BIG Blog

City of Austin has mandated an energy audit requirement for all apartment buildings 10 years or older (with some exceptions).

The Energy Conservation Audit and Disclosure (ECAD) ordinance requires Austin multifamily properties that receive electricity from Austin Energy to have an energy audit by June 1, 2011.  The city defines apartment buildings as property with 5 or more units.

The audit primarily covers these areas:   efficiency of the duct system, attic insulation, and windows.  This audit helps identify energy cost-saving opportunities but will add an expense to an investor's holding to comply.  For more details visit the apartment building ECAD ordinance.

What this means for investors looking to buy:

• An extra building evaluation that could produce some negotiating points on the purchase
• The cost of ECAD inspection, if not already completed, needs to be negotiated upfront
• Potentially better maintained properties will result due to this city mandate

What this means for landlords:

• Some expense will be incurred to comply
• Owners with a newer apartment buildings built after June 1, 1999 can be exempted
• A copy of the report must be posted at the property and provided to prospective tenants and buyers
• Non-compliance can lead to a class C misdemeanor per the city ordinance

The effectiveness of this ordinance remains to be seen.   We will track this ordinance and its affects going forward.

Savara Pharmaceutical leased 3,481 square feet of office space at 5900-2 Shepherd Mountain. Savara was represented by Jamie Patterson with Oxford Commercial and the landlord was represented by Matt Levin and Patrick Ley with Equitable Commercial Realty. 

Farmhouse Delivery leased 1,600 square feet at Park 183 at 720 Bastrop Highway. TJ Powell of Retail Solutions represented the tenant and Andrew Creixell of CSA Realty Group represented the landlord. 

The Parcel Post leased 1,050 square feet at Pfluger Crossing at 1552 FM 685 in Pflugerville. Herman Tjahja of Retail Solutions represented the landlord. 

Smart Healthy Solutions leased 1,180 square feet of office space at 701 Rio Grande. The landlord was represented by Investors Alliance Inc. and the tenant was represented by Frank Harren of Coldwell Banker United Realtors. The tenant is an online food company. 

Eloqua Ltd., a marketing automation and demand generation company, recently subleased 3,243 square feet from Sailpoint Technologies at One Far West. Ted Doucet of Oxford Commercial represented Eloqua, while Rick Whitely, also of Oxford Commercial, represented SailPoint Technologies in the transaction. 

ULTA, a beauty retailer, leased 14,798 square feet of retail space in Red Oak Village, a retail center at 2319 I-35 South. Graham Carter with the Commercial Retail Division of The Weitzman Group represented the shopping center. Jennifer Frank with Princeton Partners represented the retailer.

The Austin economy and economic outlook continues to rank #1 or #2 in the country for growth.

Forbes, Newsweek, Moody's, and other sources have posted recent articles on new job creation and housing demand.  To name a few employers, Facebook has announced hiring 200 employees (the only expansion outside of their headquarters in Palo Alto, CA).  Samsung is hiring another 500 employees to their $3.6 billion dollar Austin wafer plant upgrade.  Host Gator, one of the nations biggest internet hosting companies, is hiring another 300 employees.  The US economy is relatively soft but not in Austin, Texas.

Cap rate (or capitalization rate) is a common measurement to purchase investment properties. It is defined as net operating income NOI) divided by property value. So, if a property has NOI of $100,000 and a value (or sales price) of $1,000,000, then the cap rate would be 10%. Cap rates will vary throughout the country based on market demand, type of property, location within a city, and condition. For the Austin, Texas area, cap rates for apartment buildings are mostly in the 7% to 9% range. Class A apartment buildings tend to have lower cap rates and class B and C properties tend to have correspondingly higher cap rates. A higher cap rate often reflect the higher risk of the property, but cash flow is often higher too. This seems to be the trend in not just Austin, but many other cities across the country.

The investment measure of cap rate is often misunderstood. Cap rate does not include loan payment, loan balance, interest rate, or any loan terms for that matter. So what this means is, if an investor is over leveraged on a property (upside down on rents versus mortgage payment), they could still have a good cap rate but be in serious debt each month! So, cap rate is one measure to evaluate an investment property but certainly not the only one. ROI and cash flow are additional parameters. They both take into account debt service and are a critical part of the due diligence on a property. Stay tuned for detailed ROI and cash flow discussions.