Hello Jay,
Here are our answers to your questions below
Q1. Plan for expenses to rise 2-3% per year along with rent growth.
A1. The revised model now includes a 2% growth in expenses starting year 3 and compounding ever year thereafter.
Q2. How confident are you in the property taxes? If they assess at closer to your costs, at a 32.17 millage, you could be looking at a much steeper bill.
A2. We feel very confident with the current property tax assessment. (We revised some of the construction costs which now reflects in the new cash flow below). The calculation is taking the $1.64M less $75K in the developer’s fees bringing the total est. construction cost to $1,565,000.The town takes a 70% appraisal % which brings the adjusted property assessment to $1,095,500.We are then calculating the annual taxes at $35,242 (full year) using the mill rate of 3.217% (32.17 mill rate).We have been working very closely with the town officials and have a follow up meeting with the tax assessor, zoning and planning and the business development team over the next 2 weeks to reconfirm our numbers.
Q3. Plan for a minimum 95% occupancy even after stabilization. There is always going to be some turnover which will lead to at least marginal vacancy every year.
A3: The model now reflects a 95% occupancy even after stabilization with a 3% increase YOY starting year 3 and compounding thereafter.
Q4. If I were looking to invest, I would really want to see a projected expense report broken down by category (repairs, maintenance, common area utilities, snow removal, turnover, admin, planned capex).
A4: I have included a breakdown on the projected expenses.The expenses also include a sewer and water bill back to the tenants. The capex is excluded as we are including all leasehold improvements into the initial budget and do not foresee needing a phase two build out.
Q5. Make sure you account for all soft costs during construction and financing--are you going to require permits or variances to change the use to 14 units? Appraisals and 3rd party reports for your lender? Etc.
A5: Since Mike and I do not have the 20% to put down for the loan we are paying for the needed soft costs, e.g. 3rd party reports, appraisal, etc. out of pocket.
Q6. Not sure why your mortgage is only 3 months for the first year? Aren't you going to need some of the balance to purchase the lot, pay for the construction, etc? I would break it down month by month in the construction stage based on the draws you are going to require.
A6: List 17 named ‘Interest Only (est. 5 months)’ accounts for the prepaid cash to pay the interest only of the mortgage.We are estimating a 5 month construction period of which a total of $30,067 will be needed in advance.The assumption is that we will begin construction in May and complete by September.Year 1 only includes 3 months (Oct, Nov & Dec) of full mortgage payments ($96,682 annually / 12 mo. = $8,057 x 3 mo. = $24,170).We did the same calculation method to est. the year 1 (buildout year) for the taxes and expenses.
*Please note we have adjusted the build out from 6 months to 5, reflective in the revised Cash Flow shown below.
Q7. How old is the building? Any asbestos to remediate during construction?
A7: The building was built in 1924 and is 95 years old. The building has already been gutted down to the frame with no asbestos found onsite.
Q8. Stylistically on your pro forma, usually I see NOI calculated as a line, then mortgage, then cash flow rather than showing the mortgage line above expenses and taxes.
A8: Mike will provide on the next post a more formal pro forma which will be in the style that is typical/standard for this industry.This will help better demonstrate the NOI.
