A condominium is a building, or complex of buildings, in which every apartment or home is individually owned. Financial analysis of a condominium is different from an income producing property because the return on cost (ROC) for a condominium is generated from the total sale of the condos instead of the rent cash flow. The condo total sales is a lump sum, unlike rent income which is generated on a monthly basis, and therefore it is not unusual for condominium projects to generate higher returns than multifamily projects.
When a real estate developer builds a condominium, the goal is to sell at least 80 percent in order to be relieved of the responsibilities of maintaining and enhancing the property. Once 80 percent of the apartments are sold the responsibilities are transferred to a Homeowners’ Association (HOA), which is an organization of the apartment owners in the building. The HOA fee, which is paid by every apartment owner, usually based on the area of the unit they own, is used by the HOA for upkeep of common areas and the structure of the building.
The following is a glossary that will be useful when using our software to analyze condo developments:
The total income generated by the sale of all condominium units in the project. These assumptions can be adjusted in the Condo Sales slider section of the Condo panel, under the Use Assumptions section of the left sidebar. We have a slider for the sales price of each unit type along with the mix and sizes of each unit type.
A percentage of the total estimated sales of all the condominium units within a project that goes to a sales agent or broker. Sales Cost can be adjusted in the Condo Sales slider section of the Condo panel. We initialize the sales cost at six percent, however, this is contingent on negotiations with your broker and therefore subject to change.
Condo Net Proceeds
Total condo unit sell-out, minus the sales cost. You will find this value in the Back of Envelope panel under the Financials section of the sidebar.
Condo Project Cost
The total cost as it relates to the condo component of the project, which includes hard costs, soft costs, contingencies (for both hard and soft costs), purchase price, and demolition. It is important to note that if there are other uses in the project, such as office or retail space, the purchase price and demolition costs will be allocated to each use by percentage of area built.
The total condo profit is the condo net proceeds minus ondo project cost. This value can also be found in the Back of Envelope panel under the Financials section of the sidebar.
Condo Key Performance Indicators (KPIs)
In our software, there is a top bar with a series of KPIs specific to condo analysis, you will find three useful metrics.
Condo Average Sale
Condo Average Sale is the average sale price considering the unit mix available. For example, if you have 50 one-bedroom and 50 two-bedroom units priced at $325,000 and $400,000, the condo average sale is $362,500 per unit.
Condo Average Unit Size
Condo Average Unit Size is the average size of the unit mix. If the same one- and two-bedroom units in the previous example are 750 square feet and 800 square feet, the condo average unit size is 775 square feet.
Condo Average Sale PSF
Condo Average Sale PSF is the average sale divided by the average unit size. Combining the two examples above, the condo average sales PSF for one and two bedrooms is $467.74 per square foot.
Other General Terms
Basic Types of Leases
Gross lease is the simplest. The tenant pays a stated amount of rent each month. This amount includes the basic expenses, such as maintenance, taxes, and insurance.
Triple Net lease (NNN)
Triple Net lease (NNN) is the reverse. The tenant pays a base rent but is responsible for the costs of using the space. This lease is generally used when there is only one tenant. If there are multiple tenants, an estimated percent of the expenses is included in the lease. If the expense payments exceed the estimated amount, this amount is reimbursed back to the landlord.
When a tenant is responsible for the operating expenses of a property, for example in a triple net lease (NNN), the landlord may choose to pay the operating expenses in advance and be reimbursed by the tenant at a later time.
Loss factor is the percentage of the leasable or rentable area that is not usable by the tenant, because it contains things like service closets, trash rooms, vertical and horizontal circulation such as corridors and passageways, lobbies, and the like.
This is the percentage of the units or space that is not expected to be rented or leased. Examples include the time between tenants or the time required to improve the unit or property.
Operating Expenses (OpEx)
OpEx generally includes maintenance, taxes, and insurance.
Net Operating Income (NOI)
Net operating income is the revenue from the property minus vacancy rates and operating expenses.
Hard cost is the cost of all physical assets plus labor associated with the construction of a project. Hard cost excludes land purchase, and in our software we have also excluded demolition cost. Demolition and land purchase are individual sliders in our project cost panel.
Our software breaks down hard costs by usage; for example, office and retail each have a dedicated cost slider. We also include a bolded value, to the right of the hard cost section of the project cost panel, which is the average cost per square foot for the entire project. This takes into account individual hard cost values and the square foot amount of each use.
Soft cost accounts for expense items that are not considered direct construction costs, such as architecture, engineering, financing, and legal.
Contingencies refers to the percentage of the total cost, including hard and soft costs, that is allocated for unexpected events during the course of construction. Common examples are construction cost overruns and change orders.
Total Project Cost
The project cost is to the total cost of the development project, including hard and soft costs, contingencies, demolition, purchase price, and parking reduction fees (if applicable).
All-In Cost Per Square Foot (PSF)
The all-in cost per square foot is a standard measure of the project cost in order to compare similar projects or different versions of the project. This number is calculated by dividing the total project cost by the total buildable area.
Return on Cost (ROC)
Return on Cost (ROC) is a performance metric used to evaluate or compare development projects. The most basic ROC calculation is income minus expenses and vacancies, also known as net operating income, divided by total project cost.
If the ROC of a development project is attractive, then it makes sense to dive deeper into the analysis process with a ten-year pro-forma. Deepblocks will integrate the ten-year pro-forma with later versions of the software.