were probably thinly capitalized or unsophisticated, and the offer doesn't mean a thing. Look at recent sales of similar-sized complexes in your market. Do you have this data?