Posted by Ian on September 29, 2004 at 16:54:09:
Shane,
I know you posted this almost two weeks ago, but I found your deal interesting. Based on the numbers you provided, here’s my analysis and some suggestions:
Based on the in-place rents you provided here are the gross rent numbers I used in my calculations based on a 100%, 90%, and 85% occupancy rates, respectively:
$105,120 - 100% occupancy
$94,608 - 90% occupancy
$89,352 - 85% occupancy
From those gross rent numbers I subtracted the annual tax and insurance amounts you provided:
$99,718 - 100% occupancy
$89,206 - 90% occupancy
$83,950 - 85% occupancy
From that you need to subtract your expense numbers. Since I didn’t see that you had provided any I’ll take a straight 40% of gross rents, which some will think is conservative and others aggressive. This brings me to the following NOI figures:
$57,670 - 100%
$51,363 - 90%
$48,210 - 85%
Most lenders require at the very minimum a 1.25 debt-service coverage ratio (NOI/Annual debt service). Unless you can negotiate to change some of the terms of this deal you will not reach that ratio and I would advise against passing.
Based on my assumptions and calculations, you need to do one or some of the following in order to make this deal work:
- Negotiate with the lender to lower their interest rate
- Negotiate with the lender for either an interest-only loan, failing that, a 30-year amortization, failing that, a 25-year amortization
- Get the seller to lower the selling price
If you or anybody else disagrees with my analysis please, let me know. This was based on the analysis template that I use to analyze much larger deals and I’m not yet quite sure how it applies to smaller deals such as this one.
Hope this helps.
–Ian (Chicago)