Thread by @MattLasky

#cretwit has talked ad nauseum about the beauty of CRE due to it's simplicity (we aren't that smart) relative to other assets. It's true & part of my heart goes out to that, BUT

I'm a structure/finance guy by neurosis, a 🧵 on common mistakes I see that cost owners MILLIONS💰💵

1) Not understanding financing alternatives

Some common mistakes I see here are amongst build to suite developers and groups doing value-add projects

On the BTS side, right now there's plenty of financing alternatives for 95-100% LTC financing. If you're a merchant builder

doing STNL deals for a 100-200bps spread, not using this financing and paying an equity promote can dramatically up your cost of capital.

An example on a 1-year hold and $3mm project.

Traditional Financing at 75% LTC and a 4% interest rate I/O:

Loan Proceeds: 2,250,000

Equity required: 750,000

Let's assume no pref and a 30/70 gp/lp equity split and 150 bps of spread from stable yield on cost to exit cap rate. We'll assume we stabilize at a 7.50 cap.

Sale price at 6 cap: 3,750,000
Outstanding debt + int: 2,340,000
Profit 1,410,000

you owe your LP 750,000 of original capital so there's 660,000 left to split.

GP: 198,000
LP: 462,000

In a 100% LTC financing scenario at 6% rate using same exit assumptions and hold period:

Sale price at 6 cap: 3,750,000
outstanding debt + int: 2,385,000
GP profit-1,365,000

Lot's more leverage, but you're trading a bond proxy and making 6.89x the same amount you would if you use a traditional LP structure for the same amount of work. Maybe you don't like leverage but it's worth considering.

Next is:

Tenant Improvement and Leasing Commission Facilities. At a simple level, if you're repositioning buildings, lot's of lenders will finance part or all of the improvement budgets at whatever your leverage rate is.

Simply said, if your debt is 3.5-5% and your cost of

equity is 12%+, financing the turn around of an asset can be highly accretive given the much lower cost of capital.

I'm floored by how many sponsors pay tenant improvement money (which means you have a tenant and are adding accretive cash flow) out of equity, when their cost of

equity is 3-4x debt.

Another big mistake:

Not matching debt or asset management with the asset strategy.

You know what isn't free and is sneakily costly? REFINANCING YOUR ASSET.

Take that 3 year loan on your value add project with no options and you want to hold for another

2 to 3 years for whatever reason. On your refi you're likely to incur:

Loan origination fees, legal fees, recording fees, title. By want of example, on a 4.3mm refi, we incurred roughly 60,000 in costs.

These add up over time and can be more costly depending on the who and

where involved in the deal.

Often the above can be mitigated by better front end planning. This also includes asking for prenegotiated earn-outs on heavy lift value-add / development projects.

Asset managing to your business plan.

AM is different if you're a forever holder

vs a turn-around specialist. If you're adding value, keeping face rent as high as possible is the holy grail. As many have mentioned every dollar added can be $10-$20 in terminal value on a sale.

Where I see people go wrong? Caving on base rent near the end of a hold period

instead of other form of inducements. What can these inducements look like?

-more TI
-reduced rent
-free rent

A couple months of free rent to preserve the face rate can be a 2-3x payoff on exit.

This is just the intro level, but there's tons of structure nuance as you move up

in project size and throughout the capital stack. There isn't a one size fits all answer, but I've found many are dogmatic in their approach because "they've always done it that way," which in some cases costs millions.

Other interest things are forward funding/take outs

or programmatic jv's.

Good news on all the above is a great capital markets advisor or savvy asset manager can help you

through the above!