Session Plan

Chapter Eight:– Discussion of Occupancy Study Results– Apartments as an investment alternative– Two Apartment case studies

The Remaining Term

Now that we have covered the bulk of the textbook material, the course moves into the “real world” application phase.

Numerous properties will be discussed in chapters 8-10

Format of Case Studies

Each case study will contain a one or two page summary of the case data

We will discuss values that you have determined for the following items:– Gross Potential Income (GPI)– Effective Gross Income (EGI)– Net Operating Income (NOI)– Annual Debt Service & Debt Coverage Ratio– Sensitivity Analysis

Property Life Cycle

Ground Floor

Loan Commitment Stage Interim Stage Tenancy Absorption

Maturing Process

Aging Process Demise

Two Three Four Five Six Seven Eight

Developer

Development Period Equity Investor

Holding Period Developer

Redevelopment Period

Stage One

Property Life Cycle Pyramid (Pyrr & Cooper, 1982)

UPSIDE/Decreasing Risk DOWNSIDE/Increasing Risk

Cash Flow Fundamentals

Quantity How much lease income per month (historical/projected)? Comparison to market rental rates per square foot for similar

properties.

Quality Diversification (number of tenants) Tenant financial strength (internal information or Business Credit

Report when applicable)

Durability Length of leases relative to term of loan. Mgmt Experience with property (or similar properties)

Review of Apartment Terms

Amenities– Special features of a particular unit (fireplace, vaulted

ceilings, etc.) or of the complex as a whole (swimming pools, tennis courts, etc.)

Efficiency– An apartment without a separate bedroom

Garden Unit– A unit all on one floor

Townhouse– A unit on two floors

Types of Apartments

Walk-up Apartments– 3 to 5 floors, patio on first floor, balcony on rest

Mid-rise Apartments– 6 to 9 stories, will have an elevator to service

High-rise Apartments– General rule is one elevator for every 8 floors

Typical Apartment Complexes Contain….

Signed leases with terms of one year or less Proximity to places of employment, shopping

centers, churches, schools, and public transportation

Should be located in a residential area Proximity to parks, lakes, etc. is desirable Should not be located too close to industrial

facilities Should have adequate amount of parking

Quality of Construction

A brick exterior is typically more desirable than a wood or other exterior

Washer & Dryer hook-ups are a plus– If not need access to laundry facilities

Central Air Conditioning is desirable– As opposed to window a/c units

Condition of roof, siding, entrances, parking lot etc. affect the effective age of the property

Interior quality also affects desirability

Standard Vs. Luxury Apts.

Luxury units are typically newer and of much higher quality than lower priced units

As a general rule, the luxury apartments do not compete with standard apartments

Typically, the more amenities in a property, the higher the rent per square foot

Should always consider the supply and demand of COMPETING units when deciding on the viability of an apartment project

Replacement Reserve

The direct capitalization spreadsheet contains one expense item that will not be given to you; replacement reserve.

This is an estimate of items which will need to be replaced each year

– Like roof, structural repairs, HVAC, appliances, etc.– Varies depending on age and condition of the property– Apartments: From $100 to $250 per unit– Office/Retail/Industrial: From 1-3% of EGI

Investors used to have to place this amount of money in an escrow account each year

– Now most lenders look to make sure investor has cash on hand in case something goes bump in the night!

The Higher the Better?

Typically apartments higher than two floors will have an elevator– In many areas of the country this is required.– If an elevator exists, should always inquire about its

age and condition.

If a subject property has a third floor with stair access, it may be harder to lease those units– How might you try to get those units leased?

Off-Campus Student Housing

Too Old– Newer properties have better amenities

Too Late– Get them ready in time for Fall semester…or else!

Too New– Last one to market in saturated environment

Too Broad– Caters to students and the general public

Off-Campus Student Housing Market Study

Supply:– Focus on just student apartments– May need to include rental houses– Contact university officials for on campus units– Contact regional/city officials for future construction plans

Demand:– Total enrollment minus on-campus and commuters– Contact University officials for on-campus projections– Contact appraiser if need occupancy study (good for

approx. one year)

Results of Off-Campus Occupancy Study

Overall Current Market Vacancy: __% Three Year Average Vacancy: __% Rent per Square Foot: $____ Average Monthly Rental Rate: $___ Average Monthly Rent per Bed: $____ Average Age of Complex: ____ years old ____ Different Apartment Complexes Surveyed

– A Total of ____ apartment units! We will use these to compare our case studies to see if the rental

rates are within the market averages….

Your Role as Lender

Congratulations! You are now employed as a senior commercial lender at a large commercial bank!!– Hopefully a solvent one!

As you will be looking at these investments from the perspective of a lender, it will be helpful to get familiar with your lending guidelines.

I will provide you the lending criteria (loan amount, interest rate, amortization period, cap rate), you will do the rest!

End Apartment Slide Session