Five year lock on an industrial flex development, and the exit cap worries me

I sold a small timber parcel last fall and have about $140k that isn't doing anything. My default is more land, but I've been reading a ground-up industrial flex deal on one of the bigger portals and it keeps holding my attention.

The shape of it: $25k minimum, target 14% IRR over a 5 year hold, 8% preferred return, 70/30 split above the pref, 1.5% annual asset management fee on invested capital, 2% acquisition fee. Sponsor co-invest listed at 5% of equity. Small market on the edge of a distribution corridor, three buildings, 84,000 square feet total, phased delivery.

What bothers me. No cash distributions projected until month 30, so essentially all of the return is back-end. The pro forma exits at a 6.25 cap on year 5 NOI, and they bought the land at an implied basis that only works if lease-up hits $9.75 triple net. Current comps in that submarket that I can find run $8.25 to $9.50, and the newest one is 14 months old.

My land alternative is 40 acres I can walk on, zero yield, taxes of about $1,900 a year, and I can sell it whenever a neighbor wants it.

So the question I'm stuck on is whether a deal where every dollar of return depends on one exit assumption five years out is something I want $50k in, or whether I'm just bored of dirt. I have until the 19th before the allocation closes.

4 replies

1renee_dubois Get yours

Run the exit at 7.0 instead of 6.25 and see what's left. On a project that size that swing is usually 300 to 500 basis points of IRR, sometimes more, and it turns a 14 into something that starts with a single digit. Then run rents at $8.75 instead of $9.75 and you may be at return of capital and not much else.

The part I'd push on harder is the month 30 thing. Deferred distributions aren't unusual on ground-up, but it means the pref is accruing, not paying, and you should read exactly how accrued pref compounds. Simple annual and compounding annual look identical in the summary page and are very different by year five.

Also the 5% sponsor co-invest. Ask whether that's cash from their balance sheet or whether the acquisition fee funds it. I've seen both described the same way.

1derekj19SB1B

Who leases it? Three buildings phased over a corridor market means somebody is doing real tenant work for two years, and on the smaller portal deals that's often a local brokerage on a listing agreement, not the sponsor. Worth asking who owns lease-up risk and what the leasing commissions do to net proceeds, because those usually don't show up in the headline IRR.

Have they delivered flex product in that market before, or only larger boxes somewhere else? Sponsor track record in the exact asset class is the thing I'd weight most, ahead of the cap rate argument cairn is making, though he's right about the cap rate.

1paulgrant17PassivePRO5

The thing that would stop me is the five years. Orchard, if a roof or a tax bill or anything else lands in year three, that $50k is gone from you until the sponsor sells. Land you can list. I know that's the trade everyone signs up for, I just don't think I'd sign up for it with money I'd noticed sitting idle.

1brandonlee36Passive

I put $25k into a value-add multifamily deal on a portal in 2021 with a 3 year projected hold. It's month 44 and the last update said they're extending to pursue a refinance rather than sell into the current bid. No distributions since month 19. I'll probably get my capital back and something modest on top, but the timeline in the offering document was a hope, not a plan.

So I'd take the 5 year lock and mentally call it 7. If that still works with the rest of your money, fine.

cairn, the accrued pref point is the one I'd chase first. Mine accrues simple and I didn't notice for two years.

Five year lock on an industrial flex development, and the exit cap worries me

4 replies