Advice on Modeling Repositioning/Conversion/Redevelopment For Our Shopping Mall
Working for a large mixed-use developer and we have currently owned a large regional mall for 15 years.
Due to Covid, looking to downsize in retail and convert a sizable portion of square footage to residential.
For feasibility analysis testing, how would you build out the financial model to bake out the IRR returns for the combined asset for the duration of the entire holding period since acquisition 15 years ago?
Do you start the cash flow model with the historical acquisition basis 15 years ago (outflow, negative cash flow), then include the historical 15 years of NOI (inflow, positive cash flow), then use a two year development schedule timeline/budget (outflow, negative cash flow), then forecast 5 years of NOI (inflow, positive cash flow), then cap rate on the 6th year NOI for terminal sellout value assumption, and base your IRR calculation on the entire holding period since acquisition 15 years ago?
I would not create an IRR looking back over 15 years because that's water over the dam and irrelevant to the decision making (feasibility) process. Instead, I would build out three models: one with the redevelopment plan, one with holding the asset as-is (probably a huge drag), and one on the as-is value today (as in a broker opinion of value). I would show the NPV on all of those to compare apples to apples, along with the 5/10 year IRRs on the first two options. I would also base today's basis on the deal on the BOV value, which almost certainly has depreciated from their purchase price 15 years ago.
If your boss requests the IRR for the previous 15 years + future holding period then it would be simple to grab the cashflow strip from your three models and backend it with previous period cashflows. Getting those previous period cashflows from accounting/old documents is probably going to be a huge pain, though, so I would avoid it if it's not specifically requested.
I'm working on a project that is pretty much exactly the same as OP's project, except that we only use YOC not IRR since we are long term holder. We also use the same method you described (3 scenarios).
Since OP mentioned the retail footprint will be reduced significantly, overall the deal might not pencil unless the MF or office rent makes up for the lost GLA, right? If that's the case, how do you justify the project? Comparing the NOI or NOI CAGR between "as-is today" and "as-is long term"?
CRE Entrepreneur nailed the modelling question. From a bricks and sticks perspective, I'm very skeptical of one-off conversions of parking lots / decks / vacant boxes of struggling malls into residential. Think you really need to re-develop the whole thing to be successful over the long-term and not sure you can lead with resi but what do I know.
I think the dark boxes are usually just the starting point/ phase 1 simply because the GLA is available. If the entire project is just one-box renovation or lease up, that's just what it is - not a conversion imo.
It is irrelevant to the decision on whether to redevelop or not what the cash flow was in year -13.
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