What is After Repair Value in Commercial Real Estate?
If you're an investor or developer interested in purchasing and rehabilitating a distressed commercial property, after repair value, or ARV, is one metric you should definitely know. The ARV of a property is simply the property's market value after any repairs, renovations, or improvements have taken place.
ARV= Property Purchase Price + Value of Renovations
If a property's ARV significantly exceeds the acquisition, repair, and holding costs, then the rehabilitation project might make sense. If it does not, then an investor may need to bid lower on the property or find a more suitable property to rehabilitate.
How ARV Works in Commercial Real Estate Financing
To better understand how ARV actually works in practice, let's look at an example. If an investor purchased an apartment building for $900,000, put another $200,000 into repairs, and had holding costs of $40,000, the combined cost of the property would be $1.14 million. To determine whether this is a good deal, an investor should keep the potential ARV in mind. In most cases, the combined cost of the property should be no more than 75% of the ARV.
This is because most lenders won't refinance a loan at more than 75% of a repaired property's ARV. And, since most investors use a combination of hard money and bridge loans to finance a rehabilitation project, they want to be sure that they can get refinancing for the full cost of the project once the rehab is over. So, if we take the numbers in the previous example, we can determine that the project's minimum ARV to qualify for $1.14 million in refinancing would be around $1.52 million.
$1.14 million/0.75= $1.52 million
So, as long as the ARV of the property reaches $1.52 million, the investor can use the money from their refinance to pay off their entire hard money loan, as well as any repair expenses and holding costs.