Incremental Returns

Curious as to how you guys would underwrite an incremental return for a redevelopment of a existing shopping center to mixed-use asset. The way we look at the returns is via the incremental NOI on an as-is basis vs redevelopment. With the assumption being if the incremental ROI (= incremental NOI/Cost) does not exceed our cost of capital, then it makes more sense releasing the current center vs redeveloping. Seems like on a incremental return, our projects barely pencil above a 5% unlevered ROI for mixed-use.. Would you carry the land value as a cost to the project instead of looking at the incremental NOI? Happy to hear your thoughts. Let me know if I'm an idiot. 

Comments (3)

 
Feb 23, 2021 - 3:35pm

You have to buy the land, so you need to carry the cost of the land. On the value front, this is where the dance between lender and borrower comes in. Unless you've held the land for a very long time, or have a strong reason why the land has appreciated, most lenders won't give you credit towards the LTV on the value side - they will carry it at cost. From the equity standpoint you may look at it from the value perspective because you get the upside. So it becomes a tricky dance between what you can get and what they will give. The TLDR: there isn't a clear cut answer. It's deal dependent. 

When you are calculating your ROC internally for incremental yield, I would base it on the firms actual cost of purchasing the whole asset and redeveloping it, including the land. 

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