Waterfront Apartments– Investing in Multifamily Development


You are an acquisitions person who oversees new investments in the northeastern region of the United States.  Apartment development has been a hot theme recently, so you have been a first call for several builders lately.  One of your best development partners with significant experience in building class‐A urban residential  properties sends you a new development investment opportunity that you think would be an excellent long‐term hold.  

Unfortunately, the only capital you have to invest has a core and core plus strategy that does not invest in the development projects.  However, the fund will invest in “pre‐sale” acquisitions – meaning the fund will commit, before a property is built, to acquire it at completion before it is leased.  As long as you can underwrite the rents and expenses properly, you can acquire the property at a slight discount to what it would be worth when it is stabilized.  

Property  Summary  

The Project will consist of 282 units in a 4‐story wooden frame building with 193 parking spaces.  The proposed unit mix is 10% studio units (570 SF), 50% one bedroom units (800 SF), and 40% two bedroom units (1200 SF).  Two elevators will service all floors of the property including  the parking garage.  
The community will include a top of the line amenity package including a fitness center with yoga room, a screening room, resident lounge, game room and conference room.  Apartments will have 9’ ceilings, wood floors, stainless steel appliances, wood kitchen cabinets, stone countertops, full size washer/dryer units
and high‐end bathroom fixtures.  Some units will also feature private balconies and walk‐in closets.
The property will be located along the waterfront in East Boston, MA and will overlook the downtown skyline.  East Boston is a dense urban neighborhood with a predominantly Hispanic and Italian demographic with many restaurants  and stores that cater to the local population.
The Project is part of a large scale development which will include nearly 600 apartments and approximately 70,000 square feet of new retail and public use space upon completion. The project will have convenient access to public transportation options as well as Boston’s Logan Airport.   The site is a five‐minute walk from the MBTA public subway system, which offers access throughout Boston as well as several bus lines.  The airport is approximately 10 minutes from the property.  

Evaluate the opportunity to acquire and renovate Meadow Apartments.  Please create an Excel model and memo to explain your thoughts.  Students are encouraged to work together and may present work to the class for additional credit.  Brevity is encouraged – the best work is concise and to the point.  
1) What price are you are willing to pay for the land if this were a ground‐up development project?  Please justify the price by performing a “yield on cost” calculation assuming the investment has an opportunistic profile, which would require 6.5% yield on cost (5.0% market cap + 30% investment margin).  Assume hard costs are $275/SF and soft costs are $50/SF.  
2) What price would you be willing to pay for the property as a “pre‐sale” (i.e. purchasing at completion prior to the property being leased)?  Please justify the price by performing a “yield on cost” calculation assuming the investment  has a core‐plus profile, which would require 5.5% yield on cost (5.0% market cap + 10% investment margin).
3) What price would you be willing to pay for the property if it were stabilized?  Please justify the price by performing a “yield on cost” assuming the investment has a  core profile, which would require 5.0% yield on cost (5.0% market cap + 0% investment margin).
4) Identify the key risks related to this investment and perhaps how one might mitigate those risks to make the investment feasible.
5) Bonus:  If instead of selling the site to the developer, the land owner wanted to sign a ground lease, what rent payment (per year) would be the maximum the developer would be willing to pay?  Please assume the ground lease has a term of 99 years, has yearly payments that increase with inflation (assume 2% per year) and the land owner gets ownership of the building at the end of the ground lease.  
 General Assumptions
Rents – Use the comparable rents to underwrite what you expect to be achieved at the property.  
Rent Growth.  It is expected that rents and expenses will grow by 2% per annum.  
Vacancy – The Boston market has historically had a 2% vacancy.      
Operating Expenses – Use the comparable operating expenses to underwrite what expenses you expect for the project.  You believe the management fee will be 3% of EGR and real estate taxes should be 10% of EGR.  
Financing – Debt financing upon stabilization is expected at 50% of stabilized value at 4% interest with no amortization.
Exit Cap Rate – Use the comparable sales to underwrite what cap rate you would expect if the property were sold in the market today.  You would expect cap rates to gradually expand by approximately 1% over the next 10 years.  Exit costs are approximately 2% of exit price.

Exhibit A – Property Rendering  

Exhibit B1 – Property Sale Comp List

Exhibit B2 – Property Sale Comps Map

Exhibit C1 – Rental Comp List

Exhibit C2 – Rental Comp Map

Exhibit D – Expense Comps