Since the implementation of the Tenant Protection
Act (TPA) in June 1998, units that are vacated by existing
tenants can now be rented at prevailing market levels.
While there has been a continuing improvement in rental
market conditions, the benefits have not be spread evenly
across the market. Building that have rent structures
that were suppressed by the former rent control system
are achieving substantial gains whereas buildings with
market rent structures have not derived any real benefits.
The key criterion in evaluating an apartment
building is its income generating capability. In this
regard, the rent structure is foremost in the minds of
most investors. A building with all of its units more
or less at market levels has a flat trajectory. In this
scenario, rental growth is produced by inflationary pressure
in the overall rental market. A building with this type
of rent structure has a stable profile with no real growth
potential. In fact, cash flow may be at risk if operating
expenses rise at a rate that is greater than the general
rate of rent inflation, or if unforeseen capital expenditures
are required.
The more interesting scenario is that of
a building with a suppressed rent structure and a raising
rent trajectory. As an example, take a 50 suite building
in a prime location. In some 1960’s era low-rise
buildings, the rents had been trapped at low levels when
rent controls were introduced in the mid-1970s. Independent
owners did not aggressively pursue rent increases and
it is not uncommon to find rent levels as low as $600
for 1-bedroom units. Given that market rents are now in
the $950 range, a building with this rent structure presents
tremendous upside.
The question is: How do you measure this
upside? As an appraiser, and in quantifying this upside,
“The Internal Comparison” tool is used for
measuring upside. It compares the total monthly rent to
the rent levels that have been achieved on recent apartment
turnovers.
Continuing with the 50-suite example, we
will assume that it has a current total monthly rent of
$36,750. In the past six months, two bachelor units were
rented at $700, two 1-bedroom units were rented at $950,
and one 2-bedroom suite was rented at $1,150. These rent
levels are applied to the suite mix as follows:
As illustrated on the chart above, a total
monthly rent of $46,400 is reflected when the rent levels
that have been achieved on recent turnovers are applied
to the suite mix. This exceeds the actual monthly rent
of $36,750 by about 26%.
This “Internal Comparison: presents
the ability to measure the growth potential that exists
within a rent structure of a given building. This simple
tool provides a method for quantifying growth.
To contact Sandy
Mandel or to know more about - the upside in your building:
Tel: 416-489-4883
Fax: 416-487-9539
E-mail: sanman@sympatico.ca
