Winner of the San Diego Business Journal Top Real Estate Deals of 2014
“My team represented the owner and closed the deal from multiple offers, at the full asking price of $4.7 million. That selling point was one of the highest recorded price-per-unit sales in Golden Hill.”
I was honored and humbled when I recently won the prestigious San Diego Business Journals Deal Maker of the Year Award for best Multi-Family with the sale of El Dorado Manor in Golden Hill and also won for the top Retail Deal of the Year for the sale of the San Ysidro Swap Meet.
I wanted to take few moments to share with you the details of the apartment transaction in hopes that it will provide you with some ideas for transactions you may be involved in.The deal presented was the successful sale of a 22 unit multi-family property located just east of downtown San Diego in the Golden Hill neighborhood. My team represented the owner and closed the deal from multiple offers, at the full asking price of $4.7 million. That selling point was one of the highest recorded price-per-unit sales in Golden Hill.
This story began in 2005 when I originally teamed up with the Seller for a project to put a subdivision tract map on the property.The Seller’s original plan was to either develop the property himself or sell it as a package to a condo conversion specialist. That plan was dealt a challenge when the City of San Diego was served with a lawsuit by a private group whose aim was to stop Condo Conversion projects.
Front shot of the 22 unit golden hill apartment building for sale
With over 180 projects across the city paralyzed by pending litigation, I swiftly assembled the team necessary to start a non-profit foundation providing legal leadership to all the affected property owners.The Foundation’s actions soon gathered many of the Owners together and successfully removed them from the lawsuit.However, the larger issue was a lack of defined and realistic civic regulation covering this type of real estate transaction.
logo that was created as part of the marketing campaign
I employed the resources of the foundation to continue its mission beyond this first success. The involvement of all parties – City, Owners, Realtors, and Citizens – was the key to the creation of new condominium conversion regulations for the City of San Diego.My continued involvement in the lawsuit conversations and its successful resolution meant that condominium conversion would continue to be one of many sources of affordable home ownership for San Diegans.
Unfortunately, the delays encountered in addressing the lawsuit prevented the owner of the Golden Hill property from selling at the most opportune time, at the peak of the market for this property type.Not to be dissuaded, I continued to meet regularly over the years with the Owner, analyzing market trends and data. Incorporated into this strategy was attention to the existing tentative condominium map so that it did not lose value through expiration.
In 2012 and 2013 the meetings included a new, thorough financial analysis. The Owner and I focused on three viable scenarios for the property:
Owner to proceed with the Condominium Conversion himself
Owner and Agent (Myself) to enter into a joint venture to complete the Condominium Conversion
Owner to sell the property as it existed (multi-family apartments).
Additionally, my research addressed these issues:
Tax basis and tax consequences for the Owner
The potential tax liabilities of the Owner doing the Conversion directly
The value of the property in a 1031 exchange ascondominiums or as apartments
After 10 + years of ownership, trading out this property in the Owner’s portfolio would require a very attractive replacement and the confidence that I would be able to locate it.Our carefully considered conclusion was to list the property as an apartment building with the still-viable tentative condominium map included in the transaction.
With the Owner’s blessing, I selected an ambitious price point, which was the highest per unit price of any listing in Golden Hill.This created a fresh challenge – overcoming resistance to the number by clearly illustrating the supporting values.
Through my research of current and historic rents in the desirable neighborhood, I revealed support for aggressive pricing, indicating viable prospects for the property.A detailed list and photographs of comparable buildings in the area was compiled to show buyers what was being offered to apartment seekers at that price point.Additionally, I invested in large-scale, photo-realistic renderings of the property, illustrating its potential for renovation as a condominium project able to compete with pricier options in nearby Downtown San Diego. Packaged into a video format, the information was easily communicated to potential Buyers and their Realtors. This action enlarged the pool of potential buyers, with more agents and clients able to understand in visual terms the scope of possibilities and value being presented.
a rendering that was made for the marketing of the apartment building
The historic high price point per unit was supported and accepted, evidenced by the reception of multiple offers on the property.My persistence throughout a 10-year relationship and innovation created value and resulted in a successful transaction at full asking price for the Seller. My understanding of all facets of the transaction was invaluable in assisting the Buyer’s agent in compilation of the multitude of documents into a comprehensible format for the Buyer.
A final level of complexity had to be negotiated. The transaction needed to be completed within a specific one-week window of opportunity.The ability to do this in coordination with the Buyer’s Broker allowed the Buyer to fulfill the requirements of their 1031 exchange at the same time the Seller did the same for their 1031 transaction. Additionally the sale was carefully timed so that the Seller avoided a significant pre-payment penalty.
SAN DIEGO, Release Date â€“ Gabhart Investments Inc. sold the last property in its first micro fund, Gabhart Real Estate Opportunity Fund Series 1, LLC. The fund was invested in the purchase, rehabilitation and sale of multiple single-family homes over a 13-month period.
The homes were located throughout San Diego County with resale prices ranging from $250,000 to $500,000. All of the properties were bank-owned or short sale purchases with rehabilitation costs ranging from $30,000 to $100,000.
Gabhart Investments is currently managing three active funds focused entirely on 1-4 unit residential properties. â€œOur strategy with the funds is to minimize risk for our investors by purchasing multiple properties in each fund located in different sub-markets throughout Southern California. Investors benefit from an average of profits from several projects and they are also insulated from a lapse in one sub-marketâ€, says Curtis Gabhart, CEO.
The investor partners in Fund 1 achieved a 22% to 26% (24% average) annual internal rate of return on their capital depending on their investment date. One of the many unique features of the fund is that as each property sells, investors receive a portion of their capital allocated to that project along with estimated profits. â€œThis structure is attractive to our investor partners as it provides short-term cash flow and allows them to reinvest back into another fund or invest elsewhere,â€ says Nick Walsh, investment manager.
Gabhart Investments is currently partnering with multiple investors in their Series 5 fund. â€œWeâ€™re interested in working with partners that understand our current business plan and share our longer-term goal of expanding into new markets and investments. For example, we are in the process of creating a new fund to invest in first trust deeds within our niche market to provide investors with monthly cash flow and an alternative to our equity partnerships,â€ says Gabhart.
About Gabhart Investments Inc.
Gabhart Investments Inc., headquartered in San Diego, Calif., is a real estate investment and advisory firm specializing in the fundraising of micro funds for the investments of distressed single & multi-family residences in Southern California.Â www.gabhartinvestments.com
***The information within this site does not constitute an offer to sell or a solicitation of an offer to buy any securities. Financial results are un-audited company estimates only and are not necessarily indicative of future results which may vary substantially from those set forth herein.
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Here is a list to use that should help you with your due diligence when buying apartment buildings. Below are some of the things to request from the seller of a multifamily property.
I decided to post this list because of a comment I received on a previous posting. I did named data collection and income & expense analysis of apartment buildings (click here to read that post).
Here is an excerpt from his comment
Remember that the SELLER always LIES so NEVER ever rely on the seller to give you accurate numbers. Do your own research that way you only have your self to pat on the back!!!
Below is a list of items I use (in San Diego) that you will want to request from the apartment buildings seller and/or broker listing the property.
Due Diligence Request List
1. Annual profit and loss statements (P&Ls) past 3 years; one year of monthly P&Ls
2. Rent roll and leases including term, deposit, and payment history, Section-8 housing documents, if any
3. Tax returns (last 2 years)
4. Receipts of utility bills (water, gas, trash, sewer, electric, etc for last 12 months) or recap report from provider showing usage and cost
5. Any service or advertising contracts: (Trash, extermination, maintenance, management, commission agreements, union agreements, vending, billboard, pay telephone, etc. and any instrument or contract to be assumed by Purchaser)
6. Copies of all appraisals, engineering reports, termite reports, environmental reports
7. Insurance claims history for last 5 years (can be obtained from insurance agent)
8. List and receipts of any major repairs done in the last 5 years (paint, fence, remodel, roof, water heater, etc)
9. Insurance policy including all riders, risk assessments, and disclosure affidavit for carrier
10. Architectural and engineering plans and specifications (if available)
11. Payroll register: List of employees including name, position, wage rate, and entitled benefits
12. Business license
13. Litigation History: details of any past or pending litigation (if none, then affidavit from owner)
14. Environmental Inspection and Survey, if readily available: Key Issues: Asbestos, Lead Paint, underground tanks, wetlands
15. Warranties: existing warranties from roofers, contractors, etc. (passed to the new owner if possible).
Learning Objectives of this Post on Analyzing Apartment Buildings and Residential Income Properties: Data Collection and Income & Expense Analysis
Identify sources of data
Describe the components of an income & expense sheet
Understand how to arrive at Net Operating Income from Gross Scheduled Income
The first step to accurately determine the market value of a real estate investment is a solid program of data collection and analysis. Each property will have its own unique considerations
All should at least begin with
Overall condition of the improvements
Type of construction
Overall market conditions
Income and expense analysis
Legal requirements, zoning etc
Comparable property data
This list is broad in scope, but it’s a good foundation for the data collection plan. The data collected from the market on comparable type property will be used to determine the appropriate capitalization (CAP) rate and make market comparisons in a later step. The next step is the actual collection of the data.
The data required for the analysis is obtained from many of the same sources as the information used in residential sales:
Multiple listing service (MLS), Costar, Loopnet, Commercial Agents & Property Owners Public
Chamber of Commerce
Local Housing Authority
Local Council of Governments
Tax assessment records
This should give you an idea of a few of the possible sources of data and the steps to begin the data collection process. Once the data has been collected the next step is the analysis of the data.
The Operating Report (Profit and Loss Statement)
When analyzing a real estate investment, we begin with an existing operating statement, also known as a profit and loss statement. The operating report will consist of both income and expense items attributable to the property. In the first step of the analysis we will only be concerned with the cash income and expense of the property. We will consider depreciation and other non-cash benefits in a subsequent calculation.
Gross Scheduled Income
The gross scheduled income is the amount of money that the property would produce on an annual basis if it were fully occupied. Included in gross scheduled income would be any income attributable to the property from non rent sources.
What types of sources can be included for determining gross scheduled income?
These sources could include income from laundry and vending machines, parking and storage fees, as well as other owner operated concessions.
When analyzing the gross income, consideration is given not only to the existing rents being charged, called contract or current rent, but also economic or market rent, which is the rent the property would command if it were available for rent in the current market. An adjustment can be made to the gross income if the market indicates that market rent differs from the actual rent. If such an adjustment is made, that should be plainly noted on the operating statement (see loss to lease).
Vacancy & Collection Losses and Effective Gross Income
The chief component in the calculation of effective gross income is the vacancy and collection loss rate. Most properties are not expected to remain fully rented for the entire period of ownership. When a tenant vacates, often there is at least some rental income lost during the turn over period due to repair or remodeling time. In addition to this consideration, one must face the reality that there may be a situation where a tenant becomes unable or unwilling to pay rent as agreed. In this circumstance there will be some rental income lost.
The vacancy and collection loss is usually expressed as a percentage of the gross annual rental income. There are several generally accepted methods for determining the amount of the vacancy and collection loss
None of these things by themselves will probably give you a 100% complete picture but combining different resources the picture will become much clearer.
Historical data and market analysis are perhaps the most accurate, because typically published figures for the community are an average, and may not be representative of the property you are analyzing. Once the appropriate rate has been developed, the loss is subtracted from Gross Scheduled Income to derive at Effective Gross Income.
Gross Scheduled Income $12,000
Vacancy and Collection Loss (5%) (600) Effective Gross Income $11,400
Gross Operating Income
To figure the gross operating income you go through the following steps:
Gross Scheduled Income
– Vacancy & Credit Loss
= Effective Gross Income
+ All Other Income (garage rent, laundry income, vending, etc)
= Gross Operating Income
The figure derived from this process is what we will call rental income. This is the actual income received after taking into account vacancy and credit loss against potential income.
Other income can come from a variety of sources. In apartments, it is quite often laundry, but it could be rental on furniture for furnished apartments, garages, etc.
The resulting figure of gross operating income is all the income left over after subtracting out the above mentioned items. It is your actual income in hand before expenses. Therefore it is a very important number.
The next step in the analysis process is to determine the total operating expenses for the property. Like income, expenses will be analyzed on an annual basis. The investor will do a detailed analysis of the expenses of a given property, so it benefits the practitioner to have done a thorough analysis in the beginning.
It is important to carefully analyze all categories of expenses to accurately portray the financial condition of the property. There are different categories of expenses, depending upon the type of property you will be analyzing, however all expenses are segregated into two basic categories, fixed expenses and variable expenses.
What are three fixed expenses and 10 variable expenses?
A list of typical fixed expense categories will include
Landscaping and service contracts
Any expense that does not change from month to month
What determines a fixed expense is the fact that the expense will not vary in response to changing levels of occupancy.
Mortgages are not part of operating expenses and are categorized elsewhere.
This group of expenses is not difficult to document for your analysis, but be careful to consider the fact that these expenses may not be the same for a new owner; i.e., the building insurance may go up and most likely the real estate property tax may be reassessed upon transfer.
Real Estate taxes can be one of the largest expenses so make sure to calculate any new tax increase or decrease in your analysis.
This category of expenses is much longer, and categories to consider will vary depending on the type and size of the property under analysis. This category will include all of the expenses necessary to maintain the income stream of the property and to provide agreed upon services to the tenant. To attempt a comprehensive list of all expense categories for all types of properties might be impossible and, certainly, is beyond the scope of our study. We will discuss the more common types of expenses in some detail, remembering that each property has unique characteristics and may include its own unique expense categories.
Many properties will be managed completely by off-site personnel. The cost of off-site management is determined and subtracted as an expense of operation. It should be noted that a management expense is a valid deduction from income even if the owner is managing the property. There are many firms specializing in this field; they usually charge between 4% and 10% of the rental amount.
Payroll On-Site Personnel
Resident management is used when the day to day activities of the property require constant supervision. A resident manager is sometimes given free or reduced rent. If that is the case, you must include the managers unit rent in gross scheduled income, then enter the amount of free rent as an expense. In California, if a property has 16 or more units it is the law to have a resident manager on site.
This would be for other management costs. For instance, office and administrative expense, performance bonuses paid to an on-site manager, and any health insurance or retirement plan contributions would be listed here.
Taxes – Workers’ Compensation
Whenever there is an employee, there are various taxes the employer is responsible for. Among these are: Social security tax, unemployment tax, as well as local, state and federal income taxes. These taxes are payable by the employer, and in addition, the employer is required to withhold some amount from the employee’s pay and forward it to the IRS.
Repairs and Maintenance
This is the total amount of repairs and maintenance necessary for the year. This would not include any money spent on capital improvements. A capital improvement is any improvement which substantially increases the useful life of the property. If you find a property which has not had any maintenance expense in the recent past, you will probably find a trade off in the overall condition of the property.
This is probably the most difficult portion of the operating statement to complete accurately. This information is most easily obtained from the owner. NOTE: If the owner is paying the utility bills and is then reimbursed by the tenant, the full utility cost will be listed here and the amount reimbursed to the owner would be listed as other income (this is referred to as R.U.B.).
Accounting and Legal
This is the amount for the bookkeeping required on the property. It will include any amounts paid for payroll reporting or for monthly profit and loss statements. This should also include any legal expenses associated with evictions, drafting of leases, etc.
Advertising, Licenses and Permits
Many larger properties will have ongoing advertising expenses. At the very least there will be some cost at each vacancy. This includes the amount spent for advertising, as well as any licenses or permit charges; e.g., city business license, pool inspections, and/or housing code inspections.
This might include supplies for the vendors mentioned previously: Bug spray, batteries for smoke detectors etc.
That’s right! There should always be a category for those expenses too insignificant to warrant their own category. This would include any additional expenses which were not accounted for elsewhere in the analysis.
These are services which are supplied by outside vendors not already accounted for under fixed expense categories. These are additional services such as maintenance contracts, design services, appraisals and as many others as necessary.
Here is a list of the more common expenses in alphabetical order. Some of them we list without explanation because they are rather obvious:
Accounting and Legal expense
Licenses and permits
Miscellaneous and other expenses Property Insurance
Payroll and Workers Compensation
Real Property Taxes
Repairs and Maintenance
Utilities (Such as the electric bill)
Total Operating Expenses
This is the total of the expenses calculated. This is not to include vacancy or credit losses. Remember that what we are attempting is to give as accurate a picture as possible of the property’s financial condition. The property’s value will be dependent upon the ability to produce income, so it is important to be as accurate as possible in estimating both income and expenses.
The total operating expenses are now subtracted from the effective gross income.
Effective Gross Income $11,400
Total Operating Expenses (4,500)
Net Operating Income $ 6,900
Net Operating Income (NOI)
The net income that a property is capable of producing will be one of the first indicators of the worth of an investment. Later when we begin to apply the capitalization rate to the property, the NOI will be used to estimate total investment value.
The calculation of the net operating income does not take into consideration the effect of any potential financing of the property. This may seem odd at first, but in consideration, it will not take long to realize that the property should have a value that is completely independent of any financing that an investor might use to acquire that property.
Measure NOI correctly in order to properly value property
NOI is arrived at as follows:
Gross Operating Income
– Operating Expenses
– Capital Expenditures
Net Operating Income
The sales proceeds that come from divesting yourself of a property are as follows:
– Selling Expenses
= Net Sales Proceeds
– Adjusted Basis _
= Taxable Gain
– Depreciation _
= Capital Gain / Loss
Having discussed the income and expense analysis in detail, we will concentrate on the balance of the data and other considerations. The property will be analyzed for the following:
All of these considerations will be compared to other investments available in order to determine the appropriate rate of return and measures of value for the property being analyzed.
Test Your Knowledge: Data Collection and Income & Expense Analysis Questions
1. What is the chief component in the calculation of effective gross income?
2. How do you come to Effective Gross Income?
3. Circle the following that are considered an operating expense:
Property taxes Insurance The owner’s income taxes
Mortgage debt service Payroll taxes Utilities
4. How do you arrive at NOI from Gross Operating Income
5. How do you arrive at the capital gain / loss from the sales price?
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The subject of the interview is how to make money in the housing sector right now
Here are some key points.
Apartments leading recovery by demand, followed by industrial properties
The Commercial Real Estate sector usually trails the economy by 6 months and Multi-Family is usually the first to recover (which is starting to happen) due to there short terms leases.Â The meaning is that since the apartment leases are usually a year or less they can be adjusted upward as the market or that segment improves.
Starting to see multi-family REITS doing better. Raising there rents on average of 5% over the last 12 months.
Home ownership is going down which is good for rentals.
Some people are realizing that owning homes is very expensive and only having to write one check for their rent is attractive.
They also talked briefly about the fact that institutional investors are looking at core trophy properties and locations.Â They are much more conservative and are betting that once a recovery happens that there will be above average rent growth due to the supply constrained markets they are in and the lack of multi-family construction that has been done.
I know many of you probably wonder why a company (institutional/REIT) would buy buildings at 5 CAP rates and it is a good question. What you need to consider though is they are usually more conservative and they are comparing these investments to T Bills which are giving almost no returns.
Private investors are looking at non core properties B & C. This is what most of us will buy.
Personally I am thinking that it is time to start considering Apartments again (remember I am more of an apartment investor than houses but it is the houses where we are making the returns right now because there are not many attractive apartment deals we are finding).
I don’t believe in just jumping right (back) in. I like to wait until there is some type of pricing trend because right now there is not enough sales in San Diego to be able to accurately price apartment buildings.
It’s also good to watch other people work out the kinks and really study the market/niche you are going into. Knowing the market (your niche) better than your competition is how you create opportunities for yourself. For example if you know rents can be 20% higher than your competition because you know that segment better you have the advantage of making better choices.
For the most updated information & news on real estate & Gabhart Investments go to our facebook & twitter pages