A 22 unit development that missed its rent and lease-up targets and still cleared its hurdle
Take a 22 unit, three story walk-up, surface parked, wood frame over slab, on an infill parcel in a secondary market anchored by a hospital system and a state school. Land at $520k closing in early 2023, total cost landing at $4.91M, about $223k a unit all in including land, soft costs, and a $240k interest reserve. Debt structured as a construction loan at 65% of cost with a personal guarantee burning down at stabilization, equity of $1.72M across four partners. Underwritten rents were $1,725 blended on a mix of ones and twos. Actual leasing came in lower, first twelve leases between $1,540 and $1,625, with blended in-place landing at $1,610, about 7% under underwriting. Concessions ran one month free on the first fourteen leases, a common response when deliveries down the road force competition. Lease-up took eight months against six underwritten. Yield on cost landed at 6.4% against 6.8% underwritten, short of target but still roughly 130 basis points over comparable product trading in that market the prior year. The real risk showed up in the interest reserve, not the rent shortfall. Eight months of lease-up instead of six meant the reserve ran out about seven weeks before the loan would convert, and the lender wanted a paydown to extend. A capital call of roughly $180k pro rata covered it, unwelcome as that always is with partners. The reserve had been modeled as a delay in distributions rather than as its own line item that could actually run dry, which are two very different risks. What holds up from a case like this: a GMP contract with a real contingency built in, and starting preleasing at framing rather than waiting for certificate of occupancy. What is worth changing next time: sizing the interest reserve for a lease-up that runs 50% longer than the base case, and writing the shortfall funding mechanism into the operating agreement before it is needed.
