Calculating NOI question

15 Replies

Hey all, I'm curious to know how this gets represented, maybe you can help? Here's the example of a small 10 unit syndicated deal, which is currently self-managed...

Current OpEx water, sanitation, maintenance, taxes, insurance, landscaping, exterminator, but I'd also have these:

Property Manager 8%

Asset Manager 2%

Preferred Return 5%

CapEx Reserves 5%

Because these are specific to what my operation would be, and may or may not be expenses incurred by a future owner, how are these looked at by the bank when considering a refi, or by a future buyer? Is this 20% considered in operating expenses therefore above NOI, even though it's somewhat discretionary?


@Brian Orr

Speaking from my experience and underwriting these deals the lender will work with a predetermined range of expense ratio starting at 35% on the low end to 45% expense ratio.

Once the appraisal comes back they will look at the market expenses and your actual expenses and take the higher of the two ratios.

Most banks including alternative lenders will preliminary underwrite the deal at 40% until value comes back.

@Nasir El Ameer Thank you for the input. I've been through that lender preliminary valuation and they're at 35%. T-12 actual expenses are 39% but there's a lot of fat to be trimmed in maintenance and water. It's currently self-managed but the prior 2 years with mgmnt the expenses were 43 & 49%.

Ok so the income and certainly target income supports the mgmnt and syndication expenses, so then here's my next question... Would I phase out the preferred return through principle returns, and reduce the CapEx prior to the exit? That 10% would be a huge difference in the bottom line for the new valuation.

By the way, if you haven't guessed, this is my first syndication.

@Brian Orr

Your option to phase out and reduce capex will only help the actual expense numbers. As far as phasing the equity out for investors I cant say if that is the right or wrong approach without fully understanding your deal.

@Nasir El Ameer What I mean by that is giving distributions from cash flow (after Pref) to reduce the principle exposure. The lower I can get that down, the pref expense dollar amount goes down (in addition a quicker return for the investors) and by the time it comes to refi that's 5% less in the expense column.... 

I may just be talking a lot of maybes or not even sure what other repercussions come of that like taxes and such... Ultimately I'm writing my business plan and plotting the exit/refi on this property, and that 20% seems real high in addition to the standard OpEx. And then lower valuation, etc... etc... Am I adding too many expenses here and cutting the opportunity for a favorable exit based on a lower NOI? Is there any way around it?

Property management fee and CapEx reserves are included in your expense number when calculating NOI. Asset management and pref are NOT included in your expenses when calculating NOI. Depends on the class of property for what % your expenses are underwrote at.

@Brock Mogensen that's interesting. This is a C building being favorably underwrote by the lender at 35% expenses. I'm projecting a huge downward adjustment in sub-metering and some up front rehab to knock down on maintenance which total 23% current expenses... Can you elaborate a bit more on when it does and doesn't factor in?

C building being underwrote at 35% seems very low to me but that's great for you that their underwriting it at that.  From my experience C class buildings are ran at 50-55% expense ratio.  Repairs and maintenance will continue to be a high expense due to unit turnovers/evictions.  

@Brian Orr , not sure if syndication fees would support a 10 unit deal. It's too small and can actually kill the deal. Plan to spend anywhere from 10-20K on syndication fees depending on who you use. Reach out to @Mauricio Rauld who is a licensed SEC attorney and is well known throughout the syndication space. On another note a 10 unit property if you are self managing it expenses should range from 30% on the low end up to 40% on the high end. Good luck on your journey

@Brock Mogensen @Tj Hines I actually have a follow up to this that I'm getting ready to post on the forums... 

How do I calculate the projections for investor returns in a syndication? I've found a dozen models, but I can't find one that accounts for the sponsor aspect of it, nor the day one rehab on the property, or line item turnover rate per unit for the reposition. You guys have anything you've worked with?