$18,400 per unit on 1978 garden apartments. Tell me why I'm wrong.

Value-add multifamily on a portal, 96 units, 1978 construction, three story walk-ups, two markets over from where I do my renovation work. $28.5M purchase, $1.77M renovation budget across all units plus $340k on exteriors and amenity. That's $18,400 per unit interior, and they're projecting a $215 rent premium on a current average of $1,140.

My problem is the scope list. They're showing LVP throughout, quartz counters, cabinet refacing, new appliance package, lighting and plumbing fixtures, paint, and "select HVAC replacement as needed." In my market that scope is $22k to $26k a unit right now if you're paying subs properly and you're not self-performing. And that's before I get to the part where nobody has budgeted for what's behind the walls in a 1978 building. Cast iron drain lines, aluminum branch wiring, original panels.

Contingency in the budget is 5%. On interiors that's $88k, which is four units of surprise across 96 units.

The sponsor has done six of these, all in the same vintage band, so they either know something about buying materials I don't or they're going to be back for more money in month 14. Their downside case in the offering still shows a 9.2% IRR, and I can't find the assumption that changes in it.

$25k minimum, allocation closes in about two weeks. I'm not worried about the rent premium. I'm worried about the budget that produces it.

5 replies

1joe_delgado5AP4CPRO6

Ask them what percentage of the 96 they're actually renovating in the hold period. A lot of these budgets are per renovated unit and the plan only touches 60 or 70 units on natural turnover. $1.77M over 70 units is $25,300, which lands right in your range and makes the whole thing look sane. If it really is all 96, your number is the right number and theirs is thin.

3stephen_ok9CO2CPRO6

flint's point is the first thing to check and I'd bet that's the answer.

The other one is self-performing. Six deals in the same vintage band usually means an in-house crew and a materials contract, and that gap between $18k and $25k is close to what a GC margin plus sub markup looks like. Doesn't make the number safe, it makes it explainable.

harrow, on the downside case: what did they flex to get to 9.2%? If it's exit cap only and the rent premium and the budget stay fixed, that isn't a downside case, it's the same case with a worse sale.

1carlos_nunezActive

Cast iron in a 1978 three story walk-up will find you. I'm in the middle of that right now on a much smaller building and it isn't a line item you discover politely, it's a stack failure at 11pm and four units offline.

5% contingency on that vintage is optimistic. I'd want 10% and I'd want to know whether the construction loan or the sponsor funds an overrun.

1devon_pierce Get yoursPRO5

Is there anything in the offering about a capital call, or is it dilution if they run out? That determines whether your $25k is your maximum exposure.

1aaron_fitz10 Get yoursPRO6

Reading this thread and realizing that the whole question turns on a scope detail that isn't in the summary page, which is a bit of an education for me.

harrow, if you email them the one question flint asked and they can answer it in a sentence with a unit count, that tells you a lot on its own. If it takes three days and a call, that tells you something else.

$18,400 per unit on 1978 garden apartments. Tell me why I'm wrong.

5 replies