Capital Expenses on APOD - Posted by Lynn

Posted by ray@lcorn on August 03, 2005 at 16:21:29:


You commented that the cap rate does not reflect the return as if purchased for all cash, hence the CoC is different because of acquisition cost.

They are the same as long as you’re comparing apples to apples?using the same numbers for both calculations.

Remember that the offering cap is a fluid number. Until you get into the deal there is no way to know whether the NOI was accurate for the cap calculation. Most of the time it isn’t, so don’t get hung up in trying to be too exact with a cap rate. I look at an offering cap as a rough indication of whether I’m interested enough to pursue the deal.

What is important is the projected return. Put your energy into performing thorough due diligence and getting the operating projection (and all costs) as accurate as possible. The rest (e.g., deal structure, financing, exit strategy, etc.) will fall into place.


Capital Expenses on APOD - Posted by Lynn

Posted by Lynn on July 28, 2005 at 20:51:53:

When purchasing a property where I am having to do some deferred maintenance, and capital improvements, where do I put these figures on an APOD. Do I include these expenditures for my cash on cash and price of the property for a cap rate.



Re: Capital Expenses on APOD - Posted by Thad

Posted by Thad on July 31, 2005 at 01:39:45:

OK, ?APOD? stands for ?Annual Property Operating Data? The APOD is an instrument to help you determine the ?NOI? ?Net Operating Income? The components of the NOI are; Potential rental income, Vacancy and credit losses, Other income, and Operating expenses. You?ll notice that the APOD doesn?t even contain your mortgage payments. Since renovations are not considered an Operating expense, then I would not put them in your APOD.

If you haven?t done so yet, I would strongly recommend reading Ray?s article on Derived Capitalization Rates. I?m a small investor that has been buying and selling small apartment building for 15 years. Over the years I have evaluated properties based on IRR, and COC, with the IRR being my weighted choice. After stumbling across this website and reading many articles I have really taken a likening to the ?Derived Capitalization Rate? method.

Basically what I do is, derive a value for the building using NOI, and the Derived Capitalization Rate. Then I back out projected repairs and expenses including my profit to bring the building back up to standards. If the building is expected to need $85,000 in repairs, I add a ?developers/contractors fee? to the repair cost. This fee is the amount that you need to have in order to take on the project. Basically you have 2 different items to price, 1.) The buildings operating income after repairs, and 2.) A project making the necessary repairs. Don?t forget to include your holding cost during repairs and lease-up in your renovation cost.

Any rate, this is my way of figuring it.

Here is a web link to CCIM?s spreadsheet

I recommend their ?Financial Analysis for Commercial Investment Real Estate? Course and/or Ray?s book on Commercial Real Estate, I?ve just purchased Ray?s book, and so far it?s a great read!


Let Me Rephrase - Posted by Lynn

Posted by Lynn on July 31, 2005 at 18:00:41:

Thanks, but this is not quite what I was asking. Let me rephrase it. I have done an APOD for a 20 unit apt. The NOI is $20k as it stands, but needs $60k in renovations and/or repairs. Where do I put the 60k on the APOD…would it be added to the cost of the property, thus lowering my cap rate? Would it be considered as part of the initial investment, and used on my cash on cash?



Re: Let Me Rephrase - Posted by Thad

Posted by Thad on August 01, 2005 at 03:02:46:

It definitely doesn?t go in the APOD.

I would hold my COC and lower the purchase price.

If I understand this correctly, your problem is that if you leave your 60k in the property then your going to have to come off of your COC because of the low LTV ratio. The less leverage you use the higher the cap rate has to be to support your required COC. After all the 20k is 33% of the 60k repair bill right off the bat. The COC and the Cap rate are one in the same if you pay all cash. The only way that I know of to make 20% COC in a market of 7 to 9% cap rates is to buy right, and leverage my money.

One solution might be to refinance the building once the repairs are complete. This should allow you to pull some of your money out of the deal, leverage your remaining money back to an acceptable return.

I hope this helps.


Ray or Somebody - Posted by Lynn

Posted by Lynn on August 01, 2005 at 13:46:03:

I appreciate your trying to help but you are not grasping the situation. I have a 20 unit that is 40% vacant. As it stands, it has an NOI of $20k. I can purchase this for $166k which gives me a 12% cap. I can put $60k into it to fill the vacancies and raise rents. The question is where does my $60k go on my APOD in determining my cap rate and cash on cash.

I am fully aware I can refi after I complete the repairs and get rents back up to market.

BTW, when you pay all cash, your COC will not be the same as your cap rate. You will have acquistion costs that will apply to COC, but not cap rates.



Re: Ray or Somebody - Posted by ray@lcorn

Posted by ray@lcorn on August 01, 2005 at 17:22:50:


I think the confusion here is more of semantics and the fact there is no universally mandated format for analytical spreadsheets. I wonder if you are using a spreadsheet that calculates your return for you, hence the question of where to account for the Deferred Maintenance (DM).

If so, then I understand your confusion. We’re not all looking at the same spreadsheet, and different vendors do it different ways.

Typically, the APOD calculates NOI, then subtracts debt service, and the remaining funds (if any) are considered pre-tax cash flow. The spreadsheet may have separate entries on the APOD or a separate sheet for the purchase price, loan amount and down payment as the basis for calculating the various measures of return. Regardless of where it is entered, the math is the same.

Cap rates are figured on the NOI as if the investment were bought for all cash. And yes, the acquisition costs and any capital improvements performed in the first year (including DM, carry costs, closing costs, etc.) should be added to the purchase price. If so, then the cap rate and the CoC will be the same.

But we use leverage, and that’s where consistent methodology is important. NOI (used for the cap rate) does not include debt service, so the CoC cannot be calculated until the debt service is subtracted from NOI to determine cash flow.

Your question is whether to count the $60T DM as part of the initial investment comes down to which accounting method you use after the NOI line. Understand that the CoC return is an analytical tool and not used for bookkeeping or tax purposes.

For analytical purposes, I figure returns the way Thad outlined above. If the DM must be expended in the first year of ownership, then I include it as part of my initial cash investment, or perhaps seek a reduction in the purchase price if that’s the only way to make the deal fit my criteria. I want to know the the total cash in (NOI) divided by the total cash out, and don’t care about accounting classifications.

For your scenario, the deal would pencil out this way:

Price- $166,000
NOI- $20,000
Cap Rate - 12%

Then to figure CoC you have to know the terms of the deal. I’ll assume you are putting some amount down, plus the DM and acquisition costs?the sum of which is considered your Total Cash Invested?and the balance is coming from one or more loans:

Price - Total Cash Invested = loan amount(s)

Then you have to know the total debt service (DS) required for the loan(s) to calculate casf flow (CF) and the CoC return.

NOI - DS = CF (pre-tax)

CF / Total Cash Invested = CoC return (after conversion to a percentage)

The actual accounting may differ depending on how the DM is classified (i.e. expensed vs. capitalized) and what method of accounting is used (i.e. accrual vs. cash basis). But the cash flow is what it is, and that’s what I want to know in order to compare apples to apples between deals or to evaluate whether my goals are being met by a particular deal.

Now, did I put that in terms no one can understand? (smile)


Re: Ray or Somebody - Posted by Sharron

Posted by Sharron on August 05, 2005 at 13:03:12:

You are right and it is confusing. There are several programs out there. I was looking at APOD on the site Thad gave for CCIMs. It had a column for PARTICIAPTION EXPENSE below the NOI line. Is this for assumption fees, or what?

I know this might be nit picking, but if we do not understand what the blanks are, how can we fill them in.

Thanks, Ray…You are a big help.


Re: Ray or Somebody - Posted by Lynn

Posted by Lynn on August 03, 2005 at 16:00:24:

Thanks, Ray…You cleared up some matters. The reason I asked the question was because I have gotten the price down as low as I can. Now I will work on how much to put down, which will affect my CoC. I just wanted to know where you put DM, especially if you were going to capitalize it.

BTW, I was not aware that aquistion costs were included in cap rates. You mean cost of inspections, appraisals affects the cap rate? Now I am confused. If the NOI is $10k and the price was $100k, would the cap not be 10%. This is not including aquistion and closing costs.

Thanks again…The devil is in the details.