Foundations of Developing Multifamily- Part 4, Multifamily Stabilization

  1. 3 keys to Site Selection
  2. The 5 steps to success in developing Multifamily
  3. 5 Construction Essentials
  4. Multifamily Stabilization- The Play that sets you up for long term success
  5. Disposition 

Today’s blog is about the stabilization of your multifamily development, and is Part 4 in our series on development.

Once you have identified your site, completed your land development plan, and built your property, it will seem like the hard work is behind you. 

What comes next though will set you up for long term success, so carefully plan and stay on track for the stabilization. 

1. Advertise. 

  • When you had your building plans, a nice add on can be color & 3D renderings of your building and site. Computer generated images of people lounging by the pool and walking their dog on your recreation amenities can give a quick shot of the lifestyle offered. Use these color images to start your marketing approximately 2 months from expected completion.
  • It is advised to not publish the exact address, because if people drive by and see an active construction site, they may lose interest. Whatever you do, don’t publish photos of a building under construction because – to the untrained tenant’s eye – the square box has no appeal.
  • Start taking applications, but do not promise to deliver until you know you will have a Certificate of Occupancy. Often in construction the Certificate of Occupancy can be delayed, and no one can occupy without this certificate from municipality. Overpromising can put you in a world of hurt, if you promise a deliver date and can’t deliver to a tenant who has already given notice at another rental and ends up homeless.
  • Once the Certificate of Occupancy is in hand, do yourself a favor and make sure your new site has clean landscaping and ready to put best face forward. If you have a larger complex, staging a unit or staffing a model home is essential to people seeing themselves in the space.
  • The smartest money you will spend in the whole project is using professional photography to take pictures of your model unit, exterior and the surroundings. With the onset of our digital world, this is the easiest way to grab eyeballs and get tenants’ attention. It will also attract a higher caliber of tenant. 

2. Choosing tenants

  • When filling units, be careful not to rush to fill and accept less than high level tenants. You should plan to stagger some leases, so not all of your tenants will come up for renewal at the same time.
  • Select 8-12 month time periods, and choose a turnover in the spring/summer if possible.
  • The tenant quality will reflect how your property looks on stabilization, so take the time to make sure you have long term and stable residents.
  • If incentives are needed to fill the units, offer a month of free rent, instead of a lower overall rent, because this will boost your future value. 

3. Refinancing, Insurance and Taxes

  • Refinancing: Typically, a loan that is intended to pay off your construction loan will require a seasoning period. This is normally a 90 day requirement and will also stipulate that you have been 90% or greater occupied for 90 days. This is considered a stabilized property at this point. See Further details here. Often times a loan backed by Fannie/Freddie can provide the longest amortizations and favorable terms on a stabilized property. 
  • Insurance: Don’t forget your insurance! Updating your insurance coverages is not just good business sense, but you will be in a position for favorable rates with a brand new building.
  • Cost Segregation: If your plan is to keep the property long term, consider the benefits of a cost segregation study that can accelerate your depreciation deduction and reduce your taxable income. New construction can uniquely benefit from a cost seg, as the numbers for your improvements are brand new and available to your cost seg engineer. This can present a fantastic tax benefit to those who hold long term. 
  • Property Taxes: With a new building, the assessment will be established, often based on your permitting applications, along with market value analysis. Make sure when your tax assessment is established, that it is fair and accurate. Many commercial appraisers can help advise you on this process and an appeal if appropriate. 

With these items done, NOW you can say that the hard work if done. Enjoy your new asset and the residual cash flow. 

Watch for next week when we talk about the big payoff of Disposition. 

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