current LPs / GPs development & value add returns

[Account Closed]

What kind of returns are you currently seeing in your market for multifamily and industrial value add and development deals?

What are your current underwriting assumptions and thresholds?

Assume a project cost in the 10-50mm range in gateway / primary markets

90/10 deal

I currently use the following UW Assumptions:

cap rate expansion: 5-10 bps per year

rent growth: 2-2.5% annual

Product type:                      mid rise affordable MF spec development

Term:                                 3 yrs hold

YOC:                                   6-7%

Trended ROC/spread:          150 bps > exit cap

LIRR:                                   16-17%

EM:                                      2x

LTC:                                    65%

LPs pref:                              9%

Waterfall:                            80/20 to 13%

                                           70/30 to 18%

                                           65/35 thereafter

Look forward to what others have to say

[Michael Ealy]

@Account Closed, because of my experience and track record, the equity split is 70/30 to my side. Sometimes, although rarely, I do 50/50.

I am very selective on my projects and I only do projects that have an IRR of 30% (or higher). I usually give a 6-8% pref. For apartment projects, I don't charge an asset management fee, or disposition fee, or success fee when refinancing and sometimes, I forego my acquisition fee. My investors (LP) get first paid because of the pref and since the equity goes my way, it forces me to get projects that have a high IRR.

Since, I get to keep a lot more equity on projects with superior returns  I am not "hungry" nor desperate to have a lot of projects. I am able to focus on delivering on my committments to my investors.

My hold time is 3-5 years for apartments and 5-7 years for hotels.

Also, when I refinance, my investors retain their 30-50% equity ownership.

My investors are quite happy with the fact that they get double digit returns with the above structure and I've never lost money for my investors even through the Great Recession of 2008-2009.

16% project IRR to me is marginal. It's 30% or higher - or else, I don't do the deal. Anything lower than 30% and I am putting my investors' money at risk specially if and when the real estate market goes down.