National Apartment Association Education Institute
Certified Apartment Property Supervisor
PROPERTY EVALUATION & DUE
DILIGENCE
HOUSEKEEPING
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 Lunch
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Phones
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INTRODUCTIONS
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Name
Company
Number of Units
How Many Years In the
Business
Have you been involved
with the Due Diligence
process in your career?
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GROUND RULES
Participate fully.
 Help us stay on track.
 Be on time
 Ask questions
 Offer ideas and opinions as perceptions
 Have fun.
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Due Diligence Process
Why Owners/Companies Buy,
Sell, & Renovate Properties
Market Analysis
Property Inspections
Operational and Financial
Analysis
Analyzing and Reporting
Property Evaluation Results
Property Acquisition
Property Renovation
Property Disposition and
Refinancing
New Development Feasibility
LEARNING OUTCOMES: PROPERTY EVALUATION & DUE
DILIGENCE
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1. INTRODUCTION TO PROPERTY EVALUATION
AND DUE DILIGENCE
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WHAT IS DUE DILIGENCE
Due diligence means assessing possible risk to
the business when a buyer or investor is
considering acquiring, refinancing, or renovating
an existing property—or developing a new one.
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WHO PERFORMS DUE DILIGENCE
Buyer has the primary responsibility.
 The multi-site supervisor:
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 May
lead the evaluation and due diligence process
for the owner in a smaller company.
 May be a member of a larger due diligence and
discovery team and be assigned certain
responsibilities in the process.
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TYPES OF RISK TO ASSESS
Inflation trends
 Interest rate changes
 Management efficiencies
 Market condition changes
 Physical improvement needs
 Obsolescence issues
 Staff performance
 Neighborhood or community changes
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OVERVIEW OF THE DUE DILIGENCE PROCESS
Rent Roll Analysis
 Service and Maintenance Agreements
 Government Compliance Issues
 Recorded Documents and Litigation
 Full Physical Inspections
 Open Tax Issues
 Insurance Policies and Risk Management Claims
 Personal Property
 Market Conditions
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ACTIVITY: DEBRIEF QUESTIONS
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2. WHY OWNERS/COMPANIES BUY, SELL, &
RENOVATE PROPERTIES
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WHY OWNERS BUY, SELL, AND RENOVATE
There are many reasons why owners choose to
acquire, sell, or renovate a property. The chief
reason, however, is that owners want to further
their investment goals.
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OWNERSHIP TYPES
Individual or Sole Proprietorship
 Limited Liability Companies
 S-Corporation
 Limited Liability Partnership
 Joint Venture
 Real Estate Investment Trust (REIT)
 Tenants In Common
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RENOVATING PROPERTIES
Intended to improve the properties’ positions
within the marketplace
 Primary intention of higher rent production
and/or lower operating costs
 May be necessary in order to maintain the
asset and protect current rent levels
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CURRENT OUTLOOK FOR APARTMENTS
Renter-occupied households represent 33% of
the number of households in the United States
 20 million households moved between 2003
and 2005
 The younger the household the more likely you
are to find renters
 78% of renters have household incomes of less
than $50,000
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ACTIVITY: DEBRIEF QUESTIONS
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3. MARKET ANALYSIS
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MARKET ANALYSIS
A market study delivers the information
necessary to allow the buyer to make an
informed judgment on the value and price of
the acquisition.
 The evaluation should describe regional
economic trends, describe economic, social,
and demographic trends in the neighborhood,
and prepare a competitive property analysis
report.
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THREE COMPONENTS OF A MARKET ANALYSIS
Regional analysis
 Neighborhood analysis
 Subject Property analysis
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ANALYZING A REGION
Purpose:
To investigate the economic conditions
in the larger geographic area that serves
the apartment community
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TYPICAL SOURCES OF DATA
U.S. Bureau of the Census (www.census.gov)
 American Housing Survey
(www.census.gov/hhes/www/ahs.html)
 U.S. Bureau of Economic Analysis (www.bea.gov)
 State Agencies and Local Governments
(www.statelocalgov.net)
 Local Chambers of Commerce
 The National Apartment Association’s Annual
Income & Expenses Survey
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KEY ITEMS TO RESEARCH
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Zoning Restrictions
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Rent Control
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Building Codes
and Restrictions
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Infrastructure
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ANALYZING A NEIGHBORHOOD
Purpose: To investigate the conditions of the immediate
marketplace of the subject property identifying strengths
and weaknesses of the neighborhood and its offerings:
Neighborhood
Amenities
Educational
Facilities
Entertainment
Venues
Job Sources
Shopping Areas
Job Growth
Unemployment
Rates
Household
Formation
Population Growth
or Decline
Demographic Data
Population Size
Density
Age
Race
Gender
Income Levels
Planned
Infrastructure
Improvements
Neighborhood
Government and
Associations
Schools
Transportation
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NEIGHBORHOOD BOUNDARIES
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The property’s neighborhood is a small geographical
area, such as a few multiple blocks.
The boundaries can be natural, such as rivers and
lakes, or manmade barriers, such as streets and
highways.
Competition defines the physical perimeter within
which prospects are looking at properties.
A map can be used to plot competition, work locations
and city services.
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ANALYZING THE COMPETITION
Review property records
 Review public records
 Review publications
 Talk with local industry professionals
 Talk with local multifamily brokers
 Shop competitors
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UNDERSTAND SUPPLY & DEMAND
Supply refers to the number of apartments
available in the market at a given time.
 Demand is the need or request for those
available apartments.
 If Supply is less than Demand – the value and
rent of the apartments increase.
 If Supply is greater than Demand - there is a
decline in rents and difficulty leasing.
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ABSORPTION RATE
Units
Vacant At
the
Beginning of
a Period
Units Built
during the
period
Units
Demolished
or removed
from supply
Vacant
Units at End
of Period
Units
Absorbed
•When supply is less than demand = vacancy decreases
and absorption is positive.
•When supply greater than demand = vacancy
increases and there is negative absorption.
•Understanding the circumstances that caused this is
important.
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RENTAL COMPARISON
Create a market rental schedule for each competitor and
compile a rental comparison chart. The chart compares
base rents and market rents. Compare specifically:
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Unit type
Square footage
Market rent including additional recurring charges for
amenities
Market rent per square foot
Amenities
Incentives – these will reduce market rents to effective rents
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ACTIVITY: DEBRIEF QUESTIONS
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4. PROPERTY INSPECTIONS
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PROPERTY INSPECTIONS
The property inspection should identify any
environmental issues and document the review of:
 Exterior structures
 Interior apartment units
 Mechanical facilities
 Maintenance
 Leasing/business offices
 Common areas and amenities
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BEGINNING THE INSPECTION
Owner’s objectives and purpose of the inspection
 Inspection checklists for all inspections
 Proper recording equipment.
 Cooperate with current onsite management
 Legal notices if required
 Minimum disruption to current management and
residents.
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NOTE: Sellers sometimes do not tell existing site personnel
about considering selling a property. Make sure you are aware
of what information the current onsite team knows.
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EVALUATION STEPS
Look for
Deferred Maintenance
Functional Obsolescence
Economic Obsolescence
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ENVIRONMENTAL INSPECTIONS
Most lenders and prudent buyers will require a
Phase I Environmental Survey before funding a
loan or acquiring a property.
 Based on the extent of any renovation or rehab,
environmental inspections may also be
required.
 This is especially true with regard to asbestos,
lead, mold and other indoor air quality
assessments.
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PROPERTY EXTERIOR INSPECTIONS
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Hazards & Liability
Resident Safety
Drainage and Irrigation
Systems
Landscaping
Garages and Covered
Parking
Trash Containers and
Compacters
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Drives/Parking Areas
Perimeter Fencing or
Enclosures
Access Gates
Sidewalks
Energy Evaluation
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BUILDING INSPECTIONS
Roofs
 Façade and Carpentry
 Foundations
 Building Envelope (Windows and Doors)
 Decorative Items (Shutters, Vents, Etc.)
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ACCESSIBILITY INSPECTIONS
Parking
 Entryways
 Corridors
 Stairs
 Elevators
 Drinking fountains
 Bathrooms
 Alarms
 Signs
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Phones
 Common areas
 Building to Building
Access
 Access to office/units
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MECHANICAL INSPECTIONS
Mechanical inspections include the major systems
that serve the property, such as:
•Electricity
•Gas
•Water
•Sewer
•HVAC
•Fire Safety Systems
•Internet/Fiber Lines
•Elevators
•Irrigation
•CATV
•SATV
•Controlled Access
•Telephone service
•Trash disposal
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INTERIOR INSPECTIONS
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PUT ON YOUR MARKETING HAT!
Will the property be marketable?
First Impressions
Signage
Exterior Appearance
Unit Interiors
Considering inspection and market conditions,
will the acquisition or renovation produce a
marketable product?
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ACTIVITY: DEBRIEF
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5. OPERATIONAL AND FINANCIAL ANALYSIS
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ANALYZING INCOME SOURCES
Rent
 Fees utilities
 Fees for garage or parking spaces
 Fees for pets
 Fees for cable, recreational amenities or other
services
 Income from laundry and vending facilities
 Income from furniture or equipment rentals
 Administrative fees
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RENT ROLL ANALYSIS
The rent roll is a record of occupancy and
collection activity at a given time. It allows you to
compare rent potential with lost income due to
vacancy, concessions, and collection loss.
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LEASE FILE AUDITS
Rental Application
 Lease Processing Checklist
 Lease Agreement
 Lease Addenda (Community Policies, RUBS,
Sub-metering, Safety, Access Gate)
 Move-In Inventory and Condition
 Pet Agreement, if applicable
 Anything Else Required By Law
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ANALYZING EXPENSES
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When evaluating a potential acquisition, it is
necessary to analyze current and potential
expenses in three areas:
 Operating
Expenses
 Capital Expenditures
 Renovation Expenses and Costs
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CRITICAL OPERATING AND FINANCIAL
INFORMATION REVIEW
Current vs. Post Property Taxes
 Expected Insurance Costs
 Management Fees
 All service contracts – Do they survive an
ownership change?
 Delinquency – Who will own the bad debt?
 Personal Property Inventory
 Others?
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ACTIVITY: DEBRIEF QUESTIONS
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6. ANALYZING AND REPORTING PROPERTY
EVALUATION RESULTS
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THE EVALUATION REPORT SHOULD INCLUDE:
Market and competitive surveys
 Regional and neighborhood analyses
 Interior and exterior property inspections
 Income and expense analysis
 Lease file audit findings
 Budgets and recommendations
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KEY CONTENT FOR A DUE DILIGENCE REPORT
Section 1: Title Page
 Section 2: Letter of Transmittal
 Section 3: Description of the Property
 Section 4: Market Analysis
 Section 5: Physical Condition of the Property
 Section 6: Operational Analysis
 Section 7: Conclusions and Recommendations
 Section 8: Disclaimer
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7. PROPERTY ACQUISITION
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PROPERTY ACQUISITION AND MANAGEMENT
CHANGE
The Property Supervisor plays a critical role in the
smooth and successful transition from one owner
and/or manager to another.
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CHANGE IN MANAGEMENT
Critical Areas to Anticipate
Insurance coverage
Utility and bank notifications
Resident communication
Staff alignment and benefits
Marketing and market presence
Forms and legal documents
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CLOSING DOCUMENTS
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The current rent roll at closing
All original lease agreements and resident files
Security deposit list and funding instructions
Property tax records
Utility accounts list and unpaid bills
Outstanding bills if the purchaser agreed to assume them as
a condition of closing
List of vendors used by the property
Current vendor and service contracts
Pest inspection records
Inventory of personal property
Physical inspection reports written for the owner
Legal records
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FIRST DAYS AND WEEK AT THE PROPERTY
These are critical days in which to:
Welcome and evaluate new staff
Manage risk and liability issues
Address open legal issues
Communicate with residents and vendors
Plan maintenance program
Ramp up leasing and marketing plans
Organize administrative and financial areas
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ACTIVITY: DEBRIEF QUESTIONS
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8. PROPERTY RENOVATION
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PERFORMING A NEEDS ASSESSMENT
Projecting the costs and benefits, including the
property’s repositioning that might result
 Participating in the bid and contract process
 Handling leasing and marketing during
renovation
 Evaluating whether renovation meets the
owner’s objectives
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QUESTIONS TO ANSWER BEFORE STARTING
How will this renovation impact my stabilized
residents?
 How will this renovation impact my occupancy?
 How will this renovation impact the leasing
process?
 Are there safety concerns to employees,
residents, prospects, or guests during this
renovation?
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ACTIVITY: RENOVATIONS - WHAT WOULD YOU
HAVE DONE DIFFERENTLY?
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9. PROPERTY DISPOSITION AND REFINANCING
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BEFORE A PROPERTY DISPOSITION
Consider the potential benefit of leverage
 Consider expected future property performance
 Consider market conditions for sellers
 Consider financing and refinancing options
 Consider ownership wishes
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REFINANCING
Equity builds over time
 Loan balance relative to current value lessens
 Less financial leverage
 Refinancing increases the property’s financial
leverage
 Refinancing provides additional investment
funds.
 Refinancing is an alternative to a sale
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REFINANCING
The borrower must evaluate the incremental cost
of the refinancing.
 If the interest rate on the new funds borrowed
is higher than the interest rate on the current
loan, the incremental cost is even higher than
rate on the new funds.
 If the rate were lower, there would also be a
lower incremental cost of the additional funds.
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10. NEW DEVELOPMENT FEASIBILITY
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FEASIBILITY FOR NEW DEVELOPMENT
When evaluating a potential,
to-be-built property, it is critical
to understand the proposed
development’s market supply
and demand.
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AREAS OF A FEASIBILITY ANALYSIS
Supply and Demand Issues
 Cost Feasibility
 General Market Absorption
 Location relative to the anticipated demand
 Financing Costs
 Income and Expense Projections
 Lease Up Projections
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ACTIVITY: DEBRIEF QUESTIONS
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11. KEY TAKEAWAYS AND CLOSING
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Due Diligence Process
Why Owners/Companies Buy,
Sell, & Renovate Properties
Market Analysis
Property Inspections
Operational and Financial
Analysis
Analyzing and Reporting
Property Evaluation Results
Property Acquisition
Property Renovation
Property Disposition and
Refinancing
New Development Feasibility
LEARNING RECAP: PROPERTY EVALUATION & DUE
DILIGENCE
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ACTION PLAN
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THE ACTION PLAN
This plan is yours and yours alone
 You decide on which areas you want to work
 You set the number of goals
 You decide on the action steps and timeline.
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