Can someone with experience buying apartments help analyze a pro forma? If you can, and are interested, I will PM the pro forma to you.
Thanks in advance.
I have experience financing them—I’d be glad to look at it for you.
Regards,
Scott Miller
I’ll just post the information from the brochure the broker sent me to make life easier:
The property is local, less than 3 miles from me.
price: 7,290,000
equity: 1,450,000
proposed new loan terms: 5.8% 10 years, interest only for 5 years, then 30 year amortization (does this mean the owner is holding the note?)
8.5% cap
17% cash on cash
Income:
Price: 7,290,000
145 units…96 2br, 48 1br
all units at market rent: 1,199,232
less 6% vacancy/collection allowance: 71,954
gross rents: 1,127,278
Expenses:
tax: 105,494
insurance: 26,295
utilities: 93,353
payroll and benefits: 93,890
contract services: 92,915
mgmt. fee: 34,403
total other expenses: 79,429
total: 525,779 (3651 per unit, 4.58 sq. ft.)
NOI: 620,999
allowance for capital items (250 unit / year): 36,000
debt service (5,832,000 x 5.8%): 338,256
pro forma cash flow: 246,743
What do you think?
OK—this is what I think:
- As to the financing option included on the proforma—it’s safe to assume that this is seller backed.
- If you seriously considering this project, you need to verify the statements made on the proforma—items like audited financial statements, tax returns and lease histories is what is required to verify.
- It’s been my experience that commercial broker statements are often exaggerated/embellished to “accent the positive”.
- Using the income capitalization approach (V = NOI/R), the property in question would be 7,305,870…
- Your estimate of debt service is correct (annual factor).
- Debt Coverage Ratio would be 1.84 (bear in mind that 1.2 is the general benchmark of acceptability—the higher the number, the stronger the deal)
Assuming that these numbers can stand up to verification, this deal is financable and meets the min. threshold of every commerical loan program I’m aware of—so it’s good from a financing standpoint.
I’d like to see you shore up more on the front end (the spread between asking price and income cap calculation is only 15K)…
If you are sincere about funding this project, you need to confirm one more thing—the cap rate. Even a small swing in the cap rate rate will have a meaningful impact on property value—case in point, a jump from 8.5% to 9% would equate to a new market value of 6,899.988.
Hope this helps.
Regards,
Scott Miller
I think EZLoans is right on the money. I do think however that it would be better to figure it up as 10% instead of 6% on the vacancy/collection allowance. And yes it sounds like the owner is holding the note.
Proformas always nice. You need to verify all the income and expenses. The Loan information doesn’t indicate whether it’s owner financed…don’t assume this. It’s typical for agents to list purposed loans at market rates just for potential cashflow purposes.
I would start off by asking for the current numbers and last 2 years P&L’s. This will get you going on the right direction. If they are willing to give you tax returns upfront, that’s even better. You need to understand the submarket this property is in. What’s the market rental rates are, Avg occupancy, what are the average expenses per unit on this type of property etc etc.
Curious…when the pro forma states “equity”…is that the equity already in the property, or is that what is expected as the down paymen? It states a 17% cash on cash returen…so I’m thinking the equity is the down payment. I guess that determines if the owner is holding the note in this deal, no? I’m waiting on the last two years P & L and tax returns…
In this case, equity is also referred to the down payment. The proforma is basing it on a 20% down payment(7,290,000*20%=1,450,000).
CF 246,743/ Equity 1,450,000 = 17% COCR
The equity required or COCR has nothing to with the owner holding the note. Usually when a seller is offering financing, it will say “Owner Financing” or “Seller Financing” or " Seller Second" etc etc.
Why not just ask the agent/owner?
My guess is that he is not offering any type of financing(he’s just quoting market rates for evaluation purposes) The proforma you posted is pretty industry standard and doesn’t indicate owner financing.