Failure to review each property’s profit profile annually is roughly the same as burning money.  There are a number of ways to increase the profitability of a single commercial asset or portfolio.  Remodel, Repaint, Reposition, and Repurpose are obvious choices…that typically require significant equity and allocation of resources to accomplish.  Revamp the rent schedule is another…although being too aggressive can actually increase vacancies and turnover costs.  In this post we’ll cover low and no cost solutions, such as lowering property tax, utility and insurance costs, plus enhancing revenue through captive cable programs.

REMINDER: In a 6 Cap rate market every dollar in reduction of expenses (tends) to increase the value of the asset by $16.66, in addition to the increasing NOI.  Permanently shave $15,000 off your operating expenses and you’ll increase the cash flow to the owner by $1,250 per month and increase the value at time of sale by $250,000.

PROPERTY TAXES

Property taxes are the second largest single expense item for many multi family assets.  The truth is that the assessor gets it right much of the time.  But if someone has to pay more than their fair share of taxes it wont be my client.  I became a believer in property tax appeals working on profitability improvement projects in Las Vegas, NV and Tempe, AZ. 

Las Vegas, NV:  The REIT I worked for had approximately 200 total 3 and 4 bedroom homes in Clarke County, NV that they purchased from a builder as a bulk sale.  They were on only one tax lot so it was pretty obvious that they were being operated as a multifamily asset.  Part of what we were working on to create additional value was getting them individually platted so we could sell them as condos.  Shortly after the plat was recorded tax bills were delivered and they went up collectively $200,000.   The reason I tell you this is that I called the Clarke County Assessor’s office and told them that I thought the property should be taxed as it was being operated…as an apartment.  I followed up with a formal letter…they agreed and changed back to apartment values, saving the firm $200k per year. 

Tempe, AZ:  When the market started cooling in Phoenix we felt one of our assets was grossly over valued by the Maricopa County Appraiser.  We worked with a vendor and reduced the assessed value by $13,000,000.  That raised the cashflow significantly due to adding $150,000 to NOI.  At the prevailing Cap at that time this would have created a $3,000,000 increase in sales price if the property was to be marketed.

Full Disclosure:  I saw how important property tax appeals were that it inspired me to found a company that does just that.  Prime Property Tax Negotiation appeals property taxes on commercial assets in the US with a focus on OR, WA, and CA.  More information is available at: www.primeptn.com .  You can contact us at:  info@primeptn.com or 503.577.1034.

MULTIFAMILY INSURANCE

One of the best bargains in multifamily is insurance.  Coverage is far more affordable now than it was 5 years ago.  Price per door has actually dropped.  It’s also important to review your coverage.  You should have the higher of what your loan agreement requires, and replacement cost.  This is not a place to go cheap.  The three really good providers are usually well priced…I recommend using them instead of second or third tier vendors.  (If you want my opinions on the best companies and agents please contact me at 503.577.1034 or rick@rosecitycre.com.)  Second thing to remember if you have a portfolio of properties is that you may be able to improve your coverage and reduce your average per door cost of insurance by getting bids based on the portfolio rather than the individual properties.  I worked for a local investor on a portfolio approach and reduced his cost per unit, increased cash flow by $10,000 per month and increased the aggregate value at time of sale by $2.6 million dollars.

RUBS

Utility cost increases that are borne by the owner are a silent profit killer.  When Renters Utility Billing Service (RUBS) is used the landlord pays the utility and bills back to the tenant their portion.  The way to cut the water usage in half is to make the tenant pay for using it.  All of a sudden a toilet that flushes continuously will be reported, as will the under sink leak.  Billing amounts may be derived from sub-metering, or apportioning, and in some cases the landlord actually breaks even or makes a buck.  Be aware that some municipalities have laws regarding the methodology permitted.  This program is good from day one…and will help the landlord from absorbing future utility increases.

CAPTIVE CABLE REVENUE SHARING

A number of  cable signal providers want to shut out their competition.  To secure sole provider rights they offer revenue sharing programs to multifamily property owners.  Most of the ones I’ve checked into require 100 to 200 doors as a minimum.  this can be as a single asset or as a portfolio.  Typical contracts range from 4 to 8 years with an initial payment of $100 to $125 per door and additional quarterly payments totalling $400 over the life if the contract.  When the contract is up you can renew or change vendors.  (Note the numbers cited are for one example…other offers may be higher or lower.) This works out to be roughly $1oo per door per year additional revenue.

HOW MUCH MONEY ARE YOU BURNING?

Contact Rose City Commercial Real Estate for additional information on how to tune up the profitability of your multifamily investments, or to expand your portfolio: Rick Bean, rick@rosecitycre.com. Phone:  503.577.1034.

Investors continue to prefer U.S. apartment buildings over most commercial properties, even commercial office space, as total multifamily sales volume jumped nearly 80% in the second quarter over the same perioud last year.

Although still just a fraction of its mid-2007 peak, the nearly $15 billion in sales in the quarter brought total investment for the first half of 2011 to $24.5 billion, according to CoStar Group data.

The average per-unit price of apartment properties reached $88,500 in the quarter — the highest since the third quarter of 2008, said CoStar Global Strategist Michael Cohen during CoStar’s Mid-Year 2011 Multifamily Review & Forecast.

FREE:  Rose City Commercial Real Estate will give you a no cost opportunity to develop a long term investment plan customized to your goals.  Portland multi-family investments are poised for solid gains.  Contact Rick Bean now at: 503.577.1034 or rick@rosecitycre.com

Meanwhile, strong renter demand continues to push down apartment vacancy rates and nudge up rents. With capitalization rates for existing properties seeing strong compression in some high-flying markets, larger multifamily developers have responded by starting to ramp up their development pipelines with new projects.

Top coastal markets continued to dominate sales volume in the first half of 2011, including Washington, D.C with $2.6 billion; Los Angeles, $2.3 billion and the San Francisco Bay Area, $2.1 billion. In Atlanta, where investors have sought a large number of distressed properties, sales totaled $1.3 billion in the first six months. In Phoenix, a housing bust market where fundamentals have picked up markedly, also logged $1.3 billion in sales.

For the second quarter, the top five transaction markets were New York City, with $1.35 billion; D.C., $1.3 billion, Los Angeles, $1.21 billion; Atlanta, $764 million and San Francisco, $689 million. Those markets accounted for about 36% of all sales volume nationwide during the quarter, with CBDs and well-located submarkets seeing the lion’s share of deals.

Institutional investors were by far the most active net apartment buyers, with net purchases of $1.6 billion on total acquisitions of $3.9 billion. REITs, private equity and owner/users were also net buyers, while REITs were also net sellers in a few markets such as Portland, Phoenix, the San Francisco Bay Area and Atlanta.

Average apartment capitalization rates continued to fall in the second quarter to slightly below 7%, while weighed average cap rates, driven by the large high-priced transactions in prime markets, declined to 5.7%. However, cap rates for mid-size value-add and opportunity deals are also declining. Cap rates on smaller transactions remain in a holding pattern.

Top deals in the second quarter included the acquisition of a 25% interest in a 20-property foreclosed portfolio by The Related Cos. from Fannie Mae for about $300 million; TIAA-CREF’s acquisition of The Corner at 200 West 72nd St. in New York from Gotham Organization and Phillip International for $209 million, or 1.07 million per unit; and Canada Pension Plan Investment Board’s $84 million acquisition of a 44% interest in a 654-unit property in Seattle from New Tower Trust Co.

Supply Tight Now, But Construction Starts Are Rising

Job growth has been the traditional source of apartment demand in the past. But in this cycle much of the demand is coming from many former homeowners who have become renters since the beginning of the housing crisis. That trend, combined with a growing number of young people forming households, is driving competition for a diminishing supply of apartments, powering the improvement in apartment fundamental since 2009.

CoStar forecasts total supply additions of just 30,000 units in the 54 largest markets in 2011, just one-third of the pre-recession average of apartment delivered between 2003 and 2008. However, multifamily construction starts are starting to tick up, with more than 70,000 starts in the first two quarters of 2011, suggesting a rise in completions in coming years, particularly in the 2013-2015 time period, Cohen said.

“It’s worth paying attention to the supply front,” Cohen said. “This is where I think the apartment market could be a victim of its own success. While we are forecasting below-average annual supply growth, we need to monitor the permitting data and the starts data.”

Vacancies, Rent Concessions Continue to Decline

Renter demand, while not at the outsized levels of 2010, remains very strong across the board, led by the fast-growing southern metros and the rebound in Detroit. Demand growth equaled about 66,000 units in the first half compared to the extraordinary increase of 105,000 units in the first six months of 2010, which was the strongest since 2005. However, the 45,000 units absorbed in the most recent quarter was more than the absorption of the two previous quarters combined, Cohen noted.

Many of you know that a $1.5B  expansion is underway to extend the current lightrail system from Portland to Milwaukie.  You may not be aware that only 11% of the total funds are slated to compensate landowners for their losses. 61 businesses and 12 residences will be forced to relocate.  In all the government will be taking all or part of 129 parcels.  Many commercial brokers are licking their chops at the possibility of getting new clients…RCCRE is taking it a bit further.  We created PDX Lightrail Resources, a coalition of professionals focused on helping those impacted by the project.   Our group includes:

• Real Estate Lawyers with condemnation experience to fight for your rights and full compensation of your loss
• Commercial and Residential Brokers to assist with relocation and valuation
• Commercial Appraisers
• Residential Brokers
• CPAs to explain potential gains and losses
• Accommodators to assist with proper treatment of 1033 funds

Neither Rose City Commercial Real Estate nor PDX Lightrail Resources is fighting the creation of the Milwaukie leg of the system.  We think that Portland will benefit from the project near term through creation of much needed construction jobs and long term livability. But we are committed to making sure that those impacted recieve just compensation as required by Chapter 35 of the Oregon Revised Statues and the Federal Uniform Relocation Act.

Be aware that compensation is due not only for the whole and partial “takings”, but construction easements and other compensation items need to be considered as well!

To get a list of professionals that are part of PDX Lightrail Resources, please contact me at 503.577.1034, or send me an e-mail to: rick@rosecitycre.com.

I’ve to talked to property owners, brokers, title companies…but nobody seems to know of any properties for sale that fully meet the needs of one of my clients.  He has no 1031 or 1033 Exchange deadlines to worry about…but he does have cash sufficient to purchase 60 to 80 quality units in the Portland area.  Wilsonville doesn’t hit his sweet spot…nor does Gresham or much East of I-205.  Vancouver is possible…West and Southwest PDX would be winners. 

He’s willing to pay a fair price for quality. 

He takes real pride in ownership:  fixer-uppers are not his thing.   This is a knowledgeable investor who puts little stock into overly optimistic proformas.  The challenge for me is to deliver value to him he can’t find elsewhere by himself.  Off-market deals, pocket listings are more likely to get consideration than something on Loop-Net or Read more

Look at current and future job growth as key factors when evaluating a market for multifamily purchases.  To research opportunities I have traveled to  Reno, Albuquerque, Phoenix, Seattle,  and Los Vegas.  Without exception job creation/population growth seemed to be the common fundamentals that told the tale.  It seems that folks would move to hell if they could get a job.

That’s why I’m so strong on Portland.  We’ve seen good job growth on a consistent basis here for years and the promise of the future is for the pattern to continue or accelerate. 

For those that are dour about the current multifamily market…remember that while Cap Rates are decompressing currently, there are many properties that were purchased at the average 8.3 Cap in 2002. They would now  trade at a 6.50 Cap.  Do the math: 8.3 divided by 6.5 equals a 28% increase in value even if NOI only stayed constant.  The truth is that this market enjoyed significant increases over that period and many Portland multifamily investors have huge sums of redeployable equity, and this is the time to act.

Contact me for equity redeployment information now at: rick@rosecitycre.com