Proforma Budgeting

I have been working and re-working the numbers for my proforma budget for Van Gogh Development Corporation's artist live/work project on South Henderson Street in Seattle. A proforma budget may be easier to do when one is buying an existing building and has something of a history. But there is no existing building, and we are doing our best to estimate market rents and operating expenses in an area of the city with few comparables, and little recent construction.

I ordered a copy of Dupre and Scott's most recent market study to find as many new construction multifamily comparables as possible in South King County, as there were but two specifically in the Rainier Beach area.

I am conservatively budgeting market rents at about $1.75/sf, which will still cause 75% of the live/work units to be classified as "affordable" under the City of Seattle's definition. A mere 20% of the units must be affordable in order to qualify for the City's Multifamily Tax Exemption program. This will exempt the residential portion of the building from property taxation for twelve years - a big cost savings in this project.

One question that is emerging after looking at the comps, is whether to add more washers and dryers to the building. As of now, we have planned for one common laundry room on the main floor. But in order to attract tenants in today's market, we may want to have appliances on every floor, if not in every unit. So we will re-examine this with our builder (who is still coming up with better construction numbers for us).

Operating expenses are even more wildly variable. I have looked at a number of other proforma budgets, and looked at the National Apartment Association statistics on operating expenses. The 2012 edition of Apartment Expense Report by Dupre and Scott found that investors have averaged more than $500 per unit per year on capital expenses. Ours may not be that high, because we are building a brand new building. Nevertheless, would it make sense to include a line item in our pro forma budget for replacement reserves?

Replacement reserves cover the costs to replace such things as appliances, water heaters, window coverings, carpeting, roof, and other components. If investors also budgeted for decks, cabinetry, windows, water lines and plumbing, the reserve budget will easily exceed $600 per unit, even for a new property.

Do bank lenders require replacement reserves to be included in the operating budget?

For a recurring replacement reserve, most lending institutions will make you set aside $250 per unit per year for a newer property and $300 per unit per year for an older property. So that is the number that I will plug in for now.

One question answered. Now on to the next!

Happy Investing!