Gents,
Is anyone aware of an Industrial Development Model that would have a return on cost waterfall? Anything I come across is either a EMx, IRR, or Cash on Cash waterfall. We would gladly pay for something that would fit our needs
My firm is expanding our platform to include industrial development of warehouse/distribution centers and with the assets we currently develop, our waterfalls are ROC based
I appreciate any help!
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I might be misunderstanding your request, and feel free to correct me, but waterfalls are generally stand alone modules to any development, the asset class shouldn't matter. I've not seen a ROC based waterfall myself but if you already have an operational one for other asset classes then it should be just the same thing for industrial.
You are correct. However, the execs are more interested in seeing something completely different, mostly due to the fact that the deals we will be looking at have way different structures than our current model. I have offered to build one out that is similar to what we have, but again they want something different and want my time focused on other parts of development than excel modeling. We'd rather have something someone has already built out rather than me spend my time on it.
Yield on Cost is an above the line metric.
Waterfalls are a below the line = net cash flow metric.
How can you have a yield on cost(essentially NOI metric) to structure equity waterfalls?
Yeah that's what I'm thinking too lol. "Above a 6.5% YoC we get a 20% promote." Well how the hell do you determine ncf above a certain YoC threshold. Maybe I'm just dumb idk.
Just throw every major expense below the line ;)
Yeah ROC is a metric that is best to compare to the going-in cap rate. If it is industrial you'll be happy with a 150bps spread.
Now with ROC, if you are calculating on a yearly basis, will range from >1% in year 1 to over >100% in the exit year. Are you saying you want a waterfall that has logic that triggers distributions based on that?
This is how I interpret the two (YOC & waterfall). Correct me if I am wrong, as I am still grasping waterfall structures.
YOC and the waterfall structure aren't really linked. The waterfall is just a structure or way to characterize how distributions are made and when. YOC is the NOI (untrended/trended) divided by total project costs. Generally, there's a relationship between the YOC and return of the deal
In general, we're just setting hurdles based upon where our YOC is. For example, we have a base case YOC of 7%, as the GP we would want to set a hurdle lower than the base case to give us a better probability to achieve some promote $$
I appreciate your replies - still learning so I am willing to throw out questions whether they seem dumb or not.
but what are your hurdles, in IRR?
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