Tag:Multi-family

Cost of doing business

The Pointe has been all over the news and social media lately due to the City of Plymouth deeming the property unsafe to occupy. This has forced the charitable community to jump to action to help the residents of the 16 units there. On top of the general low income housing shortage in Marshall County, there is the issue that this property was renting at the very low rate of $400 per month. To the best of my knowledge, this is not a subsidized housing site.

As has been described to me, the facility is a former nursing home, so the “units” are small rooms with half baths, i.e. a sink and toilet. They are set up with common (shared) men’s and women’s showers and a community kitchen. There has been some deferred maintenance that includes roof leaks leading to other damage. Pictures from the Pilot News indicate that there is some mold/mildew, but the level and danger from that would have to be professionally assessed.

The landlord is taking it on the chin for this. Again, I know none of the background, reasons for deferred maintenance, etc. But I do think the $400/month is an unworkable business model. So if all the work that is projected to be needed there is done, there’s no way it supports itself at that rental rate. Here are some numbers to start the conversation:

• The property was purchased by the current owner for $126,000 in 2006 per county records.
  • The county lists the square footage of the property at 9,840sf. That’s roughly $13/sf which is dirt cheap. Assuming it had to be financed, most commercial loans require 20% down ($25,200), can only be financed for 20yrs (unlike a home with a 30 year mortgage) and with an interest lock of only 5 years, i.e. it has to be refinanced every five years. Lets assume a 5% loan rate (low right now, high a few years back), that gives you a monthly payment of $665/month or $7,980/yr.
  • The county lists the yearly taxes for this property at: $5,634
• There was a past roof repair estimate of $85,000. Apparently there has been deterioration since then and we all know what inflation has done. For discussion, lets round that up to $100,000.
• Someone shared an estimate of $10,000 for a mold assessment.
• A low estimate for mold remediation would be $100,000, which assumes $5k per unit plus common areas.
• Mold remediation will require tearing into walls, ceilings, etc. From looking at the pictures, there is a lot of repair and remediation needed without that. Let’s put $160,000 towards the units and $40,000 for the common areas. (probably low.)
• For discussion, let’s put $60,000 towards clean-up and updates to the exterior.
• This will require building permits and since it’s commercial, so architectural plans to go to State. Architect fee: $25,000
• Permit fees and such: $5,000
• Minimum of 8 months to get it done, so no rent during that period.

So lets total that up as if someone were to buy this this and puts it back the way it should. That comes to $626,000. I think this is probably a cheap number, but it’s a starting point for this discussion.

First pass: 20% down = $125,200 The remaining $580,800 financed per the above at 5% = $45,996 in loan payments, against fully rented 16 units x $400/month x 12 months = $76,800. Seems like a decent return of $30,804, but remember, right now, plunking that $626,000 into a government bond funds would pay in excess of 5%, or a yearly return of $31,300 with no risk.

But lets do a second pass the way a developer would look at this:

• Rent: 16 units x $400 each x 12 months = $76,800
• 7% vacancy and bad debt = ($5,376)
• 7% management fee = ($5,000)
• Property Taxes = ($5,634)
• Administration and leasing = ($3,000)
• Maintenance Payroll – tax, benefits, etc. = ($9,000)
• Maintenance Contracts & Supplies = ($5,000)
• Utilities (All included) = ($12,000)
• Insurance = ($13,000)
• Misc = ($1,500)
• Debt Service = (45,996)

Now we’re at a loss of $28,706 despite some of those numbers being generously on the low side. Not including the time value of money, i.e. the $125,200 down payment would earn $6,350/yr at 5%. So looking at the first three numbers in the above list, it would take a rent increase of $173/unit to get to break even. Most banks won’t finance a break even project and most developers want to make some money and have some cushion for unforeseen things. And nowhere in there was any maintenance reserve savings for when the roof needs replaced again or whatever unforeseen problem comes up.

Granted, this is an extremely simplified analysis. It doesn’t take into account the benefits of depreciation, since those are only a benefit when there is profit. Likewise it doesn’t take into account any taxes on the theoretical income. It also doesn’t take into account any escalators for inflation. There would be a large spreadsheet that a commercial developer would run this through to make their analysis.

Minimum Rent to make this begin to work would need to be $700/month, when existing tenants say they are struggling with the current $400/month. Reality is more like $800 – $900 to get to comparable rates in Plymouth that make economic sense to cover the myriad of additional things that will come up in the renovation and the probably greater management, vacancy and bad debt costs that are likely. The significant age of the building warrants a large maintenance reserve.

But lets take a step back and do really, really rough math (because I don’t know their expenses) on existing conditions assuming with the initial investment of $126,000. Assume 20% down leaves $100,800 financed. Using the 5% interest rate number in the previous scenario, that’s $665/month = $7,980 per year.

• Rent: 16 units x $400 each x 12 months = $76,800
• 7% vacancy and bad debt = ($5,376)
• 7% management fee = ($5,000)
• Property Taxes = ($5,634)
• Administration and leasing = ($3,000)
• Maintenance Payroll – tax, benefits, etc. = ($9,000)
• Maintenance Contracts & Supplies = ($5,000)
• Utilities (All included) = ($12,000)
• Insurance = ($13,000)
• Misc = ($1,500)
• Debt Service = ($7,980)

This would give us a profit of $14,944/yr. There may be other expenses I haven’t put a number to and conversely there are those that would suggest the maintenance line items should be zeroed out, since maintenance has been less than needed. In any case, this is not a gold mine as it exists today.

This is the real life example of what I’ve said for years… I would rather have a leaky roof over my head than no roof at all. Some of these residents have been living that situation, but the City has (rightly) cited safety concerns that removed their leaky roof.

the $626,000 number is a low number for the renovation, but it’s an impossible number to duplicate that building. $626,000/9,840sf = $64/sf. New construction on a facility such as this would be in excess of $200/sf. It is also questionable that a new facility such as this would meet current zoning standards, though a variance might make it possible. Then there is the issue of where to put it. Even if built on the same site, rezoning would be required along with the variance. That would prompt the same NIMBY protests that Garden Court ran into with the two sites they considered for their project. Theoretically, Garden Court’s GC Horizons project should have been less objectionable as fully functioning apartments.

Plymouth as a community has some hard decisions to make regarding housing. Complaints are rampant about facilities like The Pointe, but solutions are few. As seen with The Pointe, just shutting down the problem facility without a viable alternative creates a different crisis. As seen with Garden Court’s GC Horizons project, those that step up with a solution are often disparaged. Mayor Listenberger is making efforts, but is getting a lot of pushback. It’s tough when there’s a cry to “Do Something!“, but it’s accompanied by a chorus of “But Not That!“… no matter what “that” is…

Some things never change… That’s just part of the cost of doing business…

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