How does this large firm make money on this retail property?

26 Replies

https://therealdeal.com/miami/2017/03/29/thor-equi...

You see this large firm? Okay so they bought this property for $15 million. It is 5,000 sq. ft. and rents for $300/sq. ft./year. (It doesn't actually say the rent for the 1,700 sq. ft. rented to Pizza Rustica, but I'll just say $300/sq. ft. just like the rest of it). So in that case, this property pulls in $1,500,000 per year in revenue. Using the 50/50 rule as a "rule of thumb" that means that they keep $750,000 in profits per year on this property. (They are professionals, so maybe they do better than 50/50, but I'll use it anyway). Now this is before debt service.

If they financed 80% of this, that's $12 million. Let's just say 3.5% over 30 years. That's about $662,000/year in mortgage payments. So they are profiting $88,000/year on this property? That they put $3 million into? Meaning that it will take them 34 years to break even? That doesn't seem like a business ANYONE would want to be in, let alone guys who see themselves as really smart.

Doesn't seem to make sense. Is that really how large firms work? It's the same seemingly low income that is seen is regular financed SFH rentals.

Do you think my numbers are accurate?

Considering these are probably NNN leases and the tenants are likely responsible for all their own property taxes and repairs, the 50/50 rule wouldn't apply here.
You're also not considering the $230k/yr in principle pay down they would get, plus depreciation tax savings. Add the $230k mortgage paydown each year to the $65k you referenced and you're already up to a 10% return on down payment, and that's super conservative. The $15 mil property is, say, $10m building valuation, so that's $363k tax deduction, or $120-$150k/yr tax savings at the highest tax bracket to offset other income.
You're also not considering the $230k/yr in principle pay down they would get, plus depreciation tax savings. Add the $230k mortgage paydown each year to the $65k you referenced and you're already up to a 10% return on down payment, and that's super conservative. The $15 mil property is, say, $10m building valuation, so that's $363k tax deduction, or $120-$150k/yr tax savings at the highest tax bracket to offset other income.
Originally posted by @Chase Gochnauer :
You're also not considering the $230k/yr in principle pay down they would get, plus depreciation tax savings. Add the $230k mortgage paydown each year to the $65k you referenced and you're already up to a 10% return on down payment, and that's super conservative.

The $15 mil property is, say, $10m building valuation, so that's $363k tax deduction, or $120-$150k/yr tax savings at the highest tax bracket to offset other income.

 I understand the basics of what you're saying, but am confused about details. You said I referenced $65k. When did I say that? How are you calculating that 10% return on down payment of $3 million?

I see profits of $88k cash flow + $230k mortgage pay down + $144k depreciation = $462/year.

Correction: It's more than 88k cash flow if using NNN leases.

Using NNN leases, could you throw out a number to use instead of 50%?

Originally posted by @Jeff Greenberg :

You say that the owner is a large firm. Are we talking about an equity fund that is happy to get a 6-7% return on their money? Typically that is what NNN leases are bringing in. Investors get into NNN for the steady fairly safe cashflow and passive investment.

 The company is run by an individual, but they do use private investors, as well as institutional investors. Depending on the project, they use debt financing, equity financing, as well as mezzanine loans.

Sorry trying to do this from my phone and I cannot see the posts while I type reply. You said $88k so even with the $88k+$220k paydown = $308k which is about a 10% return on the $3m. This is not including and tax savings or potential appreciation. I honestly don't have a good cost estimate, someone else might have a better idea of that. But you may have something like roof, siding, parking lot, maybe a monument sign, that you would be responsible for. It depends how leases are written. So whatever those replacement costs would be divided by their life. The other big one of course would just be vacancy.
Originally posted by @Chase Gochnauer :
Sorry trying to do this from my phone and I cannot see the posts while I type reply. You said $88k so even with the $88k+$220k paydown = $308k which is about a 10% return on the $3m. This is not including and tax savings or potential appreciation.

I honestly don't have a good cost estimate, someone else might have a better idea of that. But you may have something like roof, siding, parking lot, maybe a monument sign, that you would be responsible for. It depends how leases are written. So whatever those replacement costs would be divided by their life. The other big one of course would just be vacancy.

 How are you calculating mortgage pay down? If $12 million is financed over 30 years, wouldn't that be an average of $400k/year? I know it's weighted, but how did you get your figure? You said $230k at first, then $220k.

And just to make sure I'm calculating ROI the same way you are... you say that $308k would be about 10% return, but wouldn't it actually be a negative return for the first 10 years? Wouldn't 10% return be $3 million times 1.1 = $3.3 million?

$12 mil over 30 years would be around $230k in principle pay down per year. I'm using rough numbers. It changes each year, each year the principle pay down per year will grow.

No, that is an incorrect way to calculate ROI. $300k per year on your $3m investment would be 10% ROI

@Patrick Philip that would be a 110% return. Your return wouldn't be negative for 10 years you just wouldn't have recouped your cash outlay for 10 years.

Might seem like bad returns to you (and me), but for people further down the road a safeish return of 8-10 is fine.

Originally posted by @Jeff Greenberg :

@Patrick Philip a 10% return on 3mill would be 300k. Re think your math.

 That's right. Because you have to count the $3 million you have in equity. So it's more like saying $3,300,000 on $3 million. 

Originally posted by @Chase Gochnauer :

$12 mil over 30 years would be around $230k in principle pay down per year. I'm using rough numbers. It changes each year, each year the principle pay down per year will grow.

No, that is an incorrect way to calculate ROI. $300k per year on your $3m investment would be 10% ROI

 How is it $230k/year if $12 million/30 = $400k/year?

You're probably right, I'm just asking for clarification.

Originally posted by @Josh C. :

Patrick Philip that would be a 110% return. Your return wouldn't be negative for 10 years you just wouldn't have recouped your cash outlay for 10 years.

Might seem like bad returns to you (and me), but for people further down the road a safeish return of 8-10 is fine.

 Yes. Because I have to include the $3 million in equity. To make analogies to the stock market, the equity plus mortgage payoff plus appreciation of property value is the market price of the stock. The cash flow including tax depreciation write offs are like the dividend.

So I should think of it as $3,300,000/$3,000,000 = 1.1

$12 mil/30 years is not how loan amortization works. Google an amortization calculator and play around with it. My number is right. It doesn't matter whether you're talking stocks, real estate, or a loan to your brother, if you have $3mil that is invested and at the end of the year you made $300k, your ROI is 10%.
$12 mil/30 years is not how loan amortization works. Google an amortization calculator and play around with it. My number is right. It doesn't matter whether you're talking stocks, real estate, or a loan to your brother, if you have $3mil that is invested and at the end of the year you made $300k, your ROI is 10%.
"1.1" that you're referring to, means a 10% ROI. Your value went up 10%. I've never seen anyone calculate it the way you are.
Originally posted by @Jeff Greenberg :

ROI is return on investment. Not return of investment. You hopefully will get the 3 mil back later, but your ROI is 10% or 300k. not 3.3mil

 But if you DIDN'T get the $3 million back later, it would be a pretty lousy investment. You would be losing money at anything under 100%.

You're not lighting $3 million on fire. You don't make money in stocks until you sell your shares. You can't buy a Lamborghini with shares of AAPL. 

But we're all saying the same thing. Just a different way of looking at it. We are arriving at the same figure.

Originally posted by @Chase Gochnauer :
$12 mil/30 years is not how loan amortization works. Google an amortization calculator and play around with it. My number is right.

It doesn't matter whether you're talking stocks, real estate, or a loan to your brother, if you have $3mil that is invested and at the end of the year you made $300k, your ROI is 10%.

 https://www.zillow.com/mortgage-calculator/amortiz...

Year 1, you're paying off $231k.

Year 30, you're paying off $615k.

But it averages out to $400k/year as it mathematically must given that $12,000,000/30 = $400k.

Am I wrong?

Originally posted by @Jeff Greenberg :

@Patrick Philip when calculating an annual return you do not add the return of original capital.  Is that how you calculate stocks?  Really???

If I were to try to calculate stocks, I would just look at the market value of all the shares I currently own divided by how much it cost me to buy them. If the stock went up 20% in 2 years, then I made 10% ROI/year, plus add dividends to that.

Is that incorrect?

Originally posted by @Patrick Philip :
Originally posted by @Chase Gochnauer:
$12 mil/30 years is not how loan amortization works. Google an amortization calculator and play around with it. My number is right.

It doesn't matter whether you're talking stocks, real estate, or a loan to your brother, if you have $3mil that is invested and at the end of the year you made $300k, your ROI is 10%.

 https://www.zillow.com/mortgage-calculator/amortiz...

Year 1, you're paying off $231k.

Year 30, you're paying off $615k.

But it averages out to $400k/year as it mathematically must given that $12,000,000/30 = $400k.

Am I wrong?

You're right, but nobody holds commercial loans for 30 years. More than likely you can't even get a 30 year fixed loan. So every 5-10 years you will be refinancing the loan and starting over. $400k is the average yes but I would not use that number in my ROI calculations

Originally posted by @Patrick Philip :
Originally posted by @Jeff Greenberg:

@Patrick Philip when calculating an annual return you do not add the return of original capital.  Is that how you calculate stocks?  Really???

If I were to try to calculate stocks, I would just look at the market value of all the shares I currently own divided by how much it cost me to buy them. If the stock went up 20% in 2 years, then I made 10% ROI/year, plus add dividends to that.

Is that incorrect?

 That is correct. This sounds different than what you were saying earlier, though. 

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