Lately I've seen a lot of posts about how tough it is to find yield. From rising construction costs to depressed going-in cap rates, nothing seems to be going right for the acquisitions associates.
Everyone knows, however, that deals can be found at any time in the cycle—it just becomes more challenging. So what recent deals have you done—or seen—that you know are fantastic? Obviously, you don't need to go into full detail and give away who you are, but please share enough to give us an idea of why it's such a good deal and what kind of returns were achieved or are expected. I'm especially looking forward to hearing about good new construction deals that are still happening.
For me, the best deal I've recently come across in the multifamily space is a 150+ unit light value-add deal in the Southeast. Sourced off-market by sponsors whom I know well, it's conservatively underwritten (even by my ridiculous standards) to achieve double-digit cash-on-cash returns in year 2, and a 20+ IRR over the 5-year hold. Personally, at this basis, I'd rather not sell and just hold the cash flow, so in my opinion the IRR is meaningless. The demographics are right and the sub-market isn't projected to experience oversupply anytime soon.
Let's hear 'em.
Had a deal with 2 Phases of construction with the second came with a pre-negotiated price if we used the same contractors again. Construction pricing moved up like crazy during phase 1, and got phase 2 built under replacement cost. Refied after completion dont have a dollar of equity left in the deal.
Dynasties are built on cash-out refis.
Probably a dumb question, but could you explain how a developer pockets money from a refi?
The developer builds a project and creates value as it reaches stabilization. The value of the asset is worth more than the cost of building it due to the stabilized NOI and the given cap rate.
At this point...a developer will either exit the deal via disposition or do a pernament refi. Keep in mind that the debt at this point is likely an IO construction loan.
Since the developer creates value through the spread between the actual development cost and the current stabilized value...the developer can refi to pay off the outstanding construction debt and then also have enough remaining proceeds to at least partially recapture the original equity contribution. Alternatively...a developer might be able to use the refi as a way to buy out the LP and therefore keep the entirety of the asset's cash flow moving forward.
Naturally...the amount of the original equity contribution...interest rates...and LTV all play important roles in this equation. Also...at the point of refi...a developer can also release various reserve accounts as cash flow...such as operational reserves and construction interest reserves. Depending on the deal...this could generate an additional $1M+ of dispersible cash at the time of a refi.
I'm not entirely sure what you mean by a calculation. That said...I can offer a bit more detail.
Let's say you have a project with a total development cost of $50MM. The capital stack includes 30% equity and 70% debt.
The debt is a construction loan that's interest only. By the time you reach stabilization...let's say that you have the original principal amount of $35MM and $1.8MM in interest. That gets you to a loan payoff of $36.8MM.
Let's say that at stabilization your NOI is $3.5MM...and it's a core asset that would trade at a 5% cap rate.
We now have an asset that's valued at $70MM...and cost $50MM to develop. Keep in mind that this is just an example...and this type of yield on cost is certainly very healthy in the real world.
At the point of a refi...it's possible to have an operation reserve account with $400k and a construction interest reserve account with $500k. Those accounts can be released and distributed as cash flow at refi. That said...let's just assume for the sake of simplicity that such funds merely cancel out the financing and closing costs associated with the refi.
The refi amount might be based on debt-income ratio or LTV or combination. Let's say that you refi at a 80% LTV (granted...this is definitely the top end of what you could expect. Therefore...this is an optimal and aggressive scenario. In reality...75% LTV would be a better mark for pro forma modeling/projections.). Anyway...at a 80% LTV...that would produce refi proceeds of $56MM.
From the $56MM in proceeds you payoff the original construction debt which is $36.8MM. That leaves you with $19.2MM. Now...note that in this example...the total equity contribution in this deal is $15MM.
The JV agreement will spell out how that $19.2MM is distributed between the GP and LP. It could be considered cash flow that is distributed according to the waterfall or could take on some other method.
I can guarantee that there's others on here with greater expertise on the finance side than me. But this should help paint you a better picture.
Once again...this example represents a high performing deal. A developer (and LP) would generally be happy to just recoup their original equity contribution with a refi.
As an added bonus...I'll share that the construction debt is likely to be based on floating LIBOR plus a spread between 1.5-2%. And the refi is likely to be a fixed rate based on treasury plus a spread.
I developed a town center deal in a suburb over the past 3 years. It recently sold, and in doing so, broke the stick frame $/unit record in the entire market, including the CBD.
It is incredibly difficult to get deals to pencil at the moment, but things will come around. Real estate isn’t an industry for eternal pessimists.
Sold a naive banker 2 grams of cocaine for $10,000, claiming to be from the purest reserve at the highest peak of the Andes Mountains. Was complete bullshit.
Acquired a 90's vintage value add multifamily deal in the Phoenix MSA. The existing owners were a local family who had effectively run it into the ground and managed it (poorly) themselves. We acquired it, invested about $12k per unit in capex and in-unit renovations, totally cleaned out the rent roll over the course of 24 months with the help of competent local management and sold it generating a 2x MOIC and a stupid high IRR. It was a heavy lift as the legacy tenants were pretty rough, but a good property manager goes a long way. We only renovated about 30% of the units and the buyer was planning to complete the renovations we started.
Purchased land for 13MM, entitled it and sold it two years later for 70MM.
Moral of the story, buy land in 2011.
More recently buying industrial in Fulton County GA 2 years back now unlevered CoC is 12% and going up with every lease renewal. Really every industrial buy in the last 5 years has been killer.
On the development side we've been able to cash out refi about 2,000 units across multiple developments since 2014.
Unless you ran into operator or GC issues ground up MF development or anything industrial related has been easy money the last 5 years. That's not to say we were feeling particularly good at closing on some of these deals (some being counted as "record breaking" pricing by one metric or another) but they've all panned out quite nicely.