Multifamily / BTR -> Forward Fund, Forward Commit, Stabilized Sale
Hi everyone,
I would like to clarify a few points that must be extremely clear for most of you here. Can you please take a look at the below and comment?
Goal is to understand:
1. How and when investors and developers make money on FF / FC / Income producing acquisition
2. Understand how you look at cap rate (yield/revenue vs. valuation when exit)
I'll try to keep this concise
150/200 units London BTR
1. Forward Fund
Investors agrees to fund £100m at 5.0% - expecting a £5.0m NOI
Developer receives DM fees and a profit margin at completion (call it 10% of cost)
Questions:
1. Is it the right way of looking at it to say 5% = net vs. saying £100m at 5% means £3.75m NOI with 25% leakage
2. Investor would value its revenue at a premium for taking construction and leasing risks hence the 5.0% vs. let's say 4.0% you would see stabilized assets trading at - You pay 5.0% (cheaper), you'll generate 5.0% (higher revenue) and you'll exit at 4% (more value more profit) - is it the right way of looking at it?
3. Is the developer profit share a part of the £100m funding costs? Or is it more £100m = land + hard cost + soft cost + dm fee then investor adds profit share (let's consider it's at completion for the purpose of that exercise, not part of project's promote structure)
4. Total cost for the investor = £100m + ~£10m debt costs + ~£10m dev profit share?
5. 5.0% valuation cap vs. 4.0% exit - Can we say that the investor benefits from a 100bps premium rewarding its risk? Is it the right ballpark?
2. Forward Commitment
Investors agrees to acquire the empty asset at PC for at 4.5% - Same income stream = £5.0m at 4.5% = £111m
Developer receives £111m payment and makes money if he managed to build for less than £111m
Questions:
1. Investor would value its revenue at a premium for taking leasing risk hence the 4.5% vs. let's say 4% you would see stabilized assets trading at - You pay 4.5% (cheaper), you'll generate 4.5% (higher revenue) and you'll exit at 4% (more value more profit) - is it the right way of looking at it?
2. 4.5% valuation cap vs. 4% exit - Can we say that the investor benefits from a 50bps premium rewarding its risk? Is it the right ballpark?
3. Stabilized Acquisition
Investors agrees to acquire the stabilized income stream of £5.0m for £125m at 4.0%
Question:
1. Investor would value its revenue without premium for being in a low risk scenario hence the 4.0% - You pay 4.0%, you'll generate 4.0% and you'll exit at 4% - You can bet on asset value appreciation, strong growth, operational efficiencies (reducing leakage), run a capex plan and increase rents to increase exit price. Is it the right way of looking at it?
Please ignore rental growth
Haven't covered this here but there is also the whole timing thing to consider (when do you start making money 3 years, 1 year, from the get go)
Thanks in advance all!
What I'm confused by:
FF: £100m costs + £10m Dev profit if not part of the £100m = £110m with exit at £125m = £15m profit?
FC: £111m costs / exit at £125m = £14m profit?
So close from FF (maybe the £100m costs must include dev profit)
FF: £100m costs + £10m Dev profit if not part of the £100m + £10m debt costs = £120m with exit at £125m = £5m profit?
Bump
bump! Would be great to understand this (few people interested as well based on the bananas!)
What is your current background / what kind of shop are you at. How many years in the job are you? Perhaps sit down with someone in your company to understand it in more detail.
1) Forward funding is the maximum commitment you will pay to the developer
for a 5.00% funding yield, where the maximum commitment is £100m, I will pay to the developer no more than £100m inclusive of land, development costs (inclusive of DM Fees) and profit payment. In return I expect 5m NOI (excl growth). I will of course have acquisition costs, SDLT (potentially), DD costs etc but those sit outside of the receipt to the developer. Those will factor into my yield on cost, not my funding yield.
2) "Valuing revenue at a premium for taking construction and leasing risk" doesn't make any sense. Why would you pay more for income when you have to take additional risks?
You value the income at a lower yield because you need a spread to the exit yield. The spread between your yield on cost and your exit yield is your profit.
3) See part 1.
4) £100m + debt costs + acq costs . Profit payment, if a true forward funding, is in the £100m
5) Yield on cost is the more important metric
Thanks a lot! That's helpful!
1/3) That's clear
2) I'm trying to understand the difference in Cost / Income / Yield / Profit for a similar asset between FF / FC / Acq - if you could give an example that would be great to understand
5) What are the yields you usually see on the market nowadays?
Is this right -> Funding yield 5% if you add the costs you mentioned it's ~4.60% yield on cost = ~ 60bps spread vs. exit?
"You value the income at a lower yield because you need a spread to the exit yield. The spread between your yield on cost and your exit yield is your profit."
I don't get it, can you give an exemple in which I value the income at a lower yield?
thanks again, appreciated!
What is your current background
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