601 Canyon Blvd and the Magic 7 Cap [Boulder Development Update]

by Osman Parvez

601 Canyon Blvd

When completed, there will be four brand spanking new residential dwellings in this multifamily building in downtown Boulder. Here's the breakdown:  three two bedroom units, one single bedroom unit, plus a carport.   The permit places the value of construction at $522,295 plus $25,000 for the carport. 

The rundown multi-family property was acquired in 2012 for $675,000 and Firstbank stepped up with a loan for $1.9MM.   See this old listing for photos and details.   Note the potential view. 

The Luxury Rental Market 
It can be challenging to ballpark luxury rents, but let's look at a few comps and try to triangulate.  Solana at Boulder Junction prices two bedrooms at $2,610 and 1 bedroom studios at $1,450 a month.    The last time I checked the Residences at 29th Street, 2 bedrooms were priced up to $2,350 and 1 bedrooms started at $1,400 (research note).   Solana and the Residences at 29th Street luxury market rentals, but neither are in as desirable a location as 601 Canyon.   Looking nearer to the project, The Arette commands astronomical rent - north of $6,000 a month while a more humble 2 bedroom unit in a similar location (without views, not updated) is asking a mere $2,100.  

I think it's a safe bet that 601 Canyon will have fantastic views and luxury appointments.  I'd expect the developer has modeled at least $3,000 per month for the 2 bedroom units and $2,000 a month for the 1 bedroom.  For modeling purposes, $11,000 a month for the building is a good (conservative) estimate.  The market might support rent as high as $14,000, in my opinion.  

Investment Performance
The LLC's address is for Bank of Commerce Mortgage, a fairly sophisticated outfit.    Firstbank is regional player, known to do portfolio loans.  It wouldn't surprise me if the $1.9MM represents 100% financing for the project (purchase money + construction loan) and is cross collateralized with other investments.  Obviously, we don't know the real numbers but it seems unlikely that this development is going to cost more than $1.9MM (including the dirt and demo)   
At an estimated building rent of $11K per month and a project cost of $1.9MM, you're looking at a 6.95% cap rate.   A solid return.   However, if the $1.9MM represents 80% LTV, the investor has another $475K in the project and cap rate is closer to 5.56% cap rate.  Not so great, especially for this location.    They'd need to see closer to $14,000 per month in order to hit that magic 7 cap.  

UPDATE - 2/3/13.  Units at 601 Canyon are listed for sale to private owners but all are currently under contract (open to back-up offers). Details are HERE.   Bank of Commerce Mortgage is also not involved, according to the developer.

Additional Resources

Boulder Development Map

p.s. Go Broncos!
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