Typical long term returns for commercial retail syndicated investments?
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
2yHi Paul,
We have 2 syndications at the company I own NNN INVEST.
One is value add buying properties for all cash and then leasing up dark spaces. These tend to have awhile before any cash flow due to lease up but equity multiple tends to be higher.
Then we have our core plus model which is mainly investment grade credit single tenant we buy all cash with.
On those core plus it's 5% pref to investors and split the cash flow above 5% - 50/50 (LP/GP) and upside 70/30 (LP/GP). Minimum investment is 200k or more per deal and must be accredited.
We go after larger properties because those under 3 million often do not have the diamond locations and a huge portion of buyers are all cash below 3 million. Basically what I call (kick the bucket) buyers. They have saved their whole life and want to pay cash and then live off of 100k or 200k until they pass away and just own the one property. They are willing to take less yield like 5 or 5 caps for perceived safety as often are in retirement years.
There are other syndications in retail like ground up development and companies that focus on shopping centers.
I do not like those because of the complexity, variables, and instability to the cash flow streams. ( example a development deal the costs could run higher than expected or take much longer or with a retail center some tenants can go out dropping cash flow and cap rate.)
A retail center can sometimes pay out a 7 pref but can have more risk. It's all about how much money you make annually with your job or business, your age, risk tolerance, liquidity, and net worth levels. The higher the net worth goes people tend to value time more than large yield and want safety. They get older and have less time to deal with headaches and investments not going as planned and want to covet what remaining time they have left in older years to create memories.
20 years in NNN retail
Hope it helps some.
15 Replies
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes2y
Hi Paul,
We have 2 syndications at the company I own NNN INVEST.
One is value add buying properties for all cash and then leasing up dark spaces. These tend to have awhile before any cash flow due to lease up but equity multiple tends to be higher.
Then we have our core plus model which is mainly investment grade credit single tenant we buy all cash with.
On those core plus it's 5% pref to investors and split the cash flow above 5% - 50/50 (LP/GP) and upside 70/30 (LP/GP). Minimum investment is 200k or more per deal and must be accredited.
We go after larger properties because those under 3 million often do not have the diamond locations and a huge portion of buyers are all cash below 3 million. Basically what I call (kick the bucket) buyers. They have saved their whole life and want to pay cash and then live off of 100k or 200k until they pass away and just own the one property. They are willing to take less yield like 5 or 5 caps for perceived safety as often are in retirement years.
There are other syndications in retail like ground up development and companies that focus on shopping centers.
I do not like those because of the complexity, variables, and instability to the cash flow streams. ( example a development deal the costs could run higher than expected or take much longer or with a retail center some tenants can go out dropping cash flow and cap rate.)
A retail center can sometimes pay out a 7 pref but can have more risk. It's all about how much money you make annually with your job or business, your age, risk tolerance, liquidity, and net worth levels. The higher the net worth goes people tend to value time more than large yield and want safety. They get older and have less time to deal with headaches and investments not going as planned and want to covet what remaining time they have left in older years to create memories.
20 years in NNN retail
Hope it helps some.
- Member since 2024 · 162 posts · 232 votes2y
thankyou so much Joel i appreciate it, been looking at some prospective syndication deals in commercial retail/shopping centers and also at some mortgage loan funds too, one offering 8% preferred, fixed rate with no profit share of anything above that with a few year lock up period, trying to figure out how to compare apples to apples within the commercial retail/shopping centers syndication is confusing as well with the different terminology and the different splits structures etc
- 2yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
They advertise 15-18%. They often deliver them or in some cases outperform. The problem is that they are highly leveraged investments. Compounding at 15-18% is great until the market turns and 100% of equity is wiped out, which is happening to many investors right now, and will continue, I believe, throughout 2024.
High leverage yields high returns… right up until it yields complete wipeouts.
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
@Paul Azad, as noted, there are a myriad of factors at play. I am an LP in an unanchored core fund that has been paying they 6%/yr pref each quarter, no issues. This investment is intended to be low risk assets (so like Joel noted) primary retail corridor in high demand areas, with a necessity focus and national, credit tenants on leases.
As you move up the risk spectrum, the projected returns should be higher, but you need to understand there is more volatility in the ability to achieve that return, meaning: a value-add deal with some vacancy, 3rd-4th generation space, more local tenants, should project a higher return than a new construction, national credit tenant base property, because there is more tenant risk, physical condition and obsolescence risk, vacancy and lease up risk, potentially retail corridor risk, etc. There are ways to mitigate some of this, but ultimately, you are taking risk in this type of deal. And so, while the projected returns are higher and hopefully underwritten in a way that those risks are accounted for, there is a higher probability that something will happen to miss those projections and end up with a lower return. But also, chances that returns could be higher if things happen to move in your direction.
- 2yRobert EllisBusiness MemberDeveloper · Miami, FL · Member since 2014 · 3k+ posts · 1k+ votes
Quote from @Joel Owens:
Hi Paul,
We have 2 syndications at the company I own NNN INVEST.
One is value add buying properties for all cash and then leasing up dark spaces. These tend to have awhile before any cash flow due to lease up but equity multiple tends to be higher.
Then we have our core plus model which is mainly investment grade credit single tenant we buy all cash with.
On those core plus it's 5% pref to investors and split the cash flow above 5% - 50/50 (LP/GP) and upside 70/30 (LP/GP). Minimum investment is 200k or more per deal and must be accredited.
We go after larger properties because those under 3 million often do not have the diamond locations and a huge portion of buyers are all cash below 3 million. Basically what I call (kick the bucket) buyers. They have saved their whole life and want to pay cash and then live off of 100k or 200k until they pass away and just own the one property. They are willing to take less yield like 5 or 5 caps for perceived safety as often are in retirement years.
There are other syndications in retail like ground up development and companies that focus on shopping centers.
I do not like those because of the complexity, variables, and instability to the cash flow streams. ( example a development deal the costs could run higher than expected or take much longer or with a retail center some tenants can go out dropping cash flow and cap rate.)
A retail center can sometimes pay out a 7 pref but can have more risk. It's all about how much money you make annually with your job or business, your age, risk tolerance, liquidity, and net worth levels. The higher the net worth goes people tend to value time more than large yield and want safety. They get older and have less time to deal with headaches and investments not going as planned and want to covet what remaining time they have left in older years to create memories.
20 years in NNN retail
Hope it helps some.
There are also development and construction firms now for build to rent single family scattered site and larger communities as well to look into
Section 8 Launch52 Reviews - Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes2y
General metrics we target on our syndication deals:
17%+ IRR
2X Equity Multiple on 5 year proforma / 3X Equity Multiple on 10 year proforma
Cash flow on day 1 with opportunity to get to 10% CoC to LP's by year 2-3
I would say these are pretty in line with market average targets for syndication deals.
You do want to be careful when you see targeted returns that are way above this benchmark. As generally it means the underwriting is not conservative.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes2y
Paul there are not apples to apples.
You could have 2 syndications offerings each having similar structures and estimated returns.
On paper they look the same. My 20 year knowledge in the space is pretty deep when selecting properties for investment.
You do not want syndicators that need deals to get going or buy lots of stuff for volume. The core plus is really a long term hold. Typically if you want to get out at some point there are provisions to sell share to the GP's, sell to another investor already in the investment, sell to outside investor ( with GP approval ).
A friend of mine owns about 15 million sq ft of retail shopping centers and has a staff of about 150 employees for property management. They also manage other centers. They make literally zero money on property management and a little bit on lease up. WHY do they do this then? They do it because they want to own as many as possible within a 100 mile radius and already know about everything there is with a center managing it for years and get first crack at buying it from the current owner and folding it into their portfolio. Also when leasing and sales cycle slows down they have revenue to keep employees on with the management fees.
These types of deals are more long term not short term equity multiple bumps and recycle to something else. Their families tend to keep funds in there when the LP shareholder parent passes away. Long term when value increases they tend to refinance every so many years or decades and pull out the money.
For core diamonds the way I look at it is you hold forever unless someone has a 1031 exchange and is seeking safety and wants to pay you an amazing price for something. ( example they will pay all cash 4.5 cap rate because they are 70 years old and want ultimate safety and do not care about much yield ). Also what could happen is we buy all cash now at higher cap rate and then sell with cap rate compression when interest rates hopefully fall by a good amount again.
Otherwise just keep holding that dirt in the strong area will typically keep going up in value.
As for 8 pref those are theoretical investments. A retail center can have 100 things go wrong with it that affect cash flow versus single tenant you know because the lease says the investment grade credit tenant takes care of everything per the lease and can model out predictable returns over time and if you have additional upside that is icing on the cake but not a requirement of the investment to be considered successful.
Most of my LP investors make medium 6 to 7 figures a year with job or business and have lots of cash and net worth. An investor making 150k a year and worth 1.5 million is usually not a good fit because they are trying to do max yield investing to try to grow fast. They want to live off the pref etc.
A doctor making millions a year doesn't need to grow fast they just want safe yield that in regular times outpaces inflation. They play the long game.
I am 49 years old now. As you get older you are not typically looking for max yield. I could seek that out and put out tons of retail center offerings to invest in but frankly I do not want that life or the stress of it.
Good luck
- 2yRobert EllisBusiness MemberDeveloper · Miami, FL · Member since 2014 · 3k+ posts · 1k+ votes
Quote from @Brock Mogensen:
General metrics we target on our syndication deals:
17%+ IRR
2X Equity Multiple on 5 year proforma / 3X Equity Multiple on 10 year proforma
Cash flow on day 1 with opportunity to get to 10% CoC to LP's by year 2-3
I would say these are pretty in line with market average targets for syndication deals.
You do want to be careful when you see targeted returns that are way above this benchmark. As generally it means the underwriting is not conservative.
have you looked at Build to rent IRRs or spec homes? we have pitched to debt funds or blind pooled funds who have some autonomy to select what they invest in and the numbers are higher than those IRRs I'll shoot you a PM. our underwriting is very conservative too.
Section 8 Launch52 Reviews - Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 797 votes2y
If you want stronger yields out of the gate than the 5-6% you see in retail I would pivot to mortgage notes. You can get 5% in a savings account today so why would you bother? I would pivot to mortgage notes which are 10-12%. With mortgage notes there is no promised IRR, long hold periods, management fees, capital calls, or wait periods to start earning. The key with any of these syndications is diversification. If you have 200K then invest in 4 different ones. The real question comes down to this: Do you want to chase IRR returns or do you want the best preferred return from day 1.
- 2yRick MartinPro MemberRental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes
@Paul Azad. It's difficult to predict in this environment for multifamily. I would say 15% IRR with an 8% pref is pretty standard. Getting the COC% to meet that pref has become increasingly difficult with interest rates, rising insurance and taxes. We have entered "tax abatement" deals into our strategy, which greatly reduces expenses and increase NOI and cash flow. I imagine we'll need to be creative for the next few years, but the future does bold well, as supply will tighten next year (boosting rents), and interest rates will (hopefully) continue to trend downwards.
- Rental Property Investor · Oak Creek, WI · Member since 2017 · 26 posts · 7 votes2y
for my syndications we are targeting an 8% preferred returned and a 1.7x equity multiple on a 3-5 year hold. We do try to write conservatively which makes deal hard to find.
- Investor · Baton Rouge, LA · Member since 2019 · 184 posts · 167 votes2yAny suggestions on where do find syndicators for mortgage note investments? I've seen a couple who are doing debt funds, but I can't find many syndicated deals for debt although I know they are out there. Feel free to PM if you'd like. Thanks.
Quote from @John M.:
If you want stronger yields out of the gate than the 5-6% you see in retail I would pivot to mortgage notes. You can get 5% in a savings account today so why would you bother? I would pivot to mortgage notes which are 10-12%. With mortgage notes there is no promised IRR, long hold periods, management fees, capital calls, or wait periods to start earning. The key with any of these syndications is diversification. If you have 200K then invest in 4 different ones. The real question comes down to this: Do you want to chase IRR returns or do you want the best preferred return from day 1.
- Rental Property Investor · Oak Creek, WI · Member since 2017 · 26 posts · 7 votes2y
From what I hear this is true. Talked with a guy recently who said they get 10% buying debt with no risk. REI does offer depreciation in the right scenarios but not everyone cares about that.
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