Skip to content
×
Pro Members Get
Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
ANNUAL Save 16%
$32.50 /mo
$390 billed annualy
MONTHLY
$39 /mo
billed monthly
7 day free trial. Cancel anytime
×
Try Pro Features for Free
Start your 7 day free trial. Pick markets, find deals, analyze and manage properties.
All Forum Categories
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

All Forum Posts by: Kim Hopkins

Kim Hopkins has started 49 posts and replied 255 times.

Quote from @Chris Seveney:
Quote from @Kim Hopkins:

Hello! 

I've put together a portfolio KPI calculator for our properties and am now realizing that I'm unclear on the best definition of "return" to use in calculations for things like Return on Equity (ROE) and Return on Investment (ROI) .

I've always defined "Return" here as Cash Flow, where Cash Flow is defined as: 

Cash Flow := NOI - Debt Service - Other Expenses.

Here, Other Expenses (or perhaps better named "One Time Expenses") include non-operating expenses such as Leasing Commissions, Capital Expenditures, and Tenant Improvements. 

My definition of ROE has always been: 

ROE := Cash Flow / Equity. 

But if I want to use ROE as a measurement of the property's general performance and to help inform potential buy/sell decisions, using Cash Flow in the numerator doesn't make a lot of sense. It's including the Other / One Time Expenses. So if I replaced a roof or had a large new lease, it could drastically lower the ROE in a given year, making it look like an underperforming property whereas that typically might not be the case. 

Instead, I think we should define ROE as either: 

ROE := NOI/Equity

OR

ROE := (NOI - Debt Service) / Equity.

Investopedia disagrees with all three definitions above and says to use Net Income in the numerator which deducts things like depreciation which makes zero sense for our purposes of analyzing property performance since one good cost seg study would wipe out your income all together. 

Why can't I find this discussion anywhere? What do you think is the correct answer?


 Well what if you have a property that every year has something major happen to it but it collects good rent but that rent is eaten up every year, that is not a great performing asset. 

Things that SHOULD not be calculated if you are measuring performance of different assets are:

1. Debt Service

2. Depreciation

For example, a metric in multifamily is the cap rate, which is the NOI (all annual revenue minus normal operating expenses, such as insurance, utilities, property management, property taxes, and repairs) divided by the property value. (in this instance you could use what you paid for it as a metric to compare assets).

Another metric is the IRR of the properties to compare them, which is a great way to compare two assets.This is taking money incoming and outlflowing with the dates. For IRR you need a projected exit and exit cost.

Another simple way is the ROI, which is the net of how much money (NOI) divided by your equity in the deal. To me that is ROI. (I do not differentiate between ROI and ROE as my investment is my equity).

 @Chris Seveney Thanks so much for the reply! Sorry for the delay in responding. I'm returning to this project now and still very interested. 

- Great point about including "one-off" expenses - if a property has a major problem every year, it's not a great asset, as you said. 

- I agree with you that depreciation should not be included in measuring performance of different assets.

- I think that debt service DOES need to be included but I think there should be TWO different measurements - one inclusive and one exclusive of debt service. The reason I think it's important to consider debt service is b/c a property may look like it's performing well compared to another, but if the debt terms on it suck, it's not performing from a cash flow perspective. Conversely if a property is not performing well and is currently debt free, it might perform better if a good debt instrument is added to it. 


- I don't use IRR on my existing portfolio because we've held some properties for 20 years and some for 2 years. As I understand IRR, the calculation "punishes" a long term hold, and we are long term hold investors.


- For ROI vs ROE - I consider the "I" to be your original investment (e.g. down payment) into the deal. I consider the "E" to be your CURRENT equity in the deal (Current Fair Market Value - Debt Owed). Those are two entirely different numbers in my book. Again if you've held a property for a long time, or if you don't have debt on it, the ROE will be correctly "punished" compared to a property with healthy debt and not too much equity sitting in it.

Would love to hear your thoughts! I'm still stuck on this. 

Quote from @Ronald Rohde:
Quote from @Kim Hopkins:
Quote from @Ronald Rohde:
Quote from @John McKee:

Kim,

Your post is spot on!  I'm seeing some ridiculous increases as well.  I'm hoping to dig into my portfolio next week as well.  I'll let you know what solutions I find.  I was just talking to a large gas station operator that only does liability because the building, tanks, and gas are too much!  But I guess when you have over 200 locations and are making hundreds of millions you can do that. 


 he's essentially self insuring. Save the premiums and replace a building at a rate less than he's earning.


 Can you expand a bit on how you would analyze the cost benefit and how you would structure the reserves for self insuring? If you have  $1M general liability and $2m property coverage, I assume you're not collecting and sitting on $3M in reserves. How does this work? 


essentially, yes, you must pass on the cost of insurance. if the tenant goes bust, thats their problem, not yours. Replacement costs for CRE have gone up, premiums go up to reflect this. I'm not saying its good or bad, but it is reality.

200% from a $5,000 bill, is still just $15,000. Isn't the business generating millions in revenue? 

Yes, you should have a line of credit or cash capable of writing a check for $2-3m. We can take my portfolio as an example, I own 5 buildings with rough premiums of $20k each. $100k per year goes into the kitty to be invested. I will breakeven with one replacement claim every 20 years (fudge to 15 years for investment returns), but thats the concept.

 @Ronald Rohde Hi, thanks for explaining your self-insuring example. That's really smart. (That's what we do with our healthcare insurance actually, for the most part). We have an LOC for $2m. Would rather save it for a buying spree (if the day ever comes!) but have reserves elsewhere. This could work well. (Though to your earlier point, I wouldn't do it for the NNNs since that's the tenants' responsibility). I guess the liability side of things could be scary (i.e. unbounded) but you could always get liability and self-insure on RV only.

Any other downsides? Anything come to mind to consider that I might not be considering? 

Quote from @Henry Clark:
Quote from @Kim Hopkins:
Quote from @Henry Clark:

Start with the highest policy increase and please provide for discussion the detail.  Just do one policy for now, for discussion.  This will further the discussion.

Example:

Coverage    prior           New     Deductible prior   Deductible new  Prem Old  Prem New

Property     $1mm       $1.5mm     $20,000                   $10,000         $10,000      $20,000

Liability

Business income

etc.

etc.

Claims history is minimal or nonexistent, correct.

Most of the snippets above are them keeping their offerings to their exposure models.  So the only way they would insure you, is to have extremely high premiums.

These properties are preexisting properties for your firm correct and not new.  These are preexisting increases from your existing insurers and not new?

If these are new properties to you and new insurers, then the premiums would generally go up since you have no history.  

@Henry Clark

Example: 

• 5 single tenant warehouse buildings in Portland, OR. 
• All but one are NNN tenants.
• No claims

• All have been owned by us for many years and have always been on one policy along with some other multi-tenant warehouse buildings in Vancouver. However, this year, NO standard carriers would cover the Portland properties, but would cover the Vancouver properties. The brokers are required by law to give us the standard carriers for the Vancouver properties. For the Portland properties, they had to go with a non-standard carrier, which is much more expensive.  

I can't break out last year's coverage because it was all bundled with other properties, but here's the new coverage info. 

Current (New) Coverage:  

• Property Building Total: $6,460,000. Rents: $531,827
• Deductible: $10,000 except for $25,000 for property with woodworking tenant. 
•  General Liability: $1M per occurrence.
Excess Liability: $5M aggregate/per occurrence. 
Additional Excess Liability: $1M aggregate / per occurance.

Prior Year Premiums: $14,651

Current Year Premiums: $48,262




 Couple angles.

1.  Deductibles of $10,000 and $25,000 are really low.  Ask the carrier to do a premium test.  Ask for only one level of deductible at $100,000 or what you consider a reasonable level.  How much do the premiums move?

2.  Without knowing your physical property and types of business, your liability seems really high.  Woodworking is highly flammable.  Are the other renters similar professions or are they more along the storage line?  Do customers come there, is this high retail?  Trying to understand the high liability coverages.  Many other questions.  Fire suppression, wood structure, nearest fire hydrant, etc.  Ask them to test the premium at 1.  Without excess, 2.  With $1mm aggregate, 3.  $250,000 per occurrence. Or other variations.  See what moves or doesn’t move.  Have the insurer audit your facility and see what can drive the premiums down.

3.  Your tenants are carrying insurance?  At what levels?  Are you listed as additional insured on the policies?  Is this factored into your Insurers premiums or do you have double coverage?  Ask your broker.   Give them copies of your tenants insurance coverage.  

4.  Are the insurers or the reinsurers predominantly just Washington and Oregon?  You might need to look at National carriers.  

Hi @Henry Clark

Sorry for the delay. Didn't realize I turned off email notifications for BP. Thanks very much for this reply. Super helpful.

1. I didn't realize $10k and $25k were really low deductibles. Sounds like our agent is not advising us as she should. There should be a rough formula or something for choosing deductible relative to RV or something. Anyways, will check this out. Thanks.


2. Great suggestion on liability being way too high. Asked for new quotes for this. 

3. Yes, our tenants carry insurance and yes, we are listed as additional insured. I will ask our broker to confirm we are not paying for double coverage. Great point.

4. The way the broker explained it to me, there is only a fixed set of standard insurance brokers in their area and that's who they have to choose from in the standard market. We are talking with a broker out of Phoenix now to see if he can do any better, but we had him quote on our Sedona property for a start, and it was significantly higher than what we already have. 

Thanks again!

Kim

Quote from @Ronald Rohde:
Quote from @John McKee:

Kim,

Your post is spot on!  I'm seeing some ridiculous increases as well.  I'm hoping to dig into my portfolio next week as well.  I'll let you know what solutions I find.  I was just talking to a large gas station operator that only does liability because the building, tanks, and gas are too much!  But I guess when you have over 200 locations and are making hundreds of millions you can do that. 


 he's essentially self insuring. Save the premiums and replace a building at a rate less than he's earning.


 Can you expand a bit on how you would analyze the cost benefit and how you would structure the reserves for self insuring? If you have  $1M general liability and $2m property coverage, I assume you're not collecting and sitting on $3M in reserves. How does this work? 

Quote from @Joel Owens:

Insurance companies raise rates on older buildings unless you can show almost everything has been properly replaced. They do not care you think everything is in good shape for older building. They go by their industry averages unless you can prove 100% otherwise with tons of documentation to be the exception to the standard.

Just like health insurance/life insurance companies have actuaries to look at when people die they have data to look at what likely happens as buildings age out even with upgrades and replacements. Harsh weather environments go into their risk assessment model.

It can be true that more mom and pop tenants even if they pay on the lease for everything can have a shock to their business with large increases. A retail center in GA say 15k sq ft can be 40k in taxes, same one in Texas 65k, Illinois can be 100k +. That makes tenants CAM costs per foot above base rent really high. Most mom and pop can't stay afloat like that. The bigger tenants the regionals to national in nature are more used to costs to be in that market for the profit model.

So the question becomes if you have weaker tenants even on NNN what do you do? You make sure those tenants are paying way below market rent and that there is demand to backfill the space through stronger tenants paying closer to market. That way weak tenant goes out after all your costs you still make tons of money. Lots of investors just buy a deal in the moment on a high cap rate without assessing and stress testing the risk model of what tenants are there and the dynamics of how their businesses might change when hit with certain costs in the future.

Hi @Joel Owens Everything you said totally makes sense in theory. The part in practice here that is strange to me is that we've owned these properties for 20 years and never seen these increases. We've never updated anything before. Why the sudden change? 

I actually just asked my broker this question (for the 10th time) and here's the most comprehensible answer: 

"Change in underwriting guidelines and will not write this class of business any longer. Their non-renewal was not related to only your account, it was across their whole book of business."

----

Regarding your comments about NNN, if I understand correctly, you're saying past that 233% increase on to the tenants and if they can't make it, so be it. Find new ones? That will not work for the one gross building, but will work for the rest.

Quote from @Ronald Rohde:

I really think you should combing under one carrier. Costs are up, replacement costs, etc. There is no way around that. If your tenants can't carry the burden, they need to raise their prices to customers. I would not spend this much energy on a NNN item after you've done the low hanging fruit.


 I can't combine under one carrier because the standard carriers all declined the Portland properties so we had to go with a non-standard carrier. It would be exorbitantly and unnecessarily expensive to combine the non-Portland properties (who qualify for standard carriers) with the Portland properties. LMK if I'm misunderstanding and always appreciate your ideas! 

@Chad McMahan Hello! I reached out via PM. LMK if it didn't come through. Took me back to the homepage afterwards which was strange. 

Quote from @Henry Clark:

Start with the highest policy increase and please provide for discussion the detail.  Just do one policy for now, for discussion.  This will further the discussion.

Example:

Coverage    prior           New     Deductible prior   Deductible new  Prem Old  Prem New

Property     $1mm       $1.5mm     $20,000                   $10,000         $10,000      $20,000

Liability

Business income

etc.

etc.

Claims history is minimal or nonexistent, correct.

Most of the snippets above are them keeping their offerings to their exposure models.  So the only way they would insure you, is to have extremely high premiums.

These properties are preexisting properties for your firm correct and not new.  These are preexisting increases from your existing insurers and not new?

If these are new properties to you and new insurers, then the premiums would generally go up since you have no history.  

@Henry Clark

Example: 

• 5 single tenant warehouse buildings in Portland, OR. 
• All but one are NNN tenants.
• No claims

• All have been owned by us for many years and have always been on one policy along with some other multi-tenant warehouse buildings in Vancouver. However, this year, NO standard carriers would cover the Portland properties, but would cover the Vancouver properties. The brokers are required by law to give us the standard carriers for the Vancouver properties. For the Portland properties, they had to go with a non-standard carrier, which is much more expensive.  

I can't break out last year's coverage because it was all bundled with other properties, but here's the new coverage info. 

Current (New) Coverage:  

• Property Building Total: $6,460,000. Rents: $531,827
• Deductible: $10,000 except for $25,000 for property with woodworking tenant. 
•  General Liability: $1M per occurrence.
Excess Liability: $5M aggregate/per occurrence. 
Additional Excess Liability: $1M aggregate / per occurance.

Prior Year Premiums: $14,651

Current Year Premiums: $48,262



@Danny Simard How big does our portfolio need to be to be a good fit for them? They look good, but big. 

@Ronald Rohde @Henry Clark

Sorry for the delay. This has turned out to be an epic project.  

To summarize the situation: 

• Portland, OR: 5 single tenant 10k SF NNN office/warehouse buildings, YB 1947-1968. 230% average increase. Snippet below of standard market carrier feedback. We have had no claims. No changes. They've just all changed their standards. The carrier we signed with (with the 233% increase) is non-standard, hence so expensive. We'll owe a minimum premium of 25% if we break with them but it still might be worth it if we can find another carrier. As you can see below, not promising.

•  2 Multi Tenant Flex Warehouses in Vancouver, WA. Increases of 11% and 57% respectively. Even the 11% seems high to me. Talking to another broker. 

• 1 Multi Tenant Flex Warehouse in SLC, UT. 49% increase. Reasons sited: accounting more for snow. Talking to another broker.

• 1 Multi Tenant Retail in Sedona, AZ. Increase 64%. Reasons cited: inflation. (Just bought the property in December so I find this ridiculous). Talking to another broker.

• 2 Multi Tenant Industrial Flex in DFW, TX. Increases around 20%. Talking to another broker. 

Our current broker says we need more detail for our SOV, especially for the Portland properties, like upgrades to electrical, plumbing, roof. We don't really have any. The buildings have been fine. Some roofs are newer (2006/18), some aren't but no leaks. I'm trying to figure out though if there is a better way to present the SOV info to make a more compelling argument. 

For example, these properties are not really "warehouse" as the insurance companies call them in the below snippet. When I hear warehouse, I think simply storage. Perhaps there is a trigger in their program that penalizes warehouse because there is no one regularly occupying the space (which is not the case here). NONE of these properties are storage. They all have office (some of them very nice office) and people regularly in the space. This is simply one example of where we need to know what the "target" is here so we can represent these properties completely accurately but also in the most favorable way possible.