All Forum Posts by: Kim Hopkins

 Is it multi or single tenant industrial? We specialize in multi-tenant industrial as well. Would love a property with that cap rate!

 Wow tell me more! I have deal FOMO. ;) Where did you find an 8.5% cap and how? And 25% down is incredible even for insurance companies. My insurance companies are saying 35% down at a minimum. Would love to hear more.

The deal I'm looking at is a 7.5% cap rate and rates are at 7.25% with 50% down! No prepayment penalty though so I could refi if rates come down. 5-year term. 

 To add on to the above, it only makes sense if it is a one-time capex improvement. But these are recurring TI and leasing commissions. It's a multi-tenant property. This process happens continually throughout the entire hold period, not just an upfront one time expense.

 Zach, It might be a good thing but it completely distorts the cash flow and cash on cash return. Think about this way. If you're raising TI and LC for the first 5 years of costs and it's a 10-year hold, you're essentially giving back the investor their own money for the first 5 years, then you're out of money for those expenses. Your cash flow goes down and your cash on cash goes down at that point. The property didn't get any less productive from a return standpoint. It was just that you were giving the investors their own money back for 5 years. Another way to say it, the investor could have taken that money in reserves and invested it somewhere else instead of just making less cash flow on your deal.

It makes it so you absolutely cannot even look at the cash on cash return and cash flow for a passive investment deal because two deals could have the exact same actual performance but entirely different cash flows and cash on cash return based on how much one operator raises up front. 

Does not sound right in what sense? I'm pretty sure the math is right. I've checked several examples. You have a good point about the IRR, but I still think any investor also considers cash flow and cash on cash return. Not to mention this also allows for an increased "preferred return" which might make one investment look artificially more attractive than another.

I'm looking at a passive real estate investment where part of their equity raise is for Tenant Improvement and Leasing Commission (TI and LC) reserves. 

When they calculate their annual cash flow, they do not include the annual estimated TI & LC since it was part of the equity raise and is in reserves. 

This increases their annual cash flow since they no longer have TI&LC as a line item. 

But more importantly, it can also increase their Cash on Cash (COC) return.

(If you just raised Equity without TI&LC, and you have Cash Flow (CF), then your COC = CF/Equity. If you raise Equity + TI&LC where TI&LC is your TI&LC for the first year for example, then the new cash on cash for that year is COC = (CF+ TI&LC)/(Equity + TI&LC). If you just play with the numbers and don't raise too much, you can increase your COC this way).

So raising additional money for TI&LC or whatever can increase your COC return. But are you really making a better return? Aren't they just taking more of your capital and giving some back slowly from reserves without it actually having anything to do with the return of the property?

Confused.

 Ok I appreciate that advice. Thank you.

 I agree. This makes the most sense. Sounds like I need to lighten up on the "thou shall not re-trade" commandment.