Property Evaluation & Due Diligence

1. National Apartment Association Education Institute Certified Apartment Property Supervisor Property Evaluation & Due Diligence

2. Restrooms Breaks Lunch Cellular Phones Smoking Housekeeping

3. Introductions • Name • Company • Number of Units • How Many Years In the Business • Have you been involved with the Due Diligence process in your career?

4. Participate fully. Help us stay on track. Be on time Ask questions Offer ideas and opinions as perceptions Have fun. Ground Rules

5. Due Diligence Process Why Owners/Companies Buy, Sell, & Renovate Properties Market Analysis Property Inspections Operational and Financial Analysis Analyzing and Reporting Property Evaluation Results Property Acquisition Property Renovation Property Disposition and Refinancing New Development Feasibility Learning Outcomes: Property Evaluation & Due Diligence

6. 1. Introduction to property evaluation and Due Diligence

7. Due diligence means assessing possible risk to the business when a buyer or investor is considering acquiring, refinancing, or renovating an existing property—or developing a new one. What is Due Diligence

8. Buyer has the primary responsibility. • The multi-site supervisor: • May lead the evaluation and due diligence process for the owner in a smaller company. • May be a member of a larger due diligence and discoveryteam and be assigned certain responsibilities in the process. Who Performs Due diligence

9. Inflation trends • Interest rate changes • Management efficiencies • Market condition changes • Physical improvement needs • Obsolescence issues • Staff performance • Neighborhood or community changes Types of Risk to Assess

10. Rent Roll Analysis • Service and Maintenance Agreements • Government Compliance Issues • Recorded Documents and Litigation • Full Physical Inspections • Open Tax Issues • Insurance Policies and Risk Management Claims • Personal Property • Market Conditions Overview of The Due Diligence process

11. Activity: Debrief Questions

12. 2. Why Owners/Companies Buy, Sell, & Renovate Properties

13. There are many reasons why owners choose to acquire, sell, or renovate a property. The chief reason, however, is that owners want to further their investment goals. Why Owners Buy, Sell, and Renovate

14. Individual or Sole Proprietorship Limited Liability Companies S-Corporation Limited Liability Partnership Joint Venture Real Estate Investment Trust (REIT) Tenants In Common Ownership Types

15. Intended to improve the properties’ positions within the marketplace Primary intention of higher rent production and/or lower operating costs May be necessary in order to maintain the asset and protect current rent levels Renovating Properties

16. Renter-occupied households represent 33% of the number of households in the United States 20 million households moved between 2003 and 2005 The younger the household the more likely you are to find renters 78% of renters have household incomes of less than $50,000 Current Outlook for Apartments

17. Activity: Debrief Questions

18. 3. Market Analysis

19. A market study delivers the information necessary to allow the buyer to make an informed judgment on the value and price of the acquisition. • The evaluation should describe regional economic trends, describe economic, social, and demographic trends in the neighborhood, and prepare a competitive property analysis report. Market Analysis

20. Regional analysis Neighborhood analysis Subject Property analysis Three Components of a market Analysis

21. Purpose: To investigate the economic conditions in the larger geographic area that serves the apartment community Analyzing A Region

22. U.S. Bureau of the Census (www.census.gov) • American Housing Survey (www.census.gov/hhes/www/ahs.html) • U.S. Bureau of Economic Analysis (www.bea.gov) • State Agencies and Local Governments (www.statelocalgov.net) • Local Chambers of Commerce • The National Apartment Association’s Annual Income & Expenses Survey Typical Sources of Data

23. Zoning Restrictions Rent Control Building Codes and Restrictions Infrastructure Key items to Research

24. Analyzing a Neighborhood Purpose: To investigate the conditions of the immediate marketplace of the subject property identifying strengths and weaknesses of the neighborhood and its offerings:

25. The property’s neighborhood is a small geographical area, such as a few multiple blocks. The boundaries can be natural, such as rivers and lakes, or manmade barriers, such as streets and highways. Competition defines the physical perimeter within which prospects are looking at properties. A map can be used to plot competition, work locations and city services. Neighborhood Boundaries

26. Review property records Review public records Review publications Talk with local industry professionals Talk with local multifamily brokers Shop competitors analyzing the Competition

27. Supply refers to the number of apartments available in the market at a given time. Demand is the need or request for those available apartments. If Supply is less than Demand – the value and rent of the apartments increase. If Supply is greater than Demand - there is a decline in rents and difficulty leasing. Understand Supply & Demand

28. Absorption Rate • When supply is less than demand = vacancy decreases and absorption is positive. • When supply greater than demand = vacancy increases and there is negative absorption. • Understanding the circumstances that caused this is important.

29. Create a market rental schedule for each competitor and compile a rental comparison chart. The chart compares base rents and market rents. Compare specifically: • Unit type • Square footage • Market rent including additional recurring charges for amenities • Market rent per square foot • Amenities • Incentives – these will reduce market rents to effective rents Rental Comparison

30. Activity: Debrief Questions

31. 4. Property Inspections

32. The property inspection should identify any environmental issues and document the review of: • Exterior structures • Interior apartment units • Mechanical facilities • Maintenance • Leasing/business offices • Common areas and amenities Property Inspections

33. Owner’s objectives and purpose of the inspection • Inspection checklists for all inspections • Proper recording equipment. • Cooperate with current onsite management • Legal notices if required • Minimum disruption to current management and residents. NOTE: Sellers sometimes do not tell existing site personnel about considering selling a property. Make sure you are aware of what information the current onsite team knows. beginning the Inspection

34. Look for Deferred Maintenance Functional Obsolescence Economic Obsolescence Evaluation Steps

35. Most lenders and prudent buyers will require a Phase I Environmental Survey before funding a loan or acquiring a property. • Based on the extent of any renovation or rehab, environmental inspections may also be required. • This is especially true with regard to asbestos, lead, mold and other indoor air quality assessments. Environmental Inspections

36. Property Exterior Inspections • Hazards & Liability • Resident Safety • Drainage and Irrigation Systems • Landscaping • Garages and Covered Parking • Trash Containers and Compacters • Drives/Parking Areas • Perimeter Fencing or Enclosures • Access Gates • Sidewalks • Energy Evaluation

37. Roofs Façade and Carpentry Foundations Building Envelope (Windows and Doors) Decorative Items (Shutters, Vents, Etc.) Building Inspections

38. Parking • Entryways • Corridors • Stairs • Elevators • Drinking fountains • Bathrooms • Alarms • Signs • Phones • Common areas • Building to Building Access • Access to office/units Accessibility Inspections

39. Mechanical inspections include the major systems that serve the property, such as: Mechanical Inspections • Electricity • Gas • Water • Sewer • HVAC • Fire Safety Systems • Internet/Fiber Lines • Elevators • Irrigation • CATV • SATV • Controlled Access • Telephone service • Trash disposal

40. Interior Inspections

41. Will the property be marketable? First Impressions Signage Exterior Appearance Unit Interiors Considering inspection and market conditions, will the acquisition or renovation produce a marketable product? Put on your marketing hat!

42. Activity: Debrief

43. 5. Operational and Financial Analysis

44. Rent • Fees utilities • Fees for garage or parking spaces • Fees for pets • Fees for cable, recreational amenities or other services • Income from laundry and vending facilities • Income from furniture or equipment rentals • Administrative fees Analyzing Income Sources

45. The rent roll is a record of occupancy and collection activity at a given time. It allows you to compare rent potential with lost income due to vacancy, concessions, and collection loss. Rent Roll Analysis

46. Rental Application • Lease Processing Checklist • Lease Agreement • Lease Addenda (Community Policies, RUBS, Sub-metering, Safety, Access Gate) • Move-In Inventory and Condition • Pet Agreement, if applicable • Anything Else Required By Law Lease File Audits

47. When evaluating a potential acquisition, it is necessary to analyze current and potential expenses in three areas: • Operating Expenses • Capital Expenditures • Renovation Expenses and Costs Analyzing Expenses

48. Current vs. Post Property Taxes Expected Insurance Costs Management Fees All service contracts – Do they survive an ownership change? Delinquency – Who will own the bad debt? Personal Property Inventory Others? Critical Operating and Financial Information Review

49. Activity: Debrief Questions

50. 6. Analyzing and Reporting Property Evaluation Results