Case Background
It’s Fall 2019 and a recent graduate from the Georgetown University Graduate Real Estate program, has decided to apply her
knowledge gained from the program and invest in real estate. Sally came across a for sale listing of a multi-family property
located in Southwest Philadelphia that could be a good starter property to buy and renovate. She contacted the selling broker
and requested information on the property. After signing a confidentially agreement, the broker provided the following
information on the property.
Address 7000 Block of Woodland Avenue, Philadelphia, PA 19142
Listing Price $420,000 “as is” with no representations
Units 5
Lot Size 0.04 acres
Gross Building Size 3,850 SF
Stories 3
Year Constructed 1915
Year Renovated 1991
Zoning C-2
Walk Score 84 (very walkable to public transportation, services, retail, etc.?)
Transit Score 74 (excellent transportation)
All units are separately metered for gas and electric and the landlord is responsible for water/sewer, common electric and heat
in the hallways, real estate taxes, insurance, repairs and maintenance and property management. Property has a rear yard that’s
not presently used and full basement access from inside and outside. The property is conveniently located on main Woodland
thoroughfare, close to transportation, restaurants, banks, shopping, grocery stores and much more. Within minutes to the airport,
I-95, Route 13, and major roads.
Rent Roll
Unit Number Net Rentable SF Monthly Rents
A – Basement – 2 Bedroom 1.5 Bath 900 sf $600.00 /mth
B – 1
st Floor Studio 1 Bath 450 sf $450.00 / mth
C – 1
st Floor Studio 1 Bath 450 sf $450.00 / mth
D – 2
nd Floor 2 Bedroom 1.5 bath 900 sf $500.00 /mth
E – 3
rd Floor 2 Bedroom 2 Bath 900 sf $600.00 /mth
Underwriting
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Sally estimated real estate taxes based on the current assessment of the property “as is” in its current state. For insurance she
looked online for property coverage to arrive at an annual premium. For repairs and maintenance, she looked at the prior
financials and figured that historical perspective was a good indicator of future performance. For property management she
estimated what she wanted to earn per month as a % of collected revenues.
She knew that properties were appreciating in the neighborhood and looked at national surveys for multi-family exit cap rates
when estimating an exit cap rate for this project.
Unit Amenities
- Walk-up units with common hallways (via a wood staircase). Access to the building is provided via mechanical
key. No security system. Each unit and hallways include smoke alarms. - Range and Refrigerator
- Carpeted Floors – stained and partially missing.
- Eat-In Kitchen
- Tub/Shower/Vanity
- Window AC Units
- Central heat via an old boiler unit in the basement
Physical Condition of the Asset
The current owner purchased the asset in 1991 as a single-family home and renovated the property into multi-family units at
that time. Interior of the units are original and dated. The carpet and appliances are in need of replacement and residents expects
central heating and air conditioning vs what is currently provided which is box air conditioning units and heat via radiator. The
roof leaks and needs a full replacement. Parking is on the street. The rear yard may be used as a common area for residents.
As part of her due diligence Sally ordered a physical needs assessment for the property. The following is a summary of that
report and includes both deferred maintenance and cosmetic enhancements for the property to remain safe and competitive.
Add “ductless” Heating and Cooling Units – $3,200 per unit includes electrical – total $16,000 - Upgrade Plumbing – $4,600 total – new lines to the public water and sewer system
- Replace carpeting and rehab the original wood flooring – $7,700 total
- Replace Appliances (range, refrigerator, add microwave) – $4,200 total
- Replace Roof (rubber membrane) – $6,500
- Replace Tub/Shower/Toilet/Vanities – $12,000 total
- Contingency – 10% of total
Market Rents
Sally having excelled in the Georgetown market study class, conducted a trade area study for the area which is southwest
Philadelphia and narrowed down her search for the community known as Elwood. Based on this research she determined that
with upgrades to Woodland that rents could be increased as follows:
Unit Number Market Rent if Renovated
A – Basement – 2 Bedroom 1.5 Bath $900.00/ mth
B – 1
st Floor Studio 1 Bath $750.00/ mth
C – 1
st Floor Studio 1 Bath $750.00/ mth
D – 2
nd Floor 2 Bedroom 1.5 bath $950.00/ mth
E – 3
rd Floor 2 Bedroom 2 Bath $925.00 / mth
Based on his market research it was determined that rents will grow 2.5% per year and operating expenses will grow
at 2% per year. Vacancy for apartment units in the neighborhood average 12%.
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Lender
Sally also excelled in the Real Estate Finance class was able to run the numbers on the overall feasibility of the project using the
feasibility XLS model. She valued the property at stabilization and put together the renovation plan with costs. She went to a
local bank who provided a construction and permanent loan quote. Terms are as follows: 80% loan to value, 6% interest rate,
25-year amortization and a 10-year term (balloon). Sally would guaranty 100% of the loan.
Zoning
Sally discovered during due diligence on the property that one the units was added by the former owner without a building
permit. That additional unit exceeds the maximum permitted units per zoning. Sally has a friend in the Philadelphia building
permit department who noted that any renovation to the property will involve dealing with a maze of inspectors and new
regulations. Sally feels the contingency factor she added to her model will cover any fees and unknown costs.
Investment
Since Sally is just starting out in the real estate business she has limited equity to invest. She decided to reach out to a few family
members and friends to help raise the required equity needed for the project. It is expected that a minimum leveraged return of
10% is needed and that her investment group plans to sell the asset once it is stabilized. She projected an exit cap rate of 8%
with a 10% cost of sale for a broker to find the buyer.
Personal Background
Sally wants to save money and act as the GC for this project despite not having any experience in this area. She also likes the
area and is considering occupying the 3rd floor unit as an owner. This will save her from having to buy a home and she can
keep an eye on the operations. She also plans to do all the leasing and repairs at the property. This is a bit of concern in that
she works full time at a local appraisal firm but given the nature of this business she could work from the unit while overseeing
the renovations and later property management and leasing.
Rubric – Instructors will review the submission in the context of the following: - Did the student demonstrate an understanding of how to prepare a feasibility model in XLS?
- Did the student demonstrate an understanding of how to identify the risks associated with this investment?
- Did the student articulate and then quantity two risks with the asset that could result in a project that loses money?
- Is the paper spell checked, grammar checked?
- Is the math correct in the XLS model?
- Are the conclusions noted in the memo clear, concise and to the point and based on an interpretation of the numbers
but not reciting the numbers?
