Typical long term returns for commercial retail syndicated investments?

Question

What are the typical returns , ie total return, or time weighted average return, or IRR, on syndicated commercial retail real estate investments you have made in past, and what area of the US have you found the best returns in?

Dustin Young · Answer

for my syndications we are targeting an 8% preferred returned and a 1.7x equity multiple on a 3-5 year hold. We do try to write conservatively which makes deal hard to find.

Brock Mogensen · Answer

General metrics we target on our syndication deals:

17%+ IRR

2X Equity Multiple on 5 year proforma / 3X Equity Multiple on 10 year proforma

Cash flow on day 1 with opportunity to get to 10% CoC to LP's by year 2-3

I would say these are pretty in line with market average targets for syndication deals.

You do want to be careful when you see targeted returns that are way above this benchmark. As generally it means the underwriting is not conservative.

Rick Martin · Answer

@Paul Azad. It's difficult to predict in this environment for multifamily. I would say 15% IRR with an 8% pref is pretty standard. Getting the COC% to meet that pref has become increasingly difficult with interest rates, rising insurance and taxes. We have entered "tax abatement" deals into our strategy, which greatly reduces expenses and increase NOI and cash flow. I imagine we'll need to be creative for the next few years, but the future does bold well, as supply will tighten next year (boosting rents), and interest rates will (hopefully) continue to trend downwards.

Joel Owens · Answer

Hi Paul,

We have 2 syndications at the company I own NNN INVEST.

One is value add buying properties for all cash and then leasing up dark spaces. These tend to have awhile before any cash flow due to lease up but equity multiple tends to be higher.

Then we have our core plus model which is mainly investment grade credit single tenant we buy all cash with.

On those core plus it's 5% pref to investors and split the cash flow above 5% - 50/50 (LP/GP) and upside 70/30 (LP/GP). Minimum investment is 200k or more per deal and must be accredited.

We go after larger properties because those under 3 million often do not have the diamond locations and a huge portion of buyers are all cash below 3 million. Basically what I call (kick the bucket) buyers. They have saved their whole life and want to pay cash and then live off of 100k or 200k until they pass away and just own the one property. They are willing to take less yield like 5 or 5 caps for perceived safety as often are in retirement years.

There are other syndications in retail like ground up development and companies that focus on shopping centers.

I do not like those because of the complexity, variables, and instability to the cash flow streams. ( example a development deal the costs could run higher than expected or take much longer or with a retail center some tenants can go out dropping cash flow and cap rate.)

A retail center can sometimes pay out a 7 pref but can have more risk. It's all about how much money you make annually with your job or business, your age, risk tolerance, liquidity, and net worth levels. The higher the net worth goes people tend to value time more than large yield and want safety. They get older and have less time to deal with headaches and investments not going as planned and want to covet what remaining time they have left in older years to create memories.

20 years in NNN retail

Hope it helps some.

Dustin Young · Answer

From what I hear this is true. Talked with a guy recently who said they get 10% buying debt with no risk. REI does offer depreciation in the right scenarios but not everyone cares about that.

John McKee · Answer

@Troy P.

Just PM me.  Most traditional syndicators can't compete with note preferred returns.

Paul Azad · Answer

thankyou for all the thoughtful responses, trying to learn all i can about passive commercial RE investing.

John McKee · Answer

If you want stronger yields out of the gate than the 5-6% you see in retail I would pivot to mortgage notes. You can get 5% in a savings account today so why would you bother? I would pivot to mortgage notes which are 10-12%.   With mortgage notes there is no promised IRR, long hold periods, management fees, capital calls, or wait periods to start earning.   The key with any of these syndications is diversification.  If you have 200K then invest in 4 different ones.  The real question comes down to this:  Do you want to chase IRR returns or do you want the best preferred return from day 1.

Robert Ellis · Answer

have you looked at Build to rent IRRs or spec homes? we have pitched to debt funds or blind pooled funds who have some autonomy to select what they invest in and the numbers are higher than those IRRs I'll shoot you a PM. our underwriting is very conservative too.

Typical long term returns for commercial retail syndicated investments?

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