Sitting on a 14 unit site and the numbers don't clear

I've got a purchase option on an infill lot zoned for about 14 units, 90 days left to decide. Land is $310k. Hard costs quoted at $215/sf on roughly 13,000 net sf, so call it $2.8M, plus soft costs and a contingency I'm carrying at 8 percent. All in I get to about $3.5M, or $250k a unit.

Rents in the immediate area for new two beds are running $1,750 to $1,850. At 14 units and a 92 percent economic occupancy that's around $270k gross, and after operating expenses I'm somewhere near $170k NOI. That's a 4.8 on cost.

My construction lender wants 65 percent loan to cost and a personal guarantee, which is a separate conversation with my wife. Even before that, a 4.8 yield on cost with exit caps where they are doesn't leave a spread I'd want to build for.

So the question I keep circling. Do I let the option expire and eat the $15k deposit, or do I try to extend and wait to see whether costs or rents move? Everything I read says starts are collapsing and that's supposed to be good for the people who build now. It doesn't feel good from where I'm sitting.

2 replies

2luis_carrera Get yours

Your 8 percent contingency on a ground-up 14 unit is thin if you don't have a GMP contract in hand. I'd want 10 to 12 until the drawings are actually complete, and that alone moves your yield on cost down another 15 or 20 basis points.

The part I'd push on is the rent comp. Are those $1,750 to $1,850 rents in buildings delivered in the last two years, or are they older product? If new supply is still leasing up nearby you're comping against concessions you can't see in the asking numbers. Ask a leasing agent what net effective looks like after free rent.

On the option, extension cost is usually cheaper than the deposit. Worth asking the seller what a 120 day extension costs before you decide to walk.

2aliyah_bAU2APRO6

$250k a unit for 14 units of new construction is not a bad number in a lot of markets, so I don't think your costs are the problem. The 4.8 yield is telling you the rents don't support new construction there yet, which is exactly what the whole sector is saying right now.

The thing I'd separate out is the personal guarantee. You wrote it as an aside and it's the biggest item on the page. If the project stalls, that guarantee follows you regardless of what the rents do. I'd get clear on what recourse burn-off looks like in writing before spending another dollar on the deposit question.

Sitting on a 14 unit site and the numbers don't clear

2 replies