All-in-One (Ai1) Walkthrough #3 – Modeling a Hypothetical Retail Development Investment

This walkthrough, our third in the series, takes you through the entire process of modeling a simple development investment. I’ve created hypothetical assumptions for this exercise written out in PDF format (download link below) and then use those assumptions to assess the viability of the investment. I model a hypothetical retail development investment using the All-in-One model.

Video Walkthrough – Modeling a Simple Retail Development

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Assumptions – Simple Retail Development

You can download these assumptions in PDF format here.

Investment Summary

• Investment name: Saddle Farms
• Parking: 250 spaces
• Year built: 2019
• Analysis Start: Jan 1, 2018
• Construction length: 18 months
• Analysis Period: 10 years
• Building size: 50,000 SF (35,000 SF anchor plus 15,000 SF inline)

Valuation

• Market NOI cap rate for comparable retail centers: 5.50%
• Forecast growth in cap rate: 5 bps per year
• Exit cap rate: 6.00%

Development Assumptions

Construction Budget

• Land cost with entitlement: 750,000
• Hard costs: 6,250,000 (125 PSF)
• Hard cost contingency: 5% of hard costs
• Soft costs: 1,250,000 (25 PSF)
• Soft cost contingency: 5% of soft costs
• Leasing costs included on rent roll

Construction Financing

• 5% interest rate
• 70% LTC loan
• 2% loan origination fee

Operating Assumptions

Rent Roll

• John’s Market – 35,000 SF (pre-leased); lease start at construction completion; 16 year lease; 12 months free rent upfront;
  • Rent: 12.50 PSF rent for years 1-6; 15.00 PSF for years 7-11; and 17.50 PSF for years 12-16
  • Leasing costs: Tenant improvements of $30 PSF; no leasing commission
  • Expense Reimbursement: 5.00 PSF CAM
  • Future leasing assumptions: N/A

• Inline space – 15,000 SF (not pre-leased)
  • 5 suites at ~3,000 SF per suite
  • Absorption: 1 suite every 3 months with first suite leasing at construction completion
  • Leasing costs: Tenant improvements of $40 PSF and 6% leasing commission for 1^st generation leases
  • Rent: 16.50 as of lease start with 2% annual bumps
  • Lease term: 63 months with 3 months free rent upfront
  • Expense Reimbursement: NNN (100% of pro rata share)
  • Future leasing:
    • Market rent: 16.50 PSF;
    • TIs: New: 20 PSF, Renewal: 7.50 PSF
    • LCs: New: 6%, Renewal: 4%
    • Free rent: none
    • Market rent growth: 3%, 3%, 2%, 2%, 2%
    • Contract rent growth: 2%
    • Expense Reimbursement: NNN (100% of pro rata share)
    • Renewal probability: 60%
    • Lease length: 60 months
    • Downtime: 6 months

Other Income

• Misc. Income: 15,000 grown at 2% annually

General Vacancy

• 10%, excluding anchor space

Operating Expenses

• CAM: 4.00 PSF
• Mgmt Fee: 3%
• Insurance: 0.25 PSF
• RE Tax: 1.25 PSF

Capital Expenditures

• Capital reserve: 0.15 PSF

Permanent Debt Assumptions

Senior Debt

• Amount: 65% of stabilized value
• Loan Fees: 0.5% of loan amount
• Interest rate: 4.25%
• Amortization: 30 years
• Interest-only: None

Junior Debt

• None

Partnership Assumptions

• Equity split: 90/10 LP/GP
• Preferred return: 8.0% paid pro rata
• Promote: 80/20 to a 12% IRR, 70/30 to a 15% IRR, 60/40 thereafter