How to read a sponsor claiming a large multifamily deal sits well below replacement cost
Take a case like this. 180 units, built 2004, secondary Sun Belt market about 40 minutes from a major metro. Purchase price $28.5M, so $158k a unit. The sponsor's deck says replacement cost in that submarket runs around $210k a unit and treats the gap as the reason to buy. The rest of the numbers usually look like this. Going-in cap around 5.2% on trailing three months annualized. Occupancy 92%, with a month free on new leases. Debt is a five year fixed agency loan at 65% LTV, sponsor shows 1.28x DSCR at close. Plan is to renovate a large share of the units, say 120 of 180, at about $12k each and push $185 a month on those units. Fees run 2% acquisition, 1.5% of collections for asset management, 7% preferred return then 70/30 to LPs above that. Below replacement cost only means something to an investor if it changes behavior in the market during the hold. A gap that never gets tested by new supply, and never shows up as rent growth, is just a number on a page. The way it turns into money is through one of three paths: rent growth in the submarket outpacing the trailing numbers because new construction really is priced out at $210k a unit, forced appreciation from the renovation program if the $185 bump is achievable and gets absorbed without concession creep, or a cap rate compression story at exit because buyers three or five years out are pricing the same replacement cost argument more aggressively than today's buyer did. Anyone underwriting this should stress test what happens if none of those three show up and rents in that submarket sit flat. At that point the deal is a 5.2% cap with fees layered on it, and the question worth asking the sponsor directly is which of the three paths they are actually underwriting to, not just citing as color.
