Acquisition financing for McKinley often comes through Fannie Mae and Freddie Mac. But sometimes the company taps the Federal Housing Administration (FHA) despite the program's stringent requirements.
“To get a 35-year HUD loan, we might have to spend X at the preclosing and make other improvements” over a certain time period, explains Albert Berriz, McKinley’s CEO. With those requirements, on top of what Berriz calls “defensive capital” for deferred maintenance, “we could be spending thousands of dollars per unit” before ROI even comes into play.
Yet, Berriz certainly made the numbers work on Manchester West. In December 2012, McKinley acquired the 33-year-old, 120-unit apartment building in Ann Arbor, Mich. The company paid the equivalent of $62,000 per unit for this building, using equity and bridge financing providing by Comerica Bank and a 35-year HUD mortgage at 4.38 percent interest.
McKinley budgeted $10,000 per unit for renovation, repairs and upgrades. Its goal was to achieve a 24 percent return on its investment spending.
The renovation plan included new flooring using a wood-plank vinyl product, and new carpeting. All of the units got an upgraded appliance package and new washers and dryers. The units were painted and got fresh plumbing finishes, electrical trim and lighting.
Typically, about half of what McKinley spends in offensive renovation capital goes towards “resetting the image of the property,” says Berriz, by upgrading signage, landscaping, and concrete work around the premises.
McKinley improved the building’s landscaping at its entry and throughout the property. It put in all new concrete sidewalks around the premises. The clubhouse and tennis courts were renovated, hallways were upgraded, carports were repaired, and new dumpster enclosures erected. New bridges to the mid-level entrances to the building’s three stories were built.
As part of its partnership with DTE Energy, McKinley made Manchester West a “McKinley Green Retrofit” by installing energy saving lighting throughout the building, new water-saving devices, and upgrading the insulation.
As a result of these changes and improvements, the building’s post-renovation appraisal rose 45 percent to $90,000 per unit. And monthly rents per unit jumped by $202.
John Caulfield is a contributing editor for Multifamily Executive.