What's the most painful part for you? Underwriting these deals repeatedly with the same outcome?

Are you at least coming away with a good data set as a result?

Any way to make this better (that's within your power)


Sorry if this is a dumb question, but if the deal only works with bullshit assumptions then why are you doing it? Your original post mentioned fee revenue; is that why?

What is the downside to your firm if these deals don't perform?

Haven't been on the principal side so trying to learn a bit here.


We are vertically integrated in house, so development fees, CM fees, leasing commissions, property mgmt fees, and of course selling the land to the JV for a marked up value. Dirty secret is that those are often way more than the actual promote you receive on the typical deal. And there is embedded profit in those - it's not just covering overhead costs.

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Some groups need to close deals to keep the lights on, see this more often with syndicators (dumb money) than insitutional JV equity (smart money). go online and look at some of the deals on crowd street or the morons who advertise on facebook for a 18 to 25% IRR on value add deals over a 5 year period, those are the guys using insane assumptions to buy deals to keep the lights on and get fees. on a $20M deal where you raise $7M of equity, you can charge a 1% acquisition fee or $200k. If recourse loan, another 1% ($200k). You do in house property management at 3% which is $45-50K per year assuming revenue is $1.5M. you then charge an asset management fee of 35 bps on equity of $7M which is $25K. you then negotiate with your debt broker less than 1%, let's call that 70 bps on $13M loan and you pocket $39K in house. If you include overseeing general contractor on value add, another $20 to $50k.

Just in year 1, you have made $300-$500k in FEES for putting together a deal. if shit goes well. let's say you sell that property for $25M net of broker fees, etc and let's say you are able to pay promote of 6-10% with operating cash flow. at exit 3-5 years later, you make a profit of $5M and split that 70/30. you just walked away with $2.5M which is a great day... if shit goes bad and you lose your shirt, you still made $300-500K in year 1...if i include asset management and property management fee, it is probably $600-800K over a 3-5 year hold in fees.

a syndicator who has to keep the lights on or someone with a fund structure who hasn't spent all the cash might be bullish and do weird shit. it ends up being a gamble for investors aka LPs which sucks because syndicator wants to do deals to keep lights on!!!

more reason to avoid the online capital raising platforms especially late stage in the cycle. a lot are just putting together SHITTY deals and showing LP returns of 15-25% net of fees for value add or core acquisitions. anyone with industry experience knows you will be lucky to get a 14% IRR in todays market if a broker is involved. only way to show strong returns is levering like hell or a true off market deal you get at a discount because you found a sucker.


I wish we were dumb LP's sometimes just so I have some deal flow to work on. We go through these packages and ask simple questions like "how will you achieve rents 30% higher than comparable product?" or "how do you expect to run the property at an NOI margin 5% higher than the market standard" which no one even attempts to answer thoroughly. It's all a joke at this point, very very little value creation right now...


The immigrant labor got smart and decided they aren't going to frame, roof, and rebar all day for $10 per hour anymore... People on the finance side without any true understanding of construction throw their hands in the air screaming "where is the cost coming from!" not realizing that all the value creation in development at a granular level is because men will do this work for these wages...


Costs up 8%-10% per annum over the last 3 years or so. I suspect it is the cost of steel + concrete. It seems to me that the development that makes the most sense in today's market is negatively correlated with the amount of steel + concrete.

Back in late 16/early 17 you could deliver suburban office with structured parking in my market for $260 ish per sq ft. On real costs today, it's probably more like $330-$340. Meanwhile the new deals that have traded cleared in the high $200s. We are at a weird point because its a super tight market, but you have to charge rents that are 20% higher on new development and nobody wants to pay. Even if you do get your building kicked off, when you go to sell, the buyers get sticker shock from the basis and you end up trading 10%-15% below pro-forma. Deals that get done on today will achieve low to mid teens returns, maybe, on a merchant build strategy.


I disagree with this, if we are talking about acquisitions and not development. It's market dependent, but there are a lot of really solid southeast suburban office markets where you can find yield still. Suburban office is one of the only asset classes where risk premiums haven't completely collapsed. Basis is everything and you can't bet on big rent growth, but we've been able to pretty consistently find opportunities.


‘Strategy’ discussions which are so vague / conceptual where we don’t have any data to even know if we’re going in the right direction. These happen way too often. Oh, and consultants trying to ‘add value’


We've been competing with out of state value-add multifamily buyers in our tertiary market. I believe its the same story everywhere but I can't get my head around how the same deal gets sold as "value-add" multiple times in the same cycle and buyers are still lining up to champ at the bit while paying lower and lower cap rates. We've frankly been punished by the market for being "smart" underwriters which has kept many deals from coming our way. Seems most buyers are willing to push their underwriting to get the deal done, banking on a greater fool at the end of the tunnel.


Same thing we are seeing. Stupid money chasing deals is making it extremely difficult on the acquisitions side (but great on the disposition side).

We are currently chasing a "value add" deal with one of our operators who actually owned the property 6 years ago. We had to take a step back and tell ourselve "woah, what are we doing?".


> We've frankly been punished by the market for being "smart" underwriters which has kept many deals from coming our way.

I haven't been on the principal side but have heard this complaint a lot from the brokerage side. So assuming you need to do deals to drive revenue, what do you do about this? Control expenses, stay lean, and wait until the market corrects?


Fortunately for us we have a management platform and a development arm so we aren't entirely reliant on acquisitions to grow business. If we were not as integrated I assume we'd have to change our strategy.. look at different property types, chase off market deals, find new markets etc


I've been really struggling to handle structuring debt for these deals. When you have a 1978 vintage property in a tertiary location being purchased at a 4.25% cap rate BEFORE the value add is done. It doesn't make sense because the cashflows do not support anything above 65% LTV. Especially when the delta between the purchase cap and interest rate is sub 50bps, leaves a small room for error.

My boss seems intent on pushing the envelope though so he is prescreen UW the bare bone minimums on expenses to help make the deal pencil. Told him I didn't agree, but because it was his name on the deal and not mine, we could go about it however he wants. Can't wait to see this thing fall apart during closing and get re-traded and I get the chance to say "I told you so" to his mug.


I'm with you man, although as the analyst on my team I play a decent role in setting client expectations from the start.

We are working on a structured program where the buyer is buying newer product in core locations and lowering rents on a portion of the unit mix to achieve a workforce housing goal. They are running hard at a bunch of nice product but are getting flustered when their "65% MAX LTV" loan is sized much closer to 50% due to DSCR constraints. It's almost like folks forget that a variable in the LTV equation is value... Pay less if you want this ratio to improve.

Good luck on the re-trades. It sounds like you're doing all that you can.


A few:

  1. Construction costs are stupid. In my market, it costs as much today to build a surface parked apartment project as it did to build a wrap deal a few years ago. It's not even all on the GCs either. All your subcontractors are driving 2019 Chevy extended cab trucks with a new boat being towed behind it.

  2. Student housing is starting to trade 50 bps higher than market. I'm personally fine with this as I much prefer building market rate to student, but for a while these cap rates were the same, and with that came certain disposition expectations.

  3. My firm is still underwriting everything to a 7 at exit (and maybe 6.75 if you can convince them) while our competitors are out there underwriting to a 6.25 exit. With the above construction price complaint, this makes getting deals done difficult.

All in all though, people are still moving to our markets en masse and there is still a need for housing. Getting deals off the ground is difficult, but leasing them up and selling them isn't at all once you do. There is a ton of money out there, both in the equity and acquisition sides.

Commercial Real Estate Developer
It's not even all on the GCs either. All your subcontractors are driving 2019 Chevy extended cab trucks with a new boat being towed behind it.

Very true. Although GCs pad their profits in a lot of areas you wouldn't expect. If you want a good laugh then read through the general conditions and see what they're charging you for a PE/ PM and what they're actually paying their PE/ PM. Subs are doing pretty hot right now. It's a volatile, tough business. But when it's good, it's really good. We have a plumber who lives in a very ritzy OC area on a ~6,000 square foot estate.

Also I had no idea trucks were as expensive as they are. I'm a car guy but never really into trucks. A PM I know just bought some Dodge for like $75k after options then another $10k in his own upgrades. Seems like a waste imo but to each their own.

“The three most harmful addictions are heroin, carbohydrates, and a monthly salary.” - Nassim Taleb

On the LP side, we are finding that our developer partners are stretched thin with too many deals and too little personnel. Turnover seems high at the operations level as qualified directors/managers are getting lured away by higher comp or are promoted to the corporate level. Developers are struggling with liquidity and are selling off their GP equity to de-risk and get needed cash to cover capital calls/enterprise expenses.

On the LP side, we are finding that our developer partners are stretched thin with too many deals and too little personnel.

Are you feeling like this is more than usual? I don't disagree at all - I just think this is typical for development firms, if not almost intentional.

Commercial Real Estate Developer