Location

Income Property Organization is pleased to present the Cottages of East Lansing (“Cottages”), which consists of 108 beds in 27 units, and is located in East Lansing, Michigan. The bid deadline for this offering is October 12th, 2017 at 4:00 pm (EST); however, Ownership will take into consideration all offers received prior to the expiration of the bid deadline. If an acceptable offer is received prior to the deadline, Ownership reserves the right to forgo the remaining bid process. Site tours will be conducted October 4th and 11th at 12:00 pm, by appointment only.

LOCATION & LOCAL ECONOMY:

The city of East Lansing is located in northwestern Ingham County, and borders the state capital of Lansing to the east. As of the 2016 census estimate, the city of East Lansing had a total population of 48,870, while Ingham County as a whole has a population of 280,891, making it Michigan’s 7th most populous county. It is noteworthy that according to the United States Census Bureau the county population increased by 2.5% over the course of the last six years. The median family income in East Lansing was most recently reported at $32,981 and the average home value is estimated at $171,800. The city of East Lansing is most famous for being home to Michigan State University (“MSU”), which is the seventh largest university in the United States with enrollment of over 50,000 students. In addition to MSU, neighboring Lansing is home to both Cooley Law School and Lansing Community College.

The local economy in East Lansing benefits greatly from MSU and many of the businesses that line the streets of downtown are very college-oriented. The Cottages are located approximately 1¾ miles from the main campus of MSU near the instersection of Lake Lansing and Abbot Rd. This area of East Lansing is largely dominated by residential; however, is in close proximity to numerous Big Box retailers and grocers such as Meijer and Kroger.

MICHIGAN STATE UNIVERSITY:

MSU is a public research facility that was founded in 1855 and became the nation’s first land-grant institution under the Morrill Act of 1862, serving as a model for future land-grant universities. MSU is a pioneer in the studies of packaging, hospitality business, plant biology, supply chain management, and telecommunications. U.S. News & World Report ranks several MSU graduate programs in the nation’s top 10, including industrial and organization psychology, osteopathic medicine, and veterinary medicine, and identifies its graduate programs in elementary education, secondary education, and nuclear physics as the best in the country. Greene’s Guides has identified MSU as a “Public Ivy,” which Greene’s describes as a publicly funded university considered as providing a quality of education comparable to those of the Ivy League schools.

As previously indicated, MSU’s current enrollment is approximately 50,000 students, which are supported by approximately 2,950 faculty members and over 532,000 living alumni across the globe. MSU is not only a leader in education, but also in athletics where it’s Division I sports teams-the “Spartans”-have won numerous NCAA National Championships for a variety of sports including football, basketball, hockey, cross country and wrestling.

PROPERTY:

The 108-bed Cottages of East Lansing is a new purpose-built student property taking occupancy for the 2017/18 academic year. The complex consists of a total of 15 buildings, with one building acting as a clubhouse and leasing center. As it relates to the unit mix at the Cottages, the property has been designed with the student renter in mind and is completely comprised of four bedroom, four and one half bath units that are approximately 1,673 ft.2 Not only are the units incredibly spacious, but the 1/1 ratio of beds to full baths is incredibly attractive to the student renter and provides the Cottages with a distinct competitive advantage in the student rental arena. The units at the Cottages also come furnished with living room furniture, a 49” flat screen TV, brand-new LG Washer and Dryer, and free 1GB fiber internet. For an additional $25 per month charge residents of the Cottages can also rent bedroom furniture that includes a bed, nightstand and a desk & chair. Based on current pre-leasing trends it appears that roughly 75% of residents are opting for this furnished bedroom, which provides the property with an excellent source of ancillary income.
The utility structure at the Cottages includes landlord-paid water, sewer and trash; however, tenants are responsible for gas and their in-unit electricity as well as the gas to run their in-unit forced air heating system. Notable for investors is the plan of ownership to pass the cost of water and sewer to the tenants in the 2018/19 academic year. It is expected that roughly $175 per tenant can be recaptured, which would nearly wash-out this entire expense.

FINANCIAL:

Since the Cottages are new construction taking occupancy for the first time this fall there are no historic operating expenses and all underwriting has been based on Ownership’s Pro Forma. In our professional opinion the Owner’s Pro Forma is an accurate representation of operations moving forward. Additionally the Owner currently manages numerous student housing projects, which makes them very knowledgeable of the costs and ancillary income associated with this product type. As such, IPO has relied heavily upon these estimates with the formation of our own Pro Forma. Currently the Cottages are 60% pre-leased for the 2017/18 academic year; however, leasing is historically late in East Lansing and its Ownership’s expectation that full occupancy will be achieved by the start of the academic year. Notwithstanding, IPO has still applied a 5% vacancy and bad debt factor within our Pro Forma to adhere to standard underwriting protocol. The use of current asking rental rates and estimates of other income and operating expenses results in a year-one NOI of $567,525. Please note, in addition to applying a 5% vacancy and bad debt factor we have also made adjustments to the current tax liability associated with the project. Currently the Cottages are assessed at $1,103,900 (State Equalized Value – “SEV”); however, upon completion of this project and its sale we expect a substantial increase in property taxes, which for purposes of the Pro Forma we have estimated at a 27% increase of the existing SEV.

It is also noteworthy to mention that there are numerous ancillary income sources that were not taken into account when formulating our Pro Forma. As previously indicated our Pro Forma does not take into consideration a water surcharge for tenants, nor does it include an admin fee that Ownership plans to charge in the second year of operation. These two sources of income themselves could potentially increase the NOI by as much as $25,000 and result in nearly $500K of value growth based on a 5.75% cap rate. As it relates to lease terms, the Cottages rents on a per bed basis and utilize an installment program whereby the residents are responsible for 12 installment payments. These installments don’t necessarily represent a monthly amount and are not prorated. This approach is taken to allow for a unit turn between academic years while still providing consistent cash flow.

IPO has seen drastic improvement in pricing over the course of the last 36 months and it is our professional opinion that values will continue to trend upwards in 2017 and into 2018 as a result of historically low multifamily inventory coupled with low interest rates and an abundance of equity and debt in the marketplace. The Cottages of East Lansing represents a trophy new-build asset in one of the most sought after student-rental markets in the country that can provide handsome & steady returns to a multifamily investor for many years to come.

The bid deadline is October 12th at 4:00 pm and IPO will be conducting group tours of the Cottages on October 4th and 11th at 12:00 pm, by appointment only. Space will be limited so please contact IPO immediately to reserve your spot.