The license transfer on a licensed 11 room house nearly took the whole year
Fourteen months of looking, one purchase. Posting the numbers because the part I got right and the part that nearly killed it were both about the license, and I didn't expect either.
The property: an 11 room licensed rooming house in an older neighborhood near a hospital, purpose-built for this in the 1940s and operated by the same family for nineteen years. Purchase 720k. I put 30% down. The reason I bought it over two other candidates is that the on-site manager, who had been there eleven years, agreed in writing to stay under a management agreement at her existing pay plus a per-room occupancy bonus.
Year one actuals:
- potential gross, 112,200 (rooms 800 to 925, furnished, utilities and weekly common cleaning included)
- collections, 103,400, so 92% economic occupancy
- operating expenses, 47,100, including the manager at 21k, cleaning contract, utilities at 14,800, insurance, license and inspection fees
- NOI, 56,300
- debt service, 41,200
The part that nearly broke it. In my state the license does not transfer with the deed. The new owner applies, and the application triggers a full re-inspection rather than the lighter annual one. That's my state's practice and I would not assume it anywhere else. The re-inspection came back with a hardwired interconnected detection requirement and an alarm panel the prior owner had been carrying on a legacy approval that did not survive the change of operator. 26,400 of work and five weeks where I could not fill the two rooms that came open. Call it 6,100 of lost rent on top.
What saved me was a 25k holdback at closing tied to the license issuing clean within 90 days. My attorney wrote it, the seller hated it, and I got 25k of the 26,400 back out of escrow. Without that clause the year's NOI is 30k and I'm funding the gap.
What I'd keep. The holdback, obviously, and I'd make it bigger next time. Buying the manager along with the building, which is the reason my collections number looks like it does and the reason I have not once driven over there at night. And asking the licensing office directly what a change of ownership triggers, in writing, before I priced the deal at all. That question cost nothing and it's the only reason I knew to ask for the holdback.
What I'd change. I underwrote utilities at 12k and got 14,800. Small in the context, but it was the one line where I trusted the seller's number instead of pulling the account history myself.