When Omaha, Ne.-based DEI Communities took over a failed LIHTC property in Oklahoma City, they acquired a seemingly endless list of problems.
The property was operated as affordable housing for 2.5 years and the asset was not widely marketed. Nonetheless, they purchased it in January and injected $12 million in renovations.
The problems stacked up immediately as Dough Hastings, senior vice president at DEI Communities, shared the story at his panel at the MFE conference in Las Vegas. A substantial crime problem had to be rectified: In fact, the police department had visited the property 957 times in the last years. Asbestos remediation was necessary, as was extermination for vermin and rodents. DEI spent tens of thousands on bed bug remediation on top of that.
But sometimes, that's the price of admission when doing an acquisition-rehab. The midrise concrete and steel construction was located just four blocks from the state capitol, and was within walking distance to about 40,000 jobs. It was a worthy bet, and after re-branding the property it went from just getting $0.53 per square foot, to $1.51.
“We didn’t apply for LEED certification, but we incorporated sustainable design in the renovation,” Hastings said. That sustainable design helped the project substantially, as recycled and long-standing graffiti-proof material was used to cover the building. It gave it an attractive façade that wouldn’t decay over the next five years.
The success of that rehab was largely due to executing the correct sized rehab and finish schedule, which Zachary Maggart, vice president of redevelopment at Boston-based Berkshire Property Advisors, said is integral to the success of a large-scale renovation.
DEI also executed a strategy with time sensitivity to lease expiration; they were ready to move new tenants in the building early. The company used an incentive program to get all residents to vacate early in April, so it could usher in a new wave of renters on time for lease up.
“We find ourselves focused on the closing date and not paying close attention to when the lease expires over a two-year period,” Maggart said.
Timing is Everything
Developers need to be careful to focus on, not just a deal's financing, but also on lease details as well. By balancing occupancy with revenue maximization, rehab plans are more executable. The same goes for the closing date; you don’t want to close in February when the leasing season is up in April and you can’t get started soon enough.
Maggart also suggests tracking real-time costs to get the best results for a rehab. It will let you know if something within your plan is not working.
“If the economy is crashing or things get soft, you can’t get ROI fairly quickly” he said, so it’s critical to know the local economic situation as it happens.
Real-time tracking also helps you peek into what the market is doing from a rehab strategy, allowing you to compare what everyone else is doing versus the strategy you want to execute.
And when entering a new market, it’s a must to have someone on the team that knows the submarket well and can accurately determine the scope of work necessary to complete the rehab.
“I can’t stress this enough, you must get the property management company involved in underwriting,” said Kellie Falk, managing director at Newport News, Va.-based Drucker & Falk.
After all, panelists agreed, you don’t want to make one of the most fatal errors in a rehab: over-improving an asset unnecessarily.
-Linsey Isaacs is an assistant editor with Multifamily Executive magazine. Follow her on twitter @LinseyI to continue this conversation.