Quick question - do you guys generally gross up NOI by your general vacancy assumption (3-5%) before capping on exit for a 100% occupied building?
ie do you use (NOI x 95%)/cap or NOI/cap when fully leased?
My thought is that exit cap rates are relative to current market comps. Market comps are typically quoted using actual NOI so therefore you should use actual NOI and not adjust NOI.
Sorry if this is a basic question.
| +48 | Being asked to stay behind and train my replacement | 14 | 3d | |
| +45 | New Comp Database - Google Form (Now with Data Validation) | 24 | 6h | |
| +30 | What does REPE actually do? | 12 | 1d | |
| +26 | Leave brokerage to be GP | 2 | 30m | |
| +24 | Public Homebuilders | 9 | 1d | |
| +24 | Seeking Career Guidance in Real Estate Development Post-Graduation | 3 | 9h | |
| +22 | REPE/Development GPA | 15 | 1d | |
| +17 | MSRE/MSRED with no RE experience; Naive to think I’ll land a job afterwards? | 4 | 3d | |
| +16 | UC Berkeley MRED vs Columbia MSRED? | 2 | 5d | |
| +15 | Hospitality Finance - Perks? | 3 | 6d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
If you are selling a building you would use the actual NOI said building is spitting off...not sure why you would reduce your valuation simply because other buildings aren’t doing as well as yours. Buyers will all have their own ways of mitigating risk so let them deal with that.
It is deal dependent. For example, an office building that upon sale is 82% occupied due to large roll, you might gross NOI up to 95% (or market vacancy) for the sale or you will push the sale out 1 year so that lease up can occur and than you sell it. Additionally, you will need to factor in any seller credits which might be provided upon sale for both of these scenarios.
Although you don’t see it happen often, you will see it done when a firm is trying to get a deal done. The thought is it is okay grossing up NOI as they will probably provide seller credits etc for the leasing (even though a lease may not actually be there to be inked at time of sale).
People will do a lot of things to get a deal done...
Personally, I believe just extend your hold one year and make sure your debt, if any, doesn’t terminate at the time of large roll, or right before it.
No, you do not fuck with your actual NOI. The next buyer may take it upon themselves to solve for a stabilized yield and etc., but that's for them to determine. Your exit cap and the next buyer's entry cap, are not contingent on hypotheticals.
My thought is that any buyer is going to add a general vacancy factor of 2-5% and assess their going-in cap on this adjusted NOI.
Just as you would adjust NOI upwards if the building is below "stabilized occupancy" you'd adjust it downward slightly if above long-term stabilized occupancy.
Mind you this exit modeling is upon acquisition and not for negotiating a sale. I know in a sale scenario you want to use all the levers you have. My question is more for what are typical best practices for modeling.
based on my limited experience with dispos, if we are "over-occupied" vs the submarket, we usually come up with a vacancy rate that is somewhere between the actual occupancy and submarket occupancy for the asset class. ex: if the building is 98% occupied and submarket occupancy is 90%, we might use ~94% for internal valuation purposes, as unlikely that the next buyer would use market cap rates to cap the 98% occ NOI. not sure how others would approach it
Most models always assume 95% occuiped, even if higher in actuality. If much lower, they will use the in-place, but likely assume in their CF's that they can lease it up to 95% over the next couple years. There are a lot of caveats, some of which I outlined below.
Multi family non stabilized - here obviously they will underwrite the actual, and then grow it to 95% over time...but the cap/price won't reflect that cash flow...but rather an NOI that is within 100-200bps of the actual occupancy.
NNN single tenant bldg - if the tenant is in palce and has term left on their lease...it's hard to UW anything other than 100% occupied. Even for a multi tenant building, if 100% occupied, you will UW some assumptions in your rollover risk...and any seller might take a haircut if the rollover is soon, even though current is 100%.
Typical scenario of stabilized asset - most models always use 95%. Actual might be a little higher/lower, but they almost always trend out and cap out to 95...
Regarding your point about grossing up and changing actuals. One of the smarter things I've heard one of my bosses say is "never pay for NOI that you don't have". Meaning, never pay for some F12 NOI based on assumptions the current managers havent been able to achieve. You want me to pay for performance you werent able to achieve? No... Yes on sale UW and assumptions, people usually use the F12 - and I understand that methodology. But fact is it sells for what someone is willing to pay...and comps go a long way here, and also who is in the market when looking for what. Lot of intangibles that drive this process - sometimes very frustratingly so.
The only footnote I would add, is a lot of shops keep things simple and just use the vacancy rate/bad debt/loss to lease all in one line item -- as everyone has their opinion on how to calculate it. So you might be 100% occupied, but you NOI is based on revenue less than your GPR...because youre taking out ~3-5% for bad debt/etc/etc.
Sit assumenda aut dolor qui. Voluptates libero alias sed. Et consequatur optio est ipsam. Cupiditate dolorum numquam dignissimos nihil quisquam quia.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...