Session Plan
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Chapter Eight:
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Discussion of Occupancy Study Results
Apartments as an investment alternative
Two Apartment case studies
The Remaining Term
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Now that we have covered the bulk of the
textbook material, the course moves into the
“real world” application phase.
Numerous properties will be discussed in
chapters 8-10
Format of Case Studies
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Each case study will contain a one or two
page summary of the case data
We will discuss values that you have
determined for the following items:
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Gross Potential Income (GPI)
Effective Gross Income (EGI)
Net Operating Income (NOI)
Annual Debt Service & Debt Coverage Ratio
Sensitivity Analysis
Property Life Cycle
UPSIDE/Decreasing Risk
Ground
Floor
Stage
One
DOWNSIDE/Increasing Risk
Loan
Commitment
Maturing Aging
Stage
Interim Stage Tenancy Absorption Process Process
Two
Three
Four
Five
Six
Seven
Demise
Eight
Developer
Development Period
Equity Investor
Holding Period
Developer
Redevelopment Period
Property Life Cycle Pyramid (Pyrr & Cooper, 1982)
Cash Flow Fundamentals
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Quantity
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How much lease income per month (historical/projected)?
Comparison to market rental rates per square foot for similar
properties.
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Quality
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Diversification (number of tenants)
Tenant financial strength (internal information or Business
Credit Report when applicable)
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Durability
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Length of leases relative to term of loan.
Mgmt Experience with property (or similar properties)
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Review of Apartment Terms
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Amenities
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Efficiency
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An apartment without a separate bedroom
Garden Unit
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Special features of a particular unit (fireplace, vaulted
ceilings, etc.) or of the complex as a whole (swimming
pools, tennis courts, etc.)
A unit all on one floor
Townhouse
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A unit on two floors
Types of Apartments
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Walk-up Apartments
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Mid-rise Apartments
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3 to 5 floors, patio on first floor, balcony on rest
6 to 9 stories, will have an elevator to service
High-rise Apartments
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General rule is one elevator for every 8 floors
Typical Apartment Complexes
Contain….
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Signed leases with terms of one year or less
Proximity to places of employment, shopping
centers, churches, schools, and public
transportation
Should be located in a residential area
Proximity to parks, lakes, etc. is desirable
Should not be located too close to industrial
facilities
Should have adequate amount of parking
Quality of Construction
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A brick exterior is typically more desirable than a
wood or other exterior
Washer & Dryer hook-ups are a plus
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Central Air Conditioning is desirable
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If not need access to laundry facilities
As opposed to window a/c units
Condition of roof, siding, entrances, parking lot
etc. affect the effective age of the property
Interior quality also affects desirability
Standard Vs. Luxury Apts.
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Luxury units are typically newer and of much
higher quality than lower priced units
As a general rule, the luxury apartments do not
compete with standard apartments
Typically, the more amenities in a property, the
higher the rent per square foot
Should always consider the supply and demand
of COMPETING units when deciding on the
viability of an apartment project
Replacement Reserve
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The direct capitalization spreadsheet contains one expense
item that will not be given to you; replacement reserve.
This is an estimate of items which will need to be replaced each
year
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Like roof, structural repairs, HVAC, appliances, etc.
Varies depending on age and condition of the property
Apartments: From $100 to $250 per unit
Office/Retail/Industrial: From 1-3% of EGI
Investors used to have to place this amount of money in an
escrow account each year
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Now most lenders look to make sure investor has cash on hand in
case something goes bump in the night!
The Higher the Better?
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Typically apartments higher than two floors
will have an elevator
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In many areas of the country this is required.
If an elevator exists, should always inquire about
its age and condition.
If a subject property has a third floor with
stair access, it may be harder to lease those
units
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How might you try to get those units leased?
Off-Campus Student Housing
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Too Old
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Too Late
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Get them ready in time for Fall semester…or else!
Too New
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Newer properties have better amenities
Last one to market in saturated environment
Too Broad
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Caters to students and the general public
Off-Campus Student Housing Market
Study
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Supply:
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Focus on just student apartments
May need to include rental houses
Contact university officials for on campus units
Contact regional/city officials for future construction plans
Demand:
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Total enrollment minus on-campus and commuters
Contact University officials for on-campus projections
Contact appraiser if need occupancy study (good for
approx. one year)
Results of Off-Campus Occupancy
Study
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Overall Current Market Vacancy: __%
Three Year Average Vacancy: __%
Rent per Square Foot: $____
Average Monthly Rental Rate: $___
Average Monthly Rent per Bed: $____
Average Age of Complex: ____ years old
____ Different Apartment Complexes Surveyed
– A Total of ____ apartment units!
We will use these to compare our case studies to see if the rental
rates are within the market averages….
Your Role as Lender
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Congratulations! You are now employed as a senior
commercial lender at a large commercial bank!!
– Hopefully a solvent one!
As you will be looking at these investments from the
perspective of a lender, it will be helpful to get
familiar with your lending guidelines.
I will provide you the lending criteria (loan amount,
interest rate, amortization period, cap rate), you will
do the rest!
End Apartment Slide Session