Why I Won’t Do Another Heavy Value-Add Multifamily Deal with Tenants In Place

In years past, the crux of my business model has been to look for smaller urban multifamily assets around the Boston area with a value-add component. Usually, the heavier the value-add component the better, as I could really extract the most juice out of the property. In a typical deal like this, I would go in and basically gut the building while it was vacant and then lease up once everything was ready to go.

Now this model worked great, but last year I picked up two buildings that at a surface level seemed to be right in the wheelhouse. The buildings were owned by a long-term owner who put minimal dollars back into the building, and it was pretty obvious. The units and exterior were in tough shape, which I was excited about because it meant we could execute our typical strategy. The cost basis we got on the buildings was also great, but there was only one caveat that we had to accept; inherit all the tenants that came with it. As in most cases, these tenants were long-term tenants who were paying a fraction of the cost of market rent.

Now, I’ve dealt with this situation many times; I always go in looking to create win-win situations with the tenants and avoid any legal battles. We were able to execute win-win agreements with several tenants, but were stuck with some that were going to be tough situations; one of them decided not to pay any rent from day one, and despite several buy-out attempts and months of back and forth refused to move out.

Now, the issue that this caused beyond the soft cost, effort, and emotional drainage of dealing with situations like this is it made the renovation execution incredibly tricky. With heavy value-add projects, I typically gut things like kitchens and baths, including doing things like replacing cast iron plumbing stacks to PVC, running new electrical, and in this particular project adding plumbing stacks for second bathrooms in the units and laundry. Now, as you can imagine, doing such work with tenants in place in some of the units when you need to run these items across the span of the building becomes very logistically tricky.

You need to have very tight coordination between your PM and contracting team to properly coordinate contractors to enter tenanted units to do the required work, which as you might imagine has plenty of room for error: contractor shows up a bit late, tenant forgets to be at home and move some belongings, tenant is unhappy about dust, leakage occurs etc. Issues with any of these caused delays in timelines, change orders from contractors, and a lot of extra work from everyone involved.

At the end of the day, as the operator of the property of course me and my team try to do everything to make it as seamless as possible, but there’s just a lot of error in this kind of situation that is simply out of our control. These sorts of issues happen, and it requires the entire team to stay super on top of each issue that arises to make sure there are no snowball issues.

What’s the takeaway from this experience? I think ultimately, though our overall cost basis now is still attractive and we ended up stabilizing the buildings, the journey to get to the end goal has been very tough. A lot of off-hour phone calls dealing with emergencies, a lot of unhappy camps, and quite a bit of cost overrun were all certainly part of the process. As we say in the industry, I’m not sure if the “juice was worth the squeeze”, and moving forward I would opt to find cleaner situations where we can execute the value-add business plan in the future.