A Capital Needs Assessment (CNA) can assist multifamily buyers in quantifying deferred maintenance and creating a timeline for disbursement of funds to remedy immediate repairs and longer-term capital outlays. In many instances, it can tell you what not to buy.
Few people are doing business as usual. In multifamily, this means capital expenditures get deferred and routine maintenance is extended (meaning put off unit later). With smaller deals (those under $5M) you can sometimes get away with calling on local trade professionals to assess roofing, HVAC, electrical, and plumbing. As the deal size increases the necessity of accomplishing a professionally prepared CNA grows more critical.
Once completed, your Capital Needs Assessment is a negotiating tool, one that can create savings and profit. It can also solidify the underlying value. Its good to know if a targeted investment property acquisition will need, for example, $250,000 in total repairs, better to know that half this number is immediate with the balance invested over a five or ten-year term.
The Capital Needs Assessment (CNA) prepares a long-term budget strategy to ensure the long-term viability of a development
Buying an apartment building is not an impulse purchase. The multifamily acquisition process is a significant time commitment but one that can be very rewarding. Including a CNA into the acquisition process allows a buyer greater confidence. Beyond simple maintenance, any investment of several million dollars (or higher) should have as part of the buyers due diligence an assessment of capital needs.
Warren Buffet purchased BNSF Railway this year. Soon after the closing on the $26 Billion Dollar deal Mr. Buffet called the CEO and said “I’m looking forward to our first century together”. Indeed, Mr. Buffet knows how to plan for the future.
Think of a CNA as a property “snapshot” that captures the functional health on a specific date, similar to how an appraisal captures the estimated value of a property on a certain date. It may be the least expensive insurance you ever buy. Consider that sellers (some sub-human) continue to obtain insurance checks for wind and/or hail damage and pocket the funds versus doing the repairs… being more than willing to sell you this same property with known damage in place and not disclosed.
The recession has made everyone “cut back” on upkeep that historically was part of standard operating procedure. Scheduled maintenance becomes deferred maintenance after a certain period of time. Routine maintenance such as changing air filters and regular pest control become “optional” to some owners when cash flow gets tight.
As a buyer of investment property, while there may be more assets to choose from, consider that sellers are not predisposed to share maintenance schedules. While this is not fraudulent consider a lack of records to be, at the very least, suspect.
Excluding developments that were built to fail (with poor quality workmanship or materials) many can maintain functionality for fifty to one hundred years if well maintained. This type of longevity seldom occurs accidentally. It requires planning, investment, and proactive stewardship.
Similar to noting that a rent roll is not the whole story on the revenue side, so too does a CNA point to deficiencies below the surface. I”m not referring exclusively to structural failing, but seal & seam, fit & finish that will require investment dollars well beyond normalized routine maintenance. the$500 million dollars asking price doesn’t put you off the CNA would be a startling eye-opener.
A perfect example of a functionally failing development is the Watergate in Washington DC. It’s been for sale for years- at least most of it has been for sale. Not only are there multiple small owners, but a hotel, commercial office, and retail space, varying leaseholds, and a helipad. Where do you start? It’s got a location. It’s got name recognition. It’s got big problems. Assuming
In today’s marketplace there are seldom multiple offers, therefore, as a serious buyer, now is an opportune time to negotiate for “days”. The first “days” to negotiate for is an extended time to perform due diligence. With this extended time, you can accomplish a thorough review without having earnest money at risk.