Case studies / 3 hypothetical scenarios
For these three practice exercises, I created a motel, shopping center, and apartment scenario, then worked through the revenue, expenses, financing, and price. None of them is a real listing.
Occupancy, room rate, labor, renovation, and debt
Tenant leases, expense recoveries, capital work, and price
Rent, vacancy, insurance, repairs, financing, and return
Three property exercises
Each article begins with the property, asking price, and sample operating statement I used. From there, I worked through the expenses and financing before deciding whether the price made sense.
In this hypothetical case, a 64-room motel in eastern Los Angeles County is offered for $11.8 million. The rooms look dated, too many reservations come through online travel agencies, and the renovation has to happen while part of the property remains open.
This hypothetical 82,000-square-foot shopping center looks healthy at 94 percent occupancy and has a grocery store bringing in regular traffic. The harder questions appear in the leases and physical condition: two large tenants expire soon, and the roof and parking lot need work.
This hypothetical six-unit Los Angeles property is fully occupied and offered for $2.35 million. The sales pitch emphasizes the rent coming in, so I added the vacancy, insurance, repairs, management, reserves, and loan payment that an owner would still have to cover.
My process
I started with the location, size, tenant or guest demand, current income, and the reason an owner might be selling.
I deducted vacancy, payroll, repairs, management, reserves, and debt service from the rent or room revenue.
A roof, lease expiration, renovation, weak tenant, or difficult refinancing can erase more cash flow than a small increase in revenue will add.
I ended with a price or decision, along with the records, inspections, and market evidence I would still want to review.
