Blossom Garden

1. Describe what you perceive to be the pros and cons of this deal from a qualitative perspective.

Blossom Garden apartments has a lot of attractive conditions. From location perspective, it has proximity to Ventura Boulevard (submarket) of the San Fernando Valley where there are high-end restaurants, trendy shopping centers, and an assortment of other convenient neighborhood amenities. It is very close to 405 and 101 freeways, allowing tenants to easily access to major employment centers such as Burbank, Hollywood, and Beverly Hills. Sherman Oaks residential house price continues to rise, widening rent/own affordability gap, possibly helping landlord find prospective tenants. The combination of high median household income of $82,000 in the region and a quiet living environment around Blossom Garden apartment could create a synergy of attracting desirable tenants. Looking into the house in more detail, I think the unit mix of well-balanced studio, 1B/1Ba, 2B/1Ba, 3B/2Ba is another benefits of this deal, attracting wider range of prospective tenants. The decent amenities such as laundry room and swimming pool, etc. make itself even more attractive. Individually metered gas and electricity will give landlord an upside to NOI, followed by (exit) cap rate, as well.

However, this house is subject to rent control, confining landlord to lower annual increase of rent price. Also, water is master metered, negatively affecting NOI. High vacancy rate of 15% (3/20) never looks promising. It is actually threatening. You should carefully audit the house of why it has high vacancy rate. It could be a temporary blip, but it could not be. Plus, 0% of as-is delinquency is hard to believe. We should consider it to be around 0.5%. Lastly, it appears that the house could have a risk of parking space scarcity. Since, the zoning is LARD1.5, it should have one space each dwelling unit of less than three rooms, one and one-half spaces each dwelling unit of three rooms, two spaces each dwelling of more than three rooms and one space each guest room (first thirty). Because the house has two 3B/3Ba, this comes to 21 parking spaces (1 space for each 18 units of less than three rooms + 1.5 spaces for each 2 units of three rooms), some tenants would complain without comfortable street parking.  

1. What assumptions in the broker package do you believe to be inaccurate, if any? Do you believe the forecasts provided in the pro forma rent roll based on your own Internet research and/or knowledge of the local market?

As the professor mentioned in the class, we should doubt almost all part of the memorandum. First off, as for the pro forma rent prices (higher rent prices), I compared them with the rent comparables. The comparables below show the current average rent prices of $1,382 and $1,699 for 1B/1B and 2B/1Ba, respectively. Although it does not come with square feet information and unit mix per each comparable, assuming that the same units would have similar square feet one another, I used these comparables as proxy, calculating average rent price as simple arithmetic average. Considering that these values would also include old contracts with cheaper rent prices, it seems that pro forma rent prices reside in somewhat achievable range although we do not have any proxies for studio and 3B/2Ba. However, you should still look to square feet comparison before making any decision on it. Average occupancy rate of 92% warns that Sherman Oaks may have higher vacancy rate than other regions. I calculated this rate with weighted average of units per each comparable. You should carefully research on this more, being suspicious about 95% of occupancy rates in the memorandum. If 8% is more close to true average vacancy rate of this region, it would be much harder than you expect to achieve higher renters for the three vacancies and other units though with immediate renovation.