Cap Rates Rising During 2010

Property and Portfolio Research projects average CAP rates to rise to between 8% and 8.5% during 2010 as the treasury rate rises and some inflationary pressure gathers.

This is very consistent with our own expectation and does not consider REO and foreclosure sales.

Blake Ratcliff

Investors’ Pro Forma and Financial Workbooks

I am preparing a financial workbook and pro forma for investor.  This items will include:

1. Property description factors including address, acreage, unit mix, key  unit descriptions, amenities, acres, and buildings,
2. Expense table to be input  by the investor,
3. Income table to be input by the investor,
4. Occupancy table to be input by the investor,
5. Economic assumptions to be input by the investor,
6. A debt table to be drawn from the lender’s offer or the input from investor assumptions and will include debt tranche / draw inputs,
7. Key metric calculations including Debt Service Coverage, Loan to Value, and Value based on 6%, 7%, 8%, and 9% capitalization rates annually and annualized for the last 90 days of each year,
8. capitalization table including investor information for investor communication,
9. Sources and Uses of equity and debt for the project,
10. Return  tables stated  as IRR and cash on cash results over 3 year, 5 year, and buy and hold annual return on invested cash.
11. 5 year improvement cost table to be input by the investor
12. 5 year proforma financials including Net Operating Income projections, Cash flow projections.
13. Appraisal inputs for building and land value.

The document will include a legend of investor inputs (cells highlighted to indicate investor input), calculated values, and which tables require investor input.

Non-Investor input cells will be locked (this will include descriptions and calculated fields).

All documents will be set up to print cleanly in portrait or landscape format.

This complete set of documents will allow investors & principals to quickly produce all required financial tables for their supporting investors or lenders.  While no pre-prepared tables can meet every scenario, I believe this tool can satisfy most investors needs.

Unfortunately, because of the complexity of this document and likely required refinements in the future, this cannot be offered for free.  The anticipated cost is under $50.00.

I am very interested in investors input on any additions or changes they would propose to this material.

Return On Investment

Most of us don’t normally consider return on investment (ROI) to be a a part of the multifamily due diligence process.  Nevertheless, we should consider it to be a part.  This is true because:

• We gain much information specifically from due diligence that directly impacts revenue and profit.
• During due diligence is the best time to measure the likelihood of success and to recalibrate our ROI expectations.  As a result, we may or may not choose certain tactics with a new investment.

These consideration can determine final capital requirements and ultimate investment goals.

Determining Capital Requirements

Investors prefer certainty and capital is a large component of that.  During due diligence, the objective for capital are:

• Determine cash requirements to complete legal and other preclosing costs,
• Determine cash requirements for anticipated rent roll changes post closing,
• Determine needs for immediate improvements as  determined by your physical inspection,
• Determine needs for immediate improvements as required by the property condition report,
• Determine needs for improvements to support the business plan developed for the property,
• Determine improvement capital requirements for the initial capital reserve,
• Evaluate and quantify marketing cost requirements,
• Allow a buffer of cash reserve for the inevitable development that are not anticipated during due diligence, and
• Evaluate and quantify reasonable reserves for potential negative operating costs during immediate ownership and based on potential future risk.