How Madison Apartment Group performs its value-add makeovers.
The Madison Apartment Group routinely acquires multifamily housing assets using a "value-add” approach. This investment strategy is a three-step process: acquire an asset below its unrealized potential value, implement a repositioning plan to create value and then dispose of the asset to realize the increased value.
The Madison at Dogwood, located in East Norriton, Pa., a suburb of Philadelphia, is an example of a successful value-add project. Here’s how Madison took an aging community with stale curb appeal and turned it into an improved asset with increased NOI and a higher valuation.
Acquired in January 2007 as part of a $314 million portfolio acquisition containing a total of 3,437 units, the 144-unit Madison at Dogwood was an ideal candidate for physical repositioning. The community is located in Montgomery County, a submarket strong enough to support an improved asset because of its proximity to major employment centers and the area’s strong household incomes and housing prices.
For any potential value-added repositioning, Madison conducts a market study to examine the competition’s rents, amenities and overall quality, and determine where improvement is needed. If the kitchen or bathroom is outdated, for instance, Madison determines what renovations would cost and projects the potential rent increase for the improved units. Madison generally seeks a 10 percent to 15 percent annual return on cost, so if it costs $10,000 to remodel a kitchen, the unit would have to generate an additional $125 per month in rent to generate a 15 percent return.
In the case of the Madison at Dogwood, which was built in 1968, the community’s look was outdated, including its large mansard roofs, aged common areas and unit interiors and stale curb appeal.
The scope of the physical repositioning included giving the buildings a more contemporary appearance. The mansard roofs were removed and replaced with a two-story design that used low-maintenance Hardie Plank siding (the siding and trim cost $403,508), shutters and new multiple-gable roofs ($189,000). Brick columns ($238,056) were added around the balconies to increase their size and to interrupt the linear appearance of the buildings.
The windows and sliding doors were replaced with new Energy Star-rated models with insulated glass ($307,033) and the balcony and patio lighting were switched to more efficient fixtures ($135,954).
The renovation program also included extensive interior improvements to the common areas of the eight buildings. Each building received new ceramic tile flooring in the foyer entrances along with new carpeting (the carpet and tile cost $74,000), painting ($63,000), lighting and handrails (the carpentry and electrical work cost $107,800). The front doors to each apartment unit were replaced with a more energy-efficient and attractive option ($62,200).
Once these physical renovations were complete, Madison was able to market this higher-quality property to the market place. With an improved asset, the market place was willing to absorb increased rents, which has directly resulted in an increase in NOI. The total renovation cost about $2.8 million ($2.4 million for the exterior and $400,000 for the interior), increased average rents by 15 percent and resulted in a 15.9 percent higher NOI.
Furthermore, the physical improvements have made this a more desirable asset to potential investors and should garner a lower cap rate and higher valuation when the property is ultimately sold or recapitalized in the future.
Joseph Mullen is a Principal of BPG Properties, serving as President and CEO of Madison Apartment Group, BPG’s multifamily investment and operating arm.
About Madison Apartment Group
Since its inception in 2001, Madison’s portfolio has grown to more than 100 communities, containing over 25,000 units in 16 states throughout the United States.