Comments (41)

Jan 29, 2019

For development we are looking for 20%+ IRR. We would dip lower if the project was located in a true gateway city (NY, Boston, D.C, Chicago, LA, or SF). It's hard to justify going much below a 20% IRR when we have sponsors that average a 16% - 17% IRR on their value add deals. There is added risk with any development and that is something we need to be compensated for.

For opportunistic value add deals we would need to see at least a 15% IRR.

Core Plus can be in the 10% - 12% range depending on how heavy the lift is.

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Jan 29, 2019

Curious if you've looked at any deals in Austin? If so, what would you say you guys would look for here?

Jan 29, 2019

Yes, I've looked at a lot of deals in Austin. We are getting close to selling 3 developments we completed there.

I'm not sure what you mean by "What you guys look for here". If you're talking about asset class we are open to pretty much anything. If you are talking about returns, see my response above. It's not a gateway market so we are pretty strict with out return metrics. Honestly, unless something changes dramatically I don't think we will do more deals in Austin anytime soon. There is a ton of capital flowing into that market and 80's vintage value add multifamily deals are only penciling to about a 12% - 13% IRR and newer vintage returns are even thinner than that.

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Jan 29, 2019

Curious how you guys look at return multiples. Construction projects are shorter than typical CRE investments - developers get their capital back much faster, which boosts up IRR.

Jan 29, 2019

MOIC's and IRR are directly tied so it's something that is included in all of our committee memos and models. I don't want to list out the IRR/MOIC targets for all our investment strategies here, but you can do the math based on the guidance I provided above.

15% IRR for a 5 year hold is always a 2.0x MOIC
26% IRR for a 3 year hold is always a 2.0x MOIC

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Jan 30, 2019
picklemonkey:

For development we are looking for 20%+ IRR. We would dip lower if the project was located in a true gateway city (NY, Boston, D.C, Chicago, LA, or SF). It's hard to justify going much below a 20% IRR when we have sponsors that average a 16% - 17% IRR on their value add deals. There is added risk with any development and that is something we need to be compensated for.

For opportunistic value add deals we would need to see at least a 15% IRR.

Core Plus can be in the 10% - 12% range depending on how heavy the lift is.

What's definition of opportunity value added vs opportunistic?

Jan 29, 2019

IMO opportunistic deals do not have in place cash flow, generally when my firm talks about value add deals there is an existing stream of cash flows we are looking to grow through an infusion of capital. With "opportunistic" deals there usually is not any cash flow until improvements are completed.

This is just my/our fairly loose definition and I'm sure others would describe things differently.

Jan 29, 2019

^^^ On the money... Although I've seen some brand name capital sources out there doing deals for -200bps on each range, respectively.

Edit: Looking back, I think I've confused some people with my comment. For clarification, I was responding to the...

20% IRR threshhold for development
15% for value-add
10%-12% for core plus

I'm saying I've seen sophisticated capital in secondary markets solve to returns at a 200bp discount to these ranges. For instance, a pure value-add deal (leasing and reno) we took a run at sponsoring was committee approved at an 11.5% IRR over 5 years.

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Jan 29, 2019

I invest with taxable capital and I've seen tax exempt investors dip down to the ranges you've described. On an after tax basis we are hitting roughly the same returns.

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Jan 29, 2019

Curious. What markets are you finding development deals with 200 bp spreads from build-to-exit?

For us, most markets are far tighter than that, but we've found a few markets in Northern Nevada, Washington, and Florida where those are achievable AND make sense from a risk-reward standpoint.

Feb 1, 2019

Sometimes hard to even pencil within 200 bps of those to be honest.

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Jan 29, 2019

These days? Realistically? Opportunistic funds are chasing value add returns for opportunistic risk. Value add funds are chasing core plus returns for value add risk. Core plus funds are chasing core returns for core plus risk.

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Feb 1, 2019

This is pretty spot on. From a multifamily perspective, no one will say it in their PPM, but we're all telegraphing lower return expectations to our LPs in the near term.

Jan 29, 2019

As a developer, I can tell you that most development deals (secondary markets) on sober underwriting are 15%-20% IRR. Would be very skeptical of anything too much in excess of that. Don't know a single value-add deal (office or multi) that fits the mid-teens return profile.

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Jan 29, 2019

We've been doing a bunch of value-add multifamily in NYC and hitting (conservative) 13-14% returns. 5-7 yr hold.

Feb 2, 2019

I do some work in the NYC market and recently underwrote a few big multifamily developments on behalf of private owners. These developers are going forward with 30-50bps spreads (YoC) with ~55% LTC. They're projecting long-term holds and very ambitious rent growth.

Thus I'm curious how anyone is conservatively projecting 13-14% IRRs in NYC on value-add multifamily, especially with what's rumbling in Albany. Are your projects all market rate? Because it sounds like there's a greater than 50% probability that rent stabilized deals lose a lot of value this summer.

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Jan 29, 2019

18% to 20% on opportunistic deals. We hardly ever do development.

Jan 30, 2019
ILikeCommercialRealEstate:

18% to 20% on opportunistic deals. We hardly ever do development.

So what do you think new development would generally require LP IRR targets of? 22-25%?

Jan 29, 2019

Totally depends on the LP's required return threshold. Our threshold IRR is higher than most.

Jan 30, 2019

With those of you assuming 20% IRR, what type of LTV are you talking about here?

Jan 29, 2019

Typically 65% LTC, but can range from 50% (if we can't get proceeds) up to 70% (our threshold).

Jan 29, 2019

60% - 65%, we might go higher leverage with some pref equity or mezz on deals in gateway markets.

Feb 20, 2019

Can you give an example on why you might choose pref equity over mezz or vice versa. Trying to understand the differences between the two. Thanks.

Jan 29, 2019

Interesting.

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Feb 5, 2019

Everyone is so focused on IRR at 15% for value add, what kind of leverage and growth do you hvae in that model? what is spread between going in and exit cap rate? There is a lot more to IRR. I have seen deals where brokers want some crazy price and solve to a 18 to 20% IRR. Unfortunately, once you look under the covers, it's easy to see these fucktards are using 4% growth in a market with 1 month rent concession and using 75% LTV. Well, no shit these dumbasses are getting a 18% IRR while I am getting 12% despite all over assumptions are relatively comparable.

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Feb 5, 2019

Good point. On multi we're solving to 11-13% net to our investors (post acq fee, AM fee, partnership costs etc). We underwrite 65-70% debt, realistic growth (we would only u/w 3%+ in a strong market like phoenix for instance) and cap rate expansion of 5-10bp/year based on building vintage and general market macros.

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Jan 29, 2019

The only useful information provided by the brokers are the historical financials and the rent roll. Even that can be manipulated by moving R&M into Capex to inflate NOI. It's amazing how much time and energy IS firms put into their books for sections that almost no one even references. If you underwrite deals based on broker assumptions you will be very disappointed.

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Feb 7, 2019
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