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!
Like this analysis?    Subscribe to my research.       Want to meet me in person?    Attend a Boulder Real Estate Meetup.    Ready to buy or sell?  Call me at 303.746.6896.  

Please Note

This document contains forward-looking statements. You are strongly cautioned that investment results are subject to business, economic and other uncertainties. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time. Always consult your financial advisor before making an investment decision.