I'm currently looking at a 105 unit deal, which is comprised of 2 different assets. One of the assets is Class A, and built 5 years ago. The other property is a 70's product that just got repositioned to a Class B product 2 years ago. The current owner is operating the properties without an actual "Management Fee", and simply pays a higher R&M expense, and simply pays the salaries of the employees in the Payroll Expense, across both properties. The Payroll expense equals 6%, which is exactly what the Management Fee would be for this asset. R&M expense is higher than average for these assets because of this as well, but it does save on paying the combination of Payroll + Management Fee + R&M.
So, here are my questions: Does anyone out there own any Class A/B that has seen this set up? It would allow me to pay a higher price for the assets, and be more competitive, but am I being penny wise and pound foolish? These would be 7-10 year holds, so in that time frame, as the assets age, am I going to start being better off running the assets traditionally as the R&M expenses begin to increase over time?
I appreciate any feedback! Thanks everyone.
Regardless of how you categorize the costs, they are what they are. Just because you roll it under R&M doesn't make payroll or management fee any less. So I don't quite understand how you think doing it this way will allow you to pay more for the property.
Also, a 5 year old class A property will have much lower operating expense (35-40%) vs a 40-50 year old B/C-class property (55-60%). You should be underwriting these deals separately and not as some weird frankenportfolio.
@Andrew Schena I'd suggest underwriting it with the way you would run them with an actual experience PM in place. You may be able to reduce the management fee due to economies of scale with these type of properties being close together.
@Michael Le You're funny...frankenportfolio...I had a good outloud, belly laugh at that one and nobody is even around me right now. Love it!
@Michael Le totally understood. I am underwriting the properties separately, but it's difficult, because the seller runs them as a portfolio and is sharing costs across them. I agree expenses for A Class should be closer to 40%, rather than the 64% he's operating at.
At the end of the day, I was trying to figure out a way to be competitive on the deals by operating the property the way the seller does on paper. I've been taught to have PM with R&M and Payroll. This guy just runs Payroll and R&M, saving himself $48K/yr. That 48K at these rates is a 800K value difference, which makes me less competitive. They're good properties, and I'm trying to make my offer look best, as this is my first larger MF purchase.
@Dan Handford that's the conclusion I came to as well instead of trying to bend myself into a pretzel trying to make my numbers work. If it happens it happens. This market across the board is incredibly frustrating to be buying your first larger MF...that's been my experience for the past 8 months.
Thanks for the input gents.