Expenses as percentage of revenue
Hello,
I just discovered and joined this web site and these forums. They look like a fantastic source of info and a fantastic group of people.
I invest in RE in NYC. I've got a number of buildings under my belt, and my MO is to buy, manage well and sit on.
I'm faced with an interesting opportunity that I'd like some expert feedback on (even non-expert is certainly welcome).
I have an opportunity to purchase 3 adjacent buildings sitting on a total lot size of 5,000 sq ft, build them out and up for a total of a 50,000 sq ft apt/retail bldg. The site is a very hot area of Brooklyn.
Problem at this point is that I'm not sure of a number of the expense variable and I was wondering what people would suggest.
I've heard experts use anywhere from 20 to 36% as rough figures -- that's quite a range. I'm sure it also varies with the size of the project. I have buildings where my total expenses run 14%, while others run 24%.
Revenue is expected to be ~$1,250,000/year. Financing on $9MM should run about $750,000/yr.
Another question, while I'm asking, is whether anyone knows a lender who's interested in financing a $9MM deal?
Thanks,
Joseph
Since you already have empirical data in hand from your other holdings, just use your own worst case estimates for your project.
I don't have anything that large.
You will have mixed use property. If your lease terms for the commercial businesses call for triple net leases, with a long term rental agreement, then you should easily estimate your commercial income with no overhead expense except your debt service.
For the residential rentals, use a 40% expense factor until you refine your estimates.
Yes, 10% of the space will be retail/commercial, with (at least close to) trip-net leases.
I'd really appreciate hearing how you come to 40%. There is a world of difference in the viability of this project between 25 and 40% overhead.
Thanks very much.
Joseph
No magic, smoke or mirrors. Just take your total annual operating expenses and divide by your actual annual (residential) rental income for the properties you already own and operate.
The fact that this project is quite a bit larger than your present holdings should not seriously affect the ratios.
In my case last year, I had a 44% operating expense factor. Since you don't give us any details to go on, I just suggested a number closer to my own experience.
I hear that Mayor Bloomberg is raising property taxes in NYC rather dramatically. You might even want to use a 50% expense factor as a hedge against your unknowns.
Indeed, NYC is an expensive place and Bloomber's recent 18% RE tax hike, following a previous 2% tax hike is no small chunk of change.
I would very much appreciate getting more specific feedback -- perhaps my estimates below would be useful?
I expect an average revenue of $24/ft.
The following are my best estimates:
Property taxes: $125,000
Insurance: $50,000
Water/sewer: $10,000
Utilities: $40,000
Management: $100,000 (8% of revenue)
Repair: $30,000
Advertising: $5,000
Accounting/legal: $10,000
Total: $370,000 ($6.70/ft)
That works out to 29.6%.
Anything about this seem incorrect?
Missing anything?
Thanks very much,
Joseph
Suggest you also add in a vacancy and rent collection expense. I usually use one month per year, for single family properties, and about 5% for multi-family properties.
Additionally, I don't see a contribution to a replacement reserve. Major systems do need to be replaced eventually, so you should consider contributing something monthly to a reserve account for this purpose. Just figure out the service life expectancy for each major system, then divide the replacement cost by the number of months still left in that systems service life. The result is the suggested amount to add to your reserve fund each month.
I don't know what your financing looks like, but in my experience, a commercial loan has a 15 year amortization. If you are using a 30 year loan to predict your debt service, you may need to allot $1MM or more to debt service each year.
Otherwise, it looks like you have most of the major expenses identified.
I know that NY property taxes are considerably higher than other areas of the country. Insurance may be higher as well.
I would suggest finding similar properties, finding out who owns them, tell them what you are doing, and talk numbers with them.
I would also call lenders in NY and see what expense factor they work with typically. I'm in Utah where 25-35% is pretty reasonable. I've talked with people in CA that assume 45-50%.
Keep in mind that some things will vary quite a bit from owner to owner. You can look up the yearly taxes (County Assessors office), You can call and get quotes on insurance (Don't trust what the seller tells you. He may be paying that much, but that doesn't mean that YOU'LL pay that much. The after affects of September 11th have trickled through the insurance world and now you and I are paying for the twin towers (roughly $49K per AMERICAN). Good chance a renewed rate will be considerably higher).
As was said, I'd also count on a 15 year amoratization until you find a lender that will go beyond that (say 25 year am. with a 15 year call).
As for lenders, go to google and look for "Commercial Loans"
I'd create an exec. summary of the project and blast it out to several hundred lenders and let them get back to you.
Good luck.