PROPERTY EVALUATION & DUE DILIGENCE
National Apartment Association Education InstituteCertified Apartment Property Supervisor
HOUSEKEEPING Restrooms Breaks Lunch Cellular Phones Smoking
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INTRODUCTIONS 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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LEARNING OUTCOMES: PROPERTY EVALUATION & DUE DILIGENCE
• 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
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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:
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 Zoning Restrictions
Rent Control
Building Codes and Restrictions
Infrastructure23
ANALYZING A NEIGHBORHOODPurpose: 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 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 RATEUnits Vacant At the
Beginning of a Perio
d
Units Built during the
period
Units Demolished
or removed from suppl
y
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. 28
RENTAL COMPARISONCreate a market rental schedule for each competitor and compile a rental comparison chart. The chart compares base rents and market rents. Compare specifically:
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 INSPECTIONSThe 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.
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 STEPSLook 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 Hazards & Liability Resident Safety Drainage and
Irrigation Systems Landscaping Garages and
Covered Parking Trash Containers
and Compacters
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 Phones Common areas Building to
Building Access Access to
office/units
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MECHANICAL INSPECTIONSMechanical 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
Individual
Units
Common
Areas
Recreational
Facilities
Employee
Work Areas
Storage Areas
Commercial Areas
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PUT ON YOUR MARKETING HAT!Will the property be marketable?
First ImpressionsSignageExterior AppearanceUnit 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 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 MANAGEMENTCritical Areas to Anticipate
Insurance coverageUtility and bank notificationsResident communicationStaff alignment and benefitsMarketing and market presenceForms and legal documents
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CLOSING DOCUMENTS 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 PROPERTYThese are critical days in which to:
Welcome and evaluate new staffManage risk and liability issuesAddress open legal issuesCommunicate with residents and vendorsPlan maintenance programRamp up leasing and marketing plansOrganize administrative and financial areas 57
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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REFINANCINGThe 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 proposeddevelopment’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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LEARNING RECAP: PROPERTY EVALUATION & DUE DILIGENCE
• 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
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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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