Refinance and IRR question

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For a ground up multifamily development I've heard that a target IRR of 18-22% is generally considered acceptable for a hold of around 5 years.

However, in a scenario where you would be able to pull out all of the of the equity at refinance upon stablization, how can this be true? even if you were the LP on the deal and the GP got a huge promote after 10 or 12%, it seems to me you would still be getting a much higher IRR than 22% at reversion at the end of year 5. Am I missing something?

Comments (6)

 
Jan 15, 2020 - 8:55am

The target IRR is deal level, don't worry about JV structure. And the refi debt won't necessarily be much more than the amount drawn on the construction loan, so you're prob only cashing out a portion of the equity.

Array
 
Jan 15, 2020 - 10:09am

I agree with you in that case, but in the cases where you are able to pull out all of the equity, say:
Project: 20MM
Construction: 15MM
Equity: 5MM

Stabilized Value: 27MM
Perm Debt @75% :20.25MM

Investors get 5.25MM out at refinance (ignoring fees)

This scenario seems like it would greatly exceed that 18%-22% target, or am I missing something?

 
Jan 15, 2020 - 10:23am

Yes but today with market land prices thats probably not realistic. If you're sitting on legacy land you can refi out 100% but if you have a new fund buying new land you're not refi'ing out 100% unless you're in some tertiary market where rents have run up and cap rates have gone down significantly during your construction period.

 
Jan 15, 2020 - 10:53am

Yes sure, anything can happen. What is the point you're trying to make or the question you're trying to ask? Also in your scenario 5 years is a long item with zero cash flow, every year your project takes is that much more money you need to make on the deal to get your IRR to that level.

But yes projects can kill it and you can return a much higher IRR than target, it happens.

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