Apartments Archives - Meybohm Commercial

Due Diligence Checklist for Multifamily Acquisition

Posted on September 2, 2021 by Jonathan Aceves

If you’re looking to invest in a multifamily property in this market, it’s just a fact: Expect to analyze and make offers on multiple properties to find the right fit.

So, having a system in place to do the necessary due diligence will help you not only move faster but also make fewer mistakes. Our multifamily due diligence checklist is your starting point; click below to download now. This is the curated list our commercial team leans on as we help buyers analyze potential multifamily acquisitions, but can serve both buyers and sellers.

We’ve broken the checklist down into six sections: Financial Audit, Rent Roll Audit, Building Inspection, Market Analysis, Legal Audit, and Marketing Audit.

In practice, this checklist would typically be used by a buyer who just put a property under contract. So, using information provided by a seller on an offering memorandum or marketing package, a buyer has run those details through their underwriting model, determined that this deal makes sense, submitted a letter of intent or purchase and sale agreement, and now has the property under contract. At that point, our commercial team uses this checklist to make sure we haven’t forgotten any important items as we move toward closing.

Financial Audit

We review two years of income statements, vendor contracts, and various invoices to confirm the numbers we put together before submitting our offer. Quite often, the seller’s financials are inflated or incorrect, and we are looking not only for items that are wrong but line items that have been left off. For example, often the seller performs maintenance or landscaping, or manages the property, and these expenses need to be accounted for.

Rent Roll Audit

Putting a solid rent roll together means reviewing all leases, understanding what delinquencies look like, and making sure we know what prepaid rents and concessions will survive closing. Some lenders require estoppels—and it is not a bad idea to add this to your workflow. Many sellers won’t be familiar with estoppels, and if you plan on using them, you should add them to the purchase and sale agreement as a special stipulation, since they are quite disruptive to tenants and most sellers will not allow you to go door to door to talk to each tenant. See this article on estoppels for a template and background on how to use them.

We will also perform a rent study to understand what competing comparable properties are renting for, which will help you project where your rents should be. Click here for an article on rent studies and how to perform them.

The final step is to interview potential property management companies and select one that can help advise you on rent rates and the local market.

Building Inspection

It’s important to thoroughly understand the condition of the property and future maintenance expenses. Roofs, electrical systems, plumbing systems and HVAC systems should all be included. A thorough review of the plat and deed should be performed to understand any easements across the property, the locations of water and sewer lines, and any potential boundary issues. Your lender may require you to have a Phase I environmental report and an appraisal—these items can be time intensive, so make sure they are ordered early in the process. Some municipalities are very strict when it comes to certificates of occupancy, permits and inspections, so ask for copies of past inspections, along with permits for prior work performed.

Market Analysis

We could write a book on market analysis, but at a high-level, you just want to make sure you understand the neighborhood and general trends in the market. Are things getting better or worse in this area? Have there been new job announcements in the area?

Legal Audit

We review insurance policies and exceptions, as well as five years’ worth of loss runs. It’s a good idea to ask if there are any unrecorded agreements affecting the property, such as neighbors driving across the property or using the dumpster, for example. The seller should disclose any potential lawsuits facing the property at this point. Also, we review the community rules, the lease form itself and the current application form. There may be fair housing issues or blatant errors in the forms, and these should be considered and corrected immediately.

Marketing Audit

We collect as much information as we can from the seller regarding their current marketing package. This includes floorplans, brochures, logos, and a review of their website and current management system. Often, we find a wide gap between the current rents and what the rent study suggests the market rents should be, and this could be attributed to lack of marketing. You will also want to review the property’s website and confirm that the domain and branding are a part of the sale and included in the contract.

Download Due Diligence Checklist HERE

We encourage you to use the checklist on potential deals you’re working on, but if you would like an advisor to help you in the acquisition process from start to finish, email us to schedule a time to discuss a buyer representation assignment with one of our brokers.

That’s it! Please also let us know how we can improve our process in the comments below. Are there any items we’ve left off the checklist? What are the biggest mistakes you’ve made in the past that could have been solved with one of these bullet points?

Estoppels: Why Investors Should Use Them

Posted on August 30, 2021August 30, 2021 by Jonathan Aceves

Last year, my partners and I closed on a portfolio of rental properties. The owner assured us that there were no leases or security deposits. After we closed, we discovered that there were in fact leases and deposits, and he refused to refund them.

We decided it would be cheaper to eat the difference than to pursue him in court, but the entire affair could have been avoided by using an estoppel.

What are estoppels?

Estoppels are usually short documents used to confirm lease details. They are a “signed statement by a party certifying for another’s benefit that certain facts are correct, as that a lease exists, that there are no defaults, and that rent is paid to a certain date. A party’s delivery of this statement estops that party from later claiming a different state of facts.” (Black’s Law Dictionary, 572, 7th Ed., 1999)

Estoppels usually confirm basic lease details such as:

The rental rate
Commencement and expiration date of the lease
That the rent hasn’t been prepaid
That the lease hasn’t been modified
That there are no defaults on either side

Why would I want to use an estoppel?

Often estoppels are required by a lender, but as an individual investor, you may want to include them in situations where the leases are unclear or if you’re unsure of the validity of the financial statements. Estoppels also ensure that the owner hasn’t collected prepaid rent or pocketed the tenant’s security deposits.

How do I use an estoppel?

You will likely want to add a clause to your contract requiring the seller to collect estoppels prior to close or allowing you to collect them from tenants prior to close.

This can be quite problematic on a larger property, as many tenants may pay electronically and not even interact with the owner or property manager on a regular basis. A simple way to execute estoppels may be for the owner to fill out the pertinent details and have them docusigned by the tenants or completed by as many tenants as possible during a property inspection.

Download Free Estoppel Agreement

Here is a simple, one-page generic version you can use. Feel free to make changes to it as needed. We hope it saves you time and money on an upcoming deal!

Need to Figure Out Market Rents? Here’s How

Posted on August 26, 2021 by Jonathan Aceves

If you’re considering a real estate investment, you’re probably asking yourself what the market rents are for a given property. So, how do you figure out the rental projections for a given market?

A rent study should answer that question and give you the tools you need to make an educated guess of where rents will go.

What is a rent study?

A rent study is a spreadsheet of rent comps, either asking rents or effective rents, with some basic information such as square footage and class of complex. For simplicity, multifamily rents are usually divided into “A”, “B”, and “C” class properties, and square footages can generally be found on Apartments.com or Apartmentfinder.com.

How do I conduct a rent study?

To start, determine the market or trade area that you want to study, and make a spreadsheet of various apartment complexes in the trade area. Add columns for beds/baths, SF, rent, and class of complex. You may also want to have a column for amenities, such as clubhouses, pools, and walking trails.

Now go online and see what are the asking rates for each of these units. With square footages, sometimes various websites will give you a range—I usually take the average of the two numbers in the range. Be wary of outliers! Sometimes “executive” or furnished units will throw off your numbers, but be persistent.

You can also conduct the rent study by phone. If you’re calling, you will still want to put your spreadsheet together and populate it with as much online information as possible. I always recommend being honest: Tell property managers you are conducting a rent study, and offer to send them a copy when it’s finished. (You should do this, not only to avoid being a liar, but so they will help you with comps next time.)

I usually confirm rents and basic rental details—and ask them anecdotally how many calls and showings they are receiving. How strong is demand? You might make a column where you note that although a given complex is asking $1.50/SF for its one-bedroom units, the manager gets many more calls for two bedrooms than for one. That is useful!

Once you have a meaningful compilation of rent comps, it’s time to turn it into a rent curve. I usually select the rent/SF and SF of the units in a given class (A, B, or C), and add a logarithmic trendline to those numbers. Then, I project forward a few hundred points and backward a few hundred points. This will give you a nice smooth curve that looks suspiciously like the ones from economics class (these are demand curves after all). Now you can match the units in question with their class peers on the graph, and use the information collected to estimate the market rents.

Congrats! Now you have a completed spreadsheet that looks like the example here: Download the Example Apartment Rent Study Here

And instead of guessing, you can base your projections on hard numbers. You may also be able to find some real anomalies in the market—undermarket rents—and some diamonds in rough. Good luck!

4 Reasons why you benefit from Exclusive Representation in Commercial Real Estate

Posted on December 18, 2020December 18, 2020 by Jonathan Aceves

In a commercial real estate transaction, a seller can leave a lot of money on the table if the buyer is well represented and they are not. Worse still, the seller may look to the buyer’s broker for advice and mistakenly believe that they are being represented and receiving advice that is in their best interest. How do you know if you need independent representation? Every seller can benefit from having their own representation, and I will lay out a few reasons why below, as well as a few case studies.

“Plans fail for lack of counsel, but with many advisers they succeed”

A few years ago, an owner who we will name “Steve” owned an automotive shop on a busy downtown corner. He was approached by his neighbor, who wanted to buy his building for what Steve believed to be a fair price. Steve accepted the offer and closed on the property. A few months later, he realized that due to the capital gain on the fully depreciated building, his taxes were nearly a quarter of the sales price! Not only had he underpriced the building, but after paying off his mortgage, the burden from tax bill started a process which ultimately led to his bankruptcy. If a good agent had advised him, they would have advised him of his tax implications, as well as making sure that the sale price was in line with the market.

About two years ago, a woman we will name “Sherry” owned a home in a downtown neighborhood. Her family was growing, and she wanted to purchase a larger home. She put an offer on a nearby home which was for sale by owner. Neither buyer or seller had any real estate experience, and they used a form they found online. Once the property was under contract, she put her home up for sale by owner. Within days, a buyer’s agent brought her an offer on her home. Sherry wanted to make sure that the contract was contingent upon her closing on the other property, which the buyer’s agent assured her it was. There were some complications with her loan, and the seller of the property she was buying refused to give her an extension—and she was forced to terminate. When she asked the buyer’s agent about terminating the contract on her home, she refused, and said that they would sue for specific performance if she did not sell. Ultimately, she was forced to sell her home under market value, and rented an apartment across the street. If a good agent had been involved, Sherry would not have been forced to sell her home for below market value, and likely would be living right now in what she considered her “dream home”.

4 Reasons to have independent representation

Representation
- The buyer’s agent has a duty of loyalty to protect their client’s best interest. Some brokers may attempt to practice what is called Dual Agency. Dual agency is a slippery slope and frowned upon by most brokers. Often what happens is that one party is treated as a “client”, and the other as a “customer”—meaning that client receives the duty of loyalty while the customer does not. All these details should be clearly disclosed to both parties, and failure to do is an egregious license law violation.
Better Leverage
- Another reason to have separate representation is for negotiating leverage. Commercial Real Estate agents, especially CCIMs, are trained to help negotiate the best possible price and terms. If you are communicating any personal details to the buyer’s broker, then they have a duty to tell the seller—which may completely remove any negotiating leverage you may have had. Think about it—any personal details which may make the Buyer think you need the money more than they need the property WILL be used against you. Your exclusive agent’s duty is to protect those details, while working to tip the scales in your favor.
Pricing
- If a buyer’s agent brings you an off-market offer on a property, how will you know if that price represents a fair market offer? Think about it—if someone is willing to go to the trouble to contact you, to do the due diligence and make an offer, could there be someone out there who would pay a little more? In my experience, off-market properties seem to sell for about 20% less than they might if they were properly marketed. Your agent’s role is to make sure that you are priced in accordance with the market, and not leaving any money on the table.
Contracts & Due Diligence
- Your agent should be familiar with the documents and amendments you are reviewing and will be able to advise you about their implications. They will be able to suggest language that would better protect you, or additional clauses to add. They should also remind you to talk with your CPA to determine what your tax consequences will look like. You agent will also be able to help with due diligence items required by the Buyer—documents such as leases, tax returns, plats–as well as interfacing with government agencies for things such as permits, zoning details and environmental concerns. They will also be able to connect with the appraiser, and hopefully give them what they need to appraise your property for the highest appropriate amount—something that a Buyer’s agent could not do.

We would love to hear from you! Please comment below. Have you ever been in a situation with an unrepresented party? Or have you ever been in transaction where you lacked appropriate counsel? Do you have any horror stories from real estate deals where good advice could have made a difference?

Additional Resources:

SIOR – How to select a commercial real estate broker

Founders Guide – How to choose the right commercial real estate broker

Commercial Property Advisors – Choosing the right commercial real estate broker

This post originally appeared in Jonathan Aceves’s blog and is republished with permission.

What is a rent roll and how do you use it?

Posted on December 4, 2020December 4, 2020 by Jonathan Aceves

For commercial and multifamily investors, no two documents are more fundamental to understand an investment than the Rent Roll and the Operating Statements. We will be studying the rent roll, looking at some case studies, and hopefully improving our due diligence process.

So what exactly is a rent roll?

A rent roll is a list of the rental units of an income property, with some basic details essential for basic property underwriting. It is one of the foundational documents needed to property understand a rental property.

Basic Items contained in a Rent Roll Items.

Exact Information can vary by property type, but these are the most common:

List of units
Name of Tenant
Rent amounts
Beds/Baths
Square footages of units
Rent Per Square foot
Prior Balances
Market Rent
Loss to Lease
Lease Start/End
Additional Fees
Security Deposit
Notes
Date the Rent Roll was created

Rent Roll Uses

Loan Applications—When purchasing a property, a lender is going to want to see a proper rent roll. You may have to create the rent roll if the owner doesn’t have one.
Market Research—Are the rents low compared to market? Is there an opportunity to raise the rents?
Lease Expirations—Are there leases expiring over the next 30 days? Are the tenants month-to-month or do they have long-term leases?
Rental History—Are there balances on accounts growing, or shrinking? Are there a lot of vacancies? Do the tenants pay on time?

How do make a rent roll?

Example – Download the template at the end of this article
Ask – If you are considering purchasing a property, ask the owner for the details.
Find the Source Documents – Leases, County Records, etc.

Case Study

I received a call from an owner of a quadplex, who wanted me to study the property. I asked him to send me rent rolls and operating statements. He didn’t have them, but sent me the leases and two year’s tax returns. I put together a rent roll, and immediately saw issues. First, his rents were $100 low compared to comparable apartments. Second, three out of four of his leases were month-to-month. Third, he had MAJOR collection issues—two of his tenants hadn’t paid rent in over six months, and all of them were behind. These issues were immediately obvious from a review of the rent roll. When I asked him about this, he got quite defensive. He’d grown quite attached to his tenants, and wasn’t willing to evict them. Obviously, it was going to be very hard to sell the complex in the condition it was in, and I advised him to deal with his tenants before selling the complex. I often think about that owner because I’m not sure he realized the state that his property was in, and a quick review of a simple rent roll would have really helped him to prepare his property for sale.

We’d love to hear your stories and lessons learned about reviewing rent rolls from prior deals! Comment below! Also please share this with people you think may benefit from reading.

Resources

Click here for a Free Excel Downloadable Rent Roll and PDF Rent Roll Template.

Article from Jeff Rohde on Roofstock with an overview of the Rent Roll. Article from American Apartment Owner Association on the basics of the rent roll.

This post originally appeared in Jonathan Aceves’s blog and is republished with permission.

New Apartments Coming to Downtown Augusta and implications to Rental Rates

Posted on January 22, 2020July 22, 2020 by Jonathan Aceves

Damon Cline reported on Monday that Downtown Augusta will see one of the first downtown multifamily projects in decades at the corner of 10th and Ellis next year. Known as “Connell’s Corner”, and long home to the local favorite “Sandwich City”, the property will soon be the home to a new high-end four-story apartment building.

‘It will boast a covered and gated 57-space parking lot, ground floor retail/restaurant space, a rooftop patio and high-tech features such as keyless entry – the types of amenities that appeal to urban-minded young professionals migrating to the downtown area.’

The story was broken by Damon Cline, who also shared some statistics and details about the overall rental market in Augusta. Overall, apartment rents are rising quickly, and what was once considered a “Class-A” apartment renting at $1.15-$1.25/SF/Month, has been eclipsed by new super-luxury apartments renting at $1.30-$1.40/SF/Month. This new class of apartments come equipped with similar finishes found in luxury homes, including granite and high-end appliances.

We recently discussed charting rent curves and what they tell us about rent rates and forecasting rent rates. I think this is a great case study. Here’s what the rent curves for downtown apartments looks like:

You can download the spreadsheet here. These are asking rates at the major downtown apartment complexes vs. downtown lofts and upstairs apartments. You can see a big difference between the two. I think what we’re seeing is that the curves are moving out–driven by a higher demand for downtown apartments like Canalside and Ironwood. My guess is that the Atticus could probably plot a new curve–maybe ask $2.15 for their smallest units, and maybe $1.50-$1.65 for their larger ones. If they’re successful with this project, I think we’ll start to see redevelopment of buildings that have up to now been impossible to redevelop with existing rental rates.

What are your thoughts? What are your observations about Augusta’s rental market? Do you think Downtown will continue to grow and develop?

Using Rent Curves to Study Multifamily Rental Rates

Posted on January 20, 2020June 12, 2020 by Jonathan Aceves

This is Jonathan Aceves with Meybohm Commercial Real Estate, advising business leaders and helping them make wise real estate decisions. Today we’re going to be discussing Multifamily Rent Curves.

How does one set out to study multifamily rental rates? We do this by building a rent curve. Let’s say you want to study the rental rates for housing in Martinez, GA. We would do a survey of rental rates at apartment complexes in the area, and plot them on a graph. The graph would start out looking like this:

Then we would separate them by class. Class is a ranking system given to multifamily properties by investors, generally A, B, C, and D. A properties are generally newer, amenitized, and really nice. B properties are usually good, but maybe a little older, maybe not the same level of amenities. C properties are in not-so-great areas, in fair condition, usually schools aren’t so good. D properties are in bad condition and really rough areas, these are the kind that you wouldn’t go to at night. Once you’ve broken them apart by class, you draw a curve over them. You would end up with something like this:

It is interesting to note the steepness of the curve, and the distance between the different curves. Another thing to note is that market changes shift the curves. This is what we see in rapidly gentrifying areas—the entire curve moves out.

So how do you use the rent curve? Well this helps investors identify opportunities for repositioning. It also helps you identify management problems. If I see a complex with below-market rents, I try to figure out why. Is it a problem that an investor can fix?

Thanks for reading! Please like and share with those you think might benefit from this. We’d love to hear from you! What are your thoughts about rental rates?

Downtown Rental Market Update

Posted on January 8, 2020June 12, 2020 by Jonathan Aceves

Today we’re going to be discussing the Olde Town Rental market update. Click here to download the Rental Study.

Overall, we’ve seen the rental rates in Olde Town (Downtown Augusta’s primary residential neighborhood) climb from an average of $.67/SF to just under a dollar per SF over the past four years. That’s a 32% increase, about 8% per year. What’s going on?

Well, as we’ve already mentioned, Cyber and Medical young professionals are choosing to live downtown. That’s driving up rents and housing prices. Also, investors are renovating properties, and so we are seeing more available rental properties that are in in decent condition.

A decent case study is 107/105 Fourth Street. We recently helped a buyer from Virginia acquire those apartments. The previous owner had owned them for over 15 years, and they were in pretty rough condition with low rents. The new owner is going to make an investment into renovating the units, and with the help of professional property management, they will lease them at market rates. The location of the property is great–the condition was terrible. Now that complex (surrounded by young, professional homeowners) will probably target young professional or medical tenants, and we’ll see it on our rent study next year, my guess is on the higher end of our graphs.

You’ll also see in the graph a strong correlation between the “Score” and the price per foot. Our scoring system is a somewhat arbitrary numbering of properties by both location and condition from 1 to 5, and then averaging these two numbers together. Thus, a property with location of 4 and condition of 5 scores a 4.5 in this measure. The number again is somewhat arbitrary, but the correlation is quite strong. So I would assign a property in rough condition and poor location an estimated rental rate of .65/ft, while a property with a good location and great condition an estimated rental rate of .95/ft. Note that this measure doesn’t take into consideration size, which the first graph makes clear is highly correlated with the rental rate.

I think this is great news for our Downtown rental market. Augusta is changing, and I believe that the rising tide will lift all ships.

What are your thoughts? What has your experience been in the rental market?

Martinez Multifamily Market Report

Posted on December 31, 2019June 12, 2020 by Jonathan Aceves

This is Jonathan Aceves with a 2019 C-Class Multifamily Market Report and a Martinez Multifamily Rent Study. Click here to Download our Asking Rent Analysis. We studied 30907 multifamily, particularly around the Steven’s Creek Corridor. What we found overall is that Class A Space commands about a 50% premium over class B space.

The primary Class A Complex in our study was Nine Two Six West, at 926 Stevens Creek Road. Nine Two Six averaged $1.26/foot/month asking rent. Rocky Creek and Iron Horse we considered Class B, which averaged at .84 cents. Fountainhead we considered Class C, and averaged $.69.

Takeaways: It does make a difference who the management company is, where it is advertised, and having good photos and floor plans.

If you are a multifamily investor with north of 20 units, you should sit down with the guys at Doorpost Management. They can give you the same economy of scale as the as the 200+ unit complexes with their integrated maintenance. Also the quality of their financial reporting is critical for owners that may be considering sales in the next few years. It’s hard to get a professional investor to take a serious look at your property when your manager can’t provide clean financials and rent rolls.

Overall Multifamily Market Notable Recent Sales:

Crossroads Apartments (B Class-74 Units, sold at 6.91 Cap/$64K per door)

Baywood Townhomes (C Class-14 Units, Sold at 9.3 Cap/$43K per Door)

2000-2006 Central Avenue (C Class-16 Units, sold at 6.3 CAP/49K per door)

Central Residents Corner (D Class-28 Units–Not yet recorded, sold at 30K per door)

We would love to hear your feedback! What is your opinion of the multifamily market? As always thanks for watching! Please Like and share with a friend!

Columbia County Apartment Development Rezoning Moves Forward

Posted on December 13, 2019June 12, 2020 by Jonathan Aceves

Columbia County Apartments — Blackstone Camp Apartments Elevation

Blackstone Camp Site — Aerial View of Apartment Site

Southeastern Development received a recommendation for approval on zoning revision to modify the shape of the site on Blackstone Camp Road. The property is near the upscale River Island Subdivision in Columbia County. The project would be limited to 274 units, and would follow the River Island PUD narrative design standards. Southeastern Development has already started the site work. The project was technically approved in 2002. It recently has received a lot of criticism from neighbors, including a petition for the Columbia County Commission to reconsider.

I think this is a good project and will ultimately be good for this community. I think it’s important to have a healthy mix of housing, and new Class-A apartments force older complexes to lower their prices, and create a cycle which helps create a diverse offering of housing products. Also, A-Class housing becomes B-Class housing, B-Class housing becomes C-Class, and so forth.

It seems that lower-income neighborhoods that don’t want to see change and diversification fight against gentrification, while higher-income neighborhoods that don’t want to see change fight against “higher crime rates” and “overcrowding of schools”.

Hare are a few additional resources, the Augusta Chronicle Article, the recent rezoning application on this project, and a 2010 Study by Columbia County on Multifamily development.

This looks like a great project that should be great for Columbia County. Augusta is continuing to grow! What are your thoughts?

Tag: Apartments