The Role of Property Management When Selling an Asset

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When it comes to selling an asset, it’s not simply a matter of finding a buyer to pay X amount. Nothing is ever that clean. From a property management perspective, a number of issues have to be taken care of prior to transferring the property over to a buyer. Many of these projects must deal with various vendors, speaking with tenants, and cleaning up paperwork. It takes an incredibly diligent eye to make sure everything is in order to sell a property. In today’s blog post, Nick Boshinski from Northstar’s property management team outlines a few of the top points a seller should address before handing the property over to a new management team.

  1. Contract Delivery – A seller must compile all current service/vendor contracts in an easily identifiable format for the buyer. Managing a property means dealing with vendors in many different areas. Cleaning services, plumbing, lawn maintenance, insurance, HVAC, winter services (salting and clearing the sidewalks), valet – it’s a long list. The seller should have a concise list of vendors they work with, how much they are paid, and agreed upon contracts for the buyer to review.

  2. Compile all asset inspection reports/permits – in order to make sure a building is up to code; a litany of tests and certifications are needed. Backflow prevention reports, annual fire tests, roof reports, elevator certificates are just a few to name. All permits and reports need to be up-to-date, and any issues that are found by an inspector can negatively impact the sale or force the seller to give the buyer thousands of dollars of tenant improvement credits at closing.

  3. Vendor Notification – Once the seller is out of the project, they need to ensure they will no longer be charged for continued services by the vendors. Anywhere from water and electric payments, to lawn care and HVAC payments. Sometimes a buyer will request that services be terminated prior to close, more typically, buyer will take over existing contracts and vendors are notified of new ownership.

  4. Verified leases and rent rolls – In order to make sure a transaction is running smoothly a seller needs to compile tenant estoppels for buyer review. Estoppels verify that executed leases and rent rolls are accurate – something vitally important for a buyer to verify. This process is done typically 2-3 weeks prior to closing, specifically to ensure everything at the building is running well.

  5. Tenant interviews – Changes in management as it relates to commercial real estate are fairly common. Once a buyer is identified, they will typically request tenant interviews, and the seller should assist in scheduling them. Prior to buying a property, a potential owner must feel comfortable with the tenants who currently occupy the space. Of course, contracts exist to ensure a tenant stays through their lease, but it’s always a good idea for a buyer to get a feel if the tenants are currently happy, what issues with the office space or building might currently exist, and if the tenant is on time with payments. Any red flags with a major tenant could derail a potential deal.

  6. Systems Transfers – Good property management teams assist tenants with any and all issues relating to the building. Many of these property managers will offer their tenants the opportunity to use a third-party portal to facilitate things like rent payment, work orders, etc. Once a new property manager takes over, it’s important for the seller to transfer administrative rights to the buyer to ensure things move forward cleanly.

 Property management is an incredibly complex job and takes individuals and teams with a keen eye for detail. Much like owning your own home, issues arise at commercial properties all the time. Property managers are on the front lines to tackle any issues that come their way. When selling an asset, property managers should run due diligence and prepare many documents in order to hand over to the prospective buyer. A detail-oriented and responsive property manager can ensure the ensuing transaction runs smoothly.

This post was written by Nick Boshinski who’s a Sr. Property Manager with Northstar Commercial Partners. If you have any questions, please contact investorrelations@northstarcp.com.

Posted on October 3, 2018 .

How to Judge IRR vs. Equity Multiple

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When looking over an investment summary, many people jump down to the bottom line and ask – how much money can I potentially make from this investment? Even though we advise all of our investors to be savvy about the risk they’re taking, we know that it’s intriguing to think of the possibilities of a high return on an investment. When thinking about returns, there are two specific numbers that are common in commercial real estate – Internal Rate of Return (IRR) and Equity Multiple. Today we’ll discuss both, how each should be viewed, and why they are important to understanding the bottom line.

Internal Rate of Return – IRR

The annualized internal rate of return is the compounded percentage of return you can expect on your investment, each year. Let’s say that you invested $100,000 in Project Alpha, and after one year, your net profit is $25,000. That means you’ve made 25% on your money and calculated as a 25% IRR! This seems like a straightforward way to look at returns, however it doesn’t tell the whole story. The problem is, IRR is designed to accommodate differing periods of contributing cash and differing periods of distributions; and the formula is nearly impossible to calculate without a computer. Specifically, the IRR formula assumes that you reinvest your distributions elsewhere making an identical return. Another issue with IRR, is the fact that short hold periods can tremendously inflate the overall IRR. For instance, let’s say you invested $100,000 into Project Beta, and you made $10,000 in only one month. 10% in 30 days is absolutely nothing to scoff at, however that annualized IRR will be calculated at 120%. While IRR is a very good barometer to have, an investor cannot reasonably rely on it in isolation, they must take a look at other factors – specifically, comparing it to the hold period. You need to look at IRR on a deal-by-deal basis to make sure a company doesn’t have artificially high IRR numbers, and make sure that one deal with a short hold period doesn’t inflate a company’s overall IRR.

Equity Multiple

One of the best metrics to use for comparing real estate investments is the equity multiple. The equity multiple is simply the amount of money that’s projected to be returned to the investor once everything has been closed. The equity multiple is expressed as a percentage of the number 1.  The number “1” represents your capital contribution, anything above 1 represents a return on your investment and anything below 1 represents how much principal you have lost. For instance, for our Project Alpha deal, you invested $100,000, and received $25,000 of profit in one year, meaning you came out with $125,000. This means the equity multiple is 1.25X (original investment “times” return percentage). If your return at the end of the investment was $150,000 in profit, plus your original investment ($100,000), then the equity multiple would be 2.5X ($250,000).  If the investment lost $25,000 then it would be expressed as .75x. Equity multiple is cleaner to use and doesn’t have to take into account things like hold period or compounding return calculations.

For every opportunity Northstar offers, we provide both projected IRR, and projected equity multiple, as different investors like to consider one or both things. We want to be as transparent as possible when it comes to our investment opportunities. We are also completely open about our prior investments and are happy to share them with you.

If you have any questions about our prior investments, please contact investorrelations@northstarcp.com. To view our current deal offerings, please visit: https://invest.northstarcommercialpartners.com/.

Posted on September 21, 2018 .

A Guide to Commercial Real Estate Fees

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So you’ve thought about dipping your toe into commercial real estate investing. You’ve looked over various investment summaries and several proformas. Then you notice fees – fees galore. A Manager’s fee, acquisition fee, sales commission fee, capital fee, organizational fee. The list seems to be never-ending – everyone has their hands in the cookie jar. One of the issues with real estate, is the fact that it is a convoluted industry with multiple parties involved. 

It is prudent to make sure each deal has the appropriate experts engaged, but it also important to get value for the fees being paid. In a relatively smooth transaction, you can account for roughly 2%-5% of the total cost to be attributed to fees (which is a very wide range, because every single real estate transaction is different). Instead of looking at fees as a sum number, it’s important to dissect them on a case-by-case basis. Today we’ll talk about what fees are involved, and discuss what to expect in terms of cost.

Most real estate deals have the following fees that need to be paid either to 3rd parties or parties associated to the Sponsor.  If you come across fees other than the ones listed below, be careful and ask for a detailed explanation.

  • Sales and Leasing Commissions

  • Development/Entitlement Fees

  • Legal Fees

  • Debt and Equity Origination Fees

  • Asset Management Fees

  • Acquisition Fees

Asset Management Fee – these fees are seen on individual deals, as well as funds. While the total fee can vary, most expect to pay between 1-2% annually on all invested equity or the value of the property. This money goes to the firm which handles all investment management services. This fee is designed to make sure someone is paying attention to all the details, hires the operators, analyzes the market, evaluates offers, oversees the budget, the loan, property management etc.

Disposition Fee – The only issue here is selling the actual asset itself. Smaller firms may sell the assets themselves to save investors money, whereas larger firms will typically hire well-known brokers to get the best possible exposure and price. Worst case scenario is paying about 3% of the sales price, which, if your investment has done well, won’t impact you too negatively. Good brokers can make a world of difference. 

Sales and Leasing Commissions Whether the brokers are 3rd party or affiliated to the sponsor it is important to have someone actively marketing the asset for lease or sale. In addition, the sponsor may have been introduced or otherwise engaged a broker to get the opportunity initially.  Leasing and sales commissions are typically between 2-6% and are shared by the buying and selling brokers.

Legal Fees – these fees are fairly broad and pertain from anything like closing the escrow, helping with loan documents, or setting up an LLC for the property/investment.

Acquisition Fee – Whether in-house or a third party, those who find a specific project or development typically charge an acquisition fee (otherwise known as a “finder’s fee”). These fees are standard industry practice and can either be flat fees ($50,000), or a percent of acquisition cost (1%-3%+).

Entitlement/Development – these fees are typically incurred in new construction and value-add projects, but don’t confuse this fee with the construction cost. These are fees which the sponsor may charge to work with the construction company. Things like negotiating bids, dealing with contractors, creating reports, running due diligence, etc. It’s a laborious process, because it takes a very keen eye for detail. These fees are anywhere from 3% to 5% of construction cost.

These are all fairly standard fees that assume an investment goes smoothly. If an investment goes south, you can almost guarantee additional fees may loom – attorney’s fees, late payment fees – the list can go on forever. It’s important to note that while annoying and pesky – fees are normal. Think about buying a car and how grueling that process is. Now imagine buying a car that costs $50,000,000 that you need to build from scratch, where all parts come from different vendors, and you need to sell it after two years. It doesn’t seem so bad anymore.

If you have any questions regarding fees or real estate in general, feel free to reach out to Northstar’s Director of Equity, Danny Mulcahy at danny@northstarcp.com. To view Northstar’s current open investment offerings, please visit https://invest.northstarcommercialpartners.com/.

Posted on September 11, 2018 .

Should you invest in data center developments?

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Should you invest in data center developments?

It may be the biggest growth industry of our lifetime. “Computer Technology” used to be nothing more than a replacement for yesterday’s technology such as the typewriter, the fax machine, the copier, and the phone. Today, not only has new technology replaced once-pivotal tools, but it also created completely new dimensions to our life.

Think about how we use technology – specifically technology that uses data – on a day-to-day basis:

  • We now share our photo albums in real-time with Facebook, Instagram, and Snapchat;
  • We text or FaceTime as opposed to call;
  • We read our news on Twitter, or on our phones;
  • We attend school on YouTube;
  • We’ve gone from records, to 8-tracks, to tapes, to CDs, to MP3s, to streaming in 30 years;
  • We work remotely through a VPN
  • We now save all of our data, and house servers on the cloud

We seem to take all of this cutting-edge technology for granted. Because of this huge leap of technology, we need a place for all of this data to be stored, which is why data center developments exist. In today’s post, we’ll discuss whether it’s viable to invest in data center developments.

Moving to the Cloud

The two biggest changes taking place today, are the evolution of the “Cloud” and the advent of AI (Artificial Intelligence). The hard drive on your desktop and the server at your office are now being replaced by the cloud. All the information you kept personally and professionally is now being stored and secured in data centers, owned and operated by companies like Google, Microsoft, Facebook, and Cisco.

Not only is the hard drive disappearing but “loading” software onto your desktop is also being quickly phased out. Remember when we you bought a printer, and you had to find a CD for installation – those days are long gone. Google now offers an alternative to Microsoft Word for free, and Microsoft now allows you to simply pay $10 a month and you always have the most recent Microsoft Office at your disposal.

AI is driving cars without a human at the wheel; it is growing crops more efficiently; rapidly improving medicine; diagnosing patients with high success rates; helping supply chain and procurement; and routing you through traffic and more.

Hence, market demand is certainly evident now, leaving the question: How does that translate to a good investment?

Pros and a Con of Data Center investing

To keep up with data storage, massive companies across the U.S. have to build facilities to store data both safely and efficiently. To maintain the integrity of the data and satisfy the consumers demand for on-demand access, hundreds of millions of dollars’ worth of equipment will be invested into each facility. Companies like Oracle and Microsoft need these data centers to keep their customers happy. With this massive investment in technology comes an enormous opportunity in commercial real estate. Here are a few positive reasons for looking towards data centers:

  • Credit Tenants: Data center buildings are inexpensive when compared to the equipment that is installed; it will not be uncommon for a data center to have a billion dollars-worth of equipment installed. Therefore, the tenants are usually substantial with strong credit ratings. The main players today are Facebook, Google, Amazon, Netflix and Microsoft. You might ask, why don’t they just build the facilities themselves? The fact of the matter is, building and owning real estate is not what these companies do; and investors frown on companies operating outside of their core competencies. This is why they tend to outsource their developments to third parties – companies that have a history of good fundamentals and developing solid buildings.
     
  • Long-term Leases: With the amount of investment each facility experiences, it is not likely that they will vacate the space.  Investors can expect to have 15-30-year leases with periodic rent escalations. Long term leases greatly enhance the value of an asset.
     
  • Cash Flow:  Having long term leases with credit tenants make data centers good investments for investors seeking long term consistent cash flow. Typically, with long term leases and cash flow, investors will get monthly or quarterly dividends from their investment, as opposed to a bulk payout towards the end. You can almost think of long term, cash flowing deals, as similar to a bond.


Here are a couple of reasons why data centers might not be a great fit for your portfolio:

  • Expensive land: If there’s a major knock against data center developments, it’s the fact that land for these projects is both expensive and there is a limited supply of fiber networks. Landowners in data center-rich areas have come to know this. In fact, one of the most surprising locations for data centers, is Northern Virginia – it’s considered the data center hub of North America. With its proximity to Washington D.C. and the main fiber trunk crossing the Atlantic Ocean, Northern Virginia is a perfect location. Because of this, land costs can average $300 per SF. Data centers are making private landowners millions of dollars for only a handful of acres. It’s an odd concept to think about, but it’s equitable to land owners in Texas, North Dakota, and Colorado, who happen to sit on a bevy of oil. Land grabs are becoming very common in Northern Virginia.
     
  • Need for cheap energy: Data centers take up a MASSIVE amount of energy. It’s hard to put into reasonable terms as to how much company will spend on energy, which will eat into profits. Between cooling servers, and simply letting terabytes of data flow every second, it is not a cheap venture. Because of this, data centers need to be in areas with access to affordable energy. Ideally, near natural gas power plants. Finding suitable land near the Atlantic and hoping for cheap energy is a tricky venture.

Data centers are a multi-billion-dollar industry that are still relatively new to the investment world. We think that the space still has an enormous amount of room for growth. This past year, Northstar has been contracted to build three data centers for a major U.S. company. We are very interested in pursuing data center developments across the country, and invite our investors to joining us in our next data center opportunity.  If you have any questions regarding data centers, then feel free to contact us at investorrelations@northstarcp.com.

Posted on August 14, 2018 .

Should You Implement Clean Energy in Commercial Real Estate?

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Nothing wastes energy like outdated commercial real estate assets. From inefficient lighting systems and HVAC systems, to poor plumbing and building construction, you would be hard pressed to find a more wasteful industry. Not only are cities, states, and the Federal government putting more stringent regulations and guidelines in place to change the industry, they are also providing several incentives to developers and landlords to build more sustainable buildings. In today’s post, Riley Grimme from the Northstar development team will talk about one such incentive targeting clean energy in commercial real estate, specifically C-PACE, or Commercial Property Assessed Clean Energy.

What is C-PACE?

C-PACE is a public-private partnership that facilitates financing for energy efficiency retrofits and new construction, a unique financing method for commercial real estate owners and developers. It enables property owners to obtain low-cost, long-term financing for qualifying energy efficiency, water conservation, and other clean energy improvements on their existing properties. For ground-up development projects, developers can finance up to 20% of the building’s total eligible construction costs if it’s designed to exceed IECC code by 5% or more, or 15% of the building’s total eligible construction costs if you meet IECC code. There are two main incentives for buildings that are designed to be energy efficient: you are eligible to receive additional lower-cost capital and your building simply consumes less energy which helps save on utility bills – both of which are very attractive to prospective buyers.

Why C-PACE?

C-PACE allows developers and landlords to not only do their part in creating a more sustainable environment and have a more marketable property, but it also offers property owners long-term (up to 20-year) financing that can significantly reduce the amount of equity needed for a project and hence increase their expected returns. The financing is repaid through an assessment on your property tax bill, due at the same time as ordinary property tax payments. It is this security of the tax lien that sticks to the property and transfers with ownership that is key to the program.

Among the benefits of PACE are:

  • Positive cash flow resulting from efficiency gains and lower cost of capital
  • Increased property value with the capital improvements
  • 100% financing with no up-front, out-of-pocket costs for the property owner
  • Landlord and tenant interest alignment as the cost savings of increased efficiency and the PACE assessment can be shared with tenants under a triple-net lease and the savings typically pay for the assessment
  • C-PACE assessment is automatically transferred to buyer upon sale
  • Compared to traditional bank financing, it is longer term, non-recourse, faster underwriting, and up-front funding

Who is eligible for C-PACE?

C-PACE legislation for commercial properties has been adopted in 32 states and the District of Columbia and is now available in more than 1,000 municipalities across the country. Typical use cases for C-PACE include new construction and redevelopment, large tenant improvement projects, and capital improvements. It can be used for most non-residential property, including commercial office, retail, industrial, hospitality, schools, healthcare, non-profits, specialty owner-operators, and multifamily (>4 units).

While C-PACE may seem too good to be true up to this point, there are a couple important considerations to note. You will need mortgage lender acknowledgement or consent before you can close on C-PACE. Since C-PACE projects increase property values and the C-PACE assessment that is senior to the mortgage loan is only the amount of past due C-PACE payments lenders typically get comfortable. Also, if it is necessary to pay off the assessment early, there is a prepayment penalty.

C-PACE and Northstar

At Northstar, we are implementing C-PACE on an existing property and exploring it on a new ground-up medical office building in Lafayette, CO that we are expecting to break ground on in August. For this project in Lafayette, we anticipate C-PACE will lower our Weighted Average Cost of Capital (WACC) and boost our potential returns. Striving to be best-in-class and seeking innovative solutions like this has a substantial impact on the returns to our investors and is a major reason so many of our investors repeatedly trust us to protect and grow their assets.

This post was written by Riley Grimme who is a member of the Northstar Development Team. If you have any questions, please contact investorrelations@northstarcp.com. If you’d like to view current investment offerings, please visit https://invest.northstarcommercialpartners.com/.

Posted on July 23, 2018 .

Why Invest in Medical Office Buildings?

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Medical office buildings or MOBs for short, cast a wide meaning in commercial real estate – they can be anything from a small building used by a dentist or optometrist, to senior care facilities, or to a large hospital campus. To date, Northstar has built 5 MOB assets for tenants across the U.S., and we believe this niche market still has a lot of growth potential. There are a variety of reasons to look towards MOB projects – anywhere from high-value tenants, to long-term leases. Today we’ll talk about why you should consider adding medical office buildings to your investment portfolio.

Market demand

  • Aging populations – Baby boomers are in the midst of retiring – some estimating about 10,000 per day.  It’s an unfortunate impact of aging – the older a population gets, the higher number of doctors’ visits that occur. According to the Centers for Disease Control, those under the age of 64 tend to average 3 doctors visit per year, whereas those over the age of 65 average nearly 7 visits per year. This shows that with an aging population, along with heightened visits, means a demand for additional medical office space exists.
     
  • Rise of Specialist - According to a recent survey, demand for medical specialists is on an upward trajectory. The study was run by Merritt Hawkins, and says “It is specialists such as cardiologists, orthopedic surgeons, pulmonologists, and others who care for the ailing organs, bones, and brains of our fastest-growing patient cohort – seniors, who are disproportionate users of care.” If the trajectory continues, then more and more specialists will need spaces to practice.
     
  • Millennial growth – Over the past 70 years, if someone mentions a growing population, they immediately point to “baby boomers” as the biggest age group. Well, that’s already changed – millennials actually have about 7 million more people than baby boomers. If that’s any indication, then the MOB market will continue to grow.

High Quality tenants and leases

  • High credit tenants – Because you’re dealing with tenants who typically have the backing of state, federal, or local governments, these tenants typically have solid financials, and are less likely to default. Additionally, doctors simply earn a lot of money. This makes them attractive tenants who typically have stronger credit.
     
  • Long-term leases – Medical equipment is hard and expensive to move. It’s not as simple as picking up a laptop, desk, and chair and moving offices. MRI machines are enormous and valuable, X-Ray machines are the same – these are machines that can cost hundreds of thousands of dollars. MOBs typically do not have high turn-over which reduces the amount of leasing commissions and tenant improvements the asset needs over time.

Longevity, Subsidies, and Locations

  • Desirable Location – Medical Office Buildings have the benefit of being located in either highly sought-after centralized locations in downtown areas, or in suburban environments with cheaper land. Both have their benefits. The main thing they want to focus on, is being close to other medical centers or hospitals. Older people tend to have a lot of doctors they need to see (i.e. general practitioner, diabetes specialist, cancer specialist, dementia, orthopedist, etc...). It’s not uncommon for a retiree to see 3 or 4 doctors in a day or week, and this makes convenience of the utmost importance.
     
  • Government subsidies – If a medical office building is a public hospital, then the developer will have a number of options when it comes to subsidies. Many times, both cities and counties will offer attractive packages to ensure a hospital will get built in a specific location – and for good reason. Once a hospital is brought to an area, both jobs are created, and the surrounding real estate value tends to increase.
     
  • Longevity – Doctors typically have a very low turnover rate. Once someone goes through years of medical school and residency, while typically being $100,000 in debt – along with an emotional attachment to helping patients, doctors at the very least have a financial obligation to work incredibly hard to get out of debt. Because of that, doctors have one of the lowest turnover rates in comparison to other professions.


Based on study’s we’ve run, industry experts we’ve spoken to, and our prior successes in the space, we think that medical office building developments is an attractive market to focus our time on.

If you would like to learn more about Northstar’s developments, or have any questions regarding MOBs, then feel free to contact investorrelations@northstarcp.com. Additionally, keep an eye on our investor portal for any new or upcoming MOB investments: https://invest.northstarcommercialpartners.com/

Posted on July 19, 2018 .

What is a Capitalization Rate?

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If you’re investing in commercial real estate, one common term that you will inevitably hear, is “cap rate” – short for “capitalization rate.” It’s a term you need to know and understand prior to putting capital towards a deal. In today’s blog, Northstar’s Senior Analyst, Will Camenson, will cover what a cap rate is, what it means in regards to investing, and how it can impact investor returns.

What is a cap rate?

Cap rates are a “rule of thumb” that allow investors to quickly compare similar assets. A cap rate is essentially the yield generated by a property.  When everything else is stripped out (debt, future sale, fees, etc.), a cap rate is the annual return an investor would receive on an all cash purchase. Mathematically, the cap rate for a property is rent minus expenses (NOI) stated as a percentage of the property’s purchase price.  

Example:

If a property has an expected Net Operating Income (NOI) of $1 million annually and is valued at $10 million then the underlying cap rate is 10%. Additionally, it is useful to compare the underlying risk of a property, a 7% cap rate on one property versus a 9% cap rate on a comparable property in a similar location suggests that the 7% cap rate property comes with a much lower risk premium than the other.

Use the following formulas to determine the Cap Rate, Expected NOI, or Expected Value:

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Another important feature of cap rates is the relationship they have to asset value. As cap rates fall, the assets value increases and vice-versa. This then begs the question - what do you want in a cap rate? The answer is - it depends. If you're investing in or buying a property, you would generally like to have a high cap rate because this equates to a lower valuation, whereas if you're either a landlord or selling the property, then you'd like to have a low cap rate because it means the asset's value is high.

While cap rates alone are not adequate to make an investment decision, they are generally the starting point when it comes to a commercial real estate transaction. In addition to cap rates it is also important to consider:

  • The age of the property
  • Tenant composition
  • Tenant Diversity
  • Lease roll-over and lease term remaining
  • Market trends
  • Economic fundamentals of the area
  • Equity multiple

In summary, cap rates are a combination of many factors that affect the value of real estate. They are an integral part of evaluating a property, specifically, when laying it side-by-side a similar property in the same area. It's never advisable to solely look at one statistic when evaluating a property - it's always a good idea to take a holistic view, however cap rates are always a good place to start.

Today’s post was written by Northstar’s Senior Financial Analyst, Will Camenson. If you’d like to review Northstar’s current investor offerings, visit our investor portal at: https://invest.northstarcommercialpartners.com/

Posted on June 25, 2018 .

Questions to Ask Prior to Investing Part III - Questions to Ask Yourself

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In Part III of our investment series, it’s time to focus on questions to ask yourself prior to putting capital towards a commercial real estate investment. We’ve already talked about questions to ask about the sponsor in Part I, as well as questions to ask about the investment in Part II. Now we must tackle the tricky issue of what to ask yourself prior to investing. In today’s post we’ll cover things like what percent of your income should you invest? Are you looking for growth or income? To effectively put capital towards an investment, you need to take an introspective look to make sure you’re ready.

Questions to ask yourself

Is this your first investment? What is your prior investing experience? Private-side commercial real estate investing isn’t for everyone. You have to remind yourself that you are not playing the stock market. Typically, once your investment is tied up in an investment, you might not get it back for 2, 3, 4 years or even longer. While real estate doesn’t necessarily feel the same effects from tumultuous stock market rides, you do need to know the market. Research cities, locations, and industries – try to become an expert yourself, but if you don’t go that route, ask the sponsor.

How much can I afford to lose?  Research has shown men and women look at risk tolerance very differently; risk tolerance is a psychological term, and men are nearly always more “risk tolerant” but investments are likely being made by a couple, so it is important for a couple to be able to look at things the same way.  A less common term, but far more appropriate, is Risk Threshold - this meaning how much of your portfolio can you afford to lose; wherein your lifestyle, quality of life, or goals will not be adversely affected if you lost the investment?

Real estate investments can be very secure, produce good income and outsized returns, but in contrast to the public markets where you can sell and salvage some of your investments if things are going dramatically wrong, you do not have that luxury with private investments.  If things are going wrong, you are in it until the end and you could lose ALL your investment.  So, as the old adage goes, hope for the best but plan for the worst.

Am I eligible to invest? Different types of investments come with different types of requirements. Places like the stock market or equity crowdfunding allow for almost any individual to investment in an opportunity (occasionally with ceilings). Every investment that Northstar offers, is strictly for accredited investors. This means that an individual or couple must fall into one of three categories: 1) an individual with annualized income of more than $200,000; 2) a couple with annualized income of more than $300,000; 3) net worth excluding a primary residence of more than $1,000,000. If you do not fall into a category making you an accredited investor, there are still many real estate opportunities on equity crowdfunding platforms.

Are private investments right for me and my family?  Most private commercial real estate investments only accept accredited investors; if you do not have a net worth in excess of one million or annual income of $200,000 then private real estate investments might not be appropriate for you as they are illiquid and often considered high risk.  If you think you might need the funds within 3-5 years, private investments might not be right for you.

What percentage of my investable asset do I want in real estate? This is a tricky question that is completely dependent on your net worth, liquidity requirements, risk threshold, and investment goals. An important aspect to consider is the amount of leverage the various investments you chose have; from a risk mitigation perspective, the less leverage being used, the more you can allocate. Investment guidance has evolved over the last decade and now many of the thought leaders and brokerages support an allocation of 10% or more. The Yale endowment, which has similar goals as a retiree (i.e. capital preservation and income generation being the priorities), has about 10% of their portfolio in real estate not including the real estate owned by companies they are invested in. 

Diversification

Once you have an idea of your total commitment to the asset, the next thing to consider is the level of diversification.  There are several key areas that diversification is important:

Product type: Multi family, office, retail, industrial etc.

Geography: gateway markets, secondary markets, foreign markets

Strategy: income, growth, equity, debt

Sponsors: local developers, national developer.

Structure: direct investments, partnerships, funds

How long can I keep this money tied up? A big knock against real estate investing for some people, is the fact that your money is not liquid. Unless you’re in a fund structure where you can typically get your investment back in 60 or 90 days or a REIT that has daily liquidity, your money is typically tied up for several years. Occasionally you might be able to sell your private securities, however, it will likely be at a terrible discount. Ask yourself, are you okay with not having access to your investment for 2, 3, or 5 years? Delays in real estate can happen, so always be prepared that your funds might be tied up for a bit longer than expected.

Do I trust the sponsor? When it comes to investing and real estate, it mainly boils down to trust. Even if you throw everything out the window, what does your gut say? Does the person selling you an investment have a strong background? Do the numbers make sense? Does the sponsor have a long track record? Take a look at Parts I and II of our investment series to see what questions you should ask prior to investing.

Do I feel good about the opportunity? Have you ever invested in a stock, then the next day read a negative article on the company, prompting you to overreact and sell? Sometimes with investing, you get cold feet. It’s a natural feeling. With private-side investing, once a subscription agreement is signed, you typically don’t have the ability to back out or sell your shares. Because of this, you have to feel incredibly confident about your investment. The good news is, real estate isn’t nearly as volatile as the stock market, and good pieces of land almost always tend to appreciate in value.

How do you feel about the asset itself?  Do you want pride of ownership or simply want safety, income, and growth?  Today there are a lot of marijuana real estate opportunities, how do you feel about that? How about gun manufactures, tobacco fields, low income housing, etc. These are hard, personal questions that you should ask yourself.

Will my significant partner/spouse feel the same way? Most people who are in a serious relationship quickly realize that questions surrounding money are joint decisions. When it comes to investing, it’s important that you take into account what your significant other thinks. If a poor investment decision is made by one individual, then they will have to deal with the consequences.
Hopefully this blog post, along with our prior two (Questions to Ask the Sponsor, and Questions to Ask About the Investment) will help provide you with helpful information if you’re thinking about investing in private-side commercial real estate. We encourage you to research potential opportunities, and ask any number of questions. If you’d like to see what opportunities Northstar has available, then please visit https://invest.northstarcommercialpartners.com/.

If you have any questions, please do not hesitate to email our Investor Relations department – they typically respond in less than 24 hours. You can reach them at InvestorRelations@northstarcp.com.

This post was written by Northstar’s Director of Equity, Danny Mulcahy. 

Posted on June 15, 2018 .

Investment Series Part II - Questions to Ask About the Investment

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Continuing with Part II of our investment series, today we’ll focus on questions you should consider asking about a specific real estate investment (Click here to read Part I – Questions to Ask the Manager). When it comes to a commercial real estate opportunity, don’t be afraid to get down into the weeds, and ask for specifics. If you don’t recognize a term or if the verbiage is confusing, then feel free to ask for clarification. Take for instance Internal Rate of Return, or IRR – it’s something that can be casually thrown around, and many CRE professionals take for granted that it’s an uncommon term outside of real estate investing. If it’s something you don’t recognize, then ask! If you’re putting $10,000, $50,000, $100,000, or more towards an investment, it’s important that you understand what exactly you’re getting into.

With most investments, when it comes to the opportunity itself, you always want to start with the numbers. However, not in the way you think. Don’t only focus on the positive of how much money you could make – try to focus on the negative to help setup realistic expectations. How much could you lose? What are the specific risks? What happens if a capital call occurs? These are just a few important questions to pose prior to putting your money at stake.

Questions about the investment

Does the Sponsor have a Private Placement Memorandum and Subscription Agreement?  Technically, a sponsor does not need to provide accredited investors with any documentation before or after they invest; it can actually be all done with a handshake. A sophisticated Sponsor will provide a PPM that provides all the various risk disclosures, a summary of the investment, summary of all the fees, budget, and more. In addition, there should be a copy of the company operating agreement which outlines all the responsibilities, and liabilities of both the manager/sponsor and the members/ investors. When things go wrong with an investment, it’s documents like these that help to protect the investor.

How much leverage is being used? Is there mezzanine financing? Is the loan fixed or adjustable? One of the biggest risk factors in commercial real estate investing is the use of high leverage, but it is also a big part of why investment returns in commercial real estate outpace most other asset classes. In today’s market, the standard loan should have about a 70-30 debt-to-equity ratio.  If the sponsor and investors are looking for income, they will use less debt, if they are looking for growth they will use more. A few follow-up questions to ask are: What are the loan terms? Interest only? What is the amortization schedule, is it assumable? Are there prepayment fees?

What position in the distribution am I in? What is the equity structure? Is there a preferred equity share class? In every real estate investment, the profits are split between the sponsor and the members. A common distribution structure allows for the investors to accrue a preferred return between 6-12% annually and a return of all their invested capital before the profits are shared with the sponsor.  Thereafter, it can be as simple as 80% of the remaining profits go to the investors and 20% to the sponsor, but more often than not, there is a “Waterfall” distribution. At Northstar, we typically offer a 10% preferred return, return of equity, then 70% to investors and 30% to the sponsor until the total return to investors exceeds 25% annual, and then the remaining profits are split 50/50. The preferred return should not be confused with Preferred equity members – preferred equity is a different share class that typically accepts a lower return than the common equity, but in exchange, they take less risk by being paid before the common equity.

Will there be any scheduled capital calls? The operating agreement should provide a detailed schedule and/or a detailed explanation for when and why there will be additional capital calls.

What is the likelihood of unforeseen capital call? Nobody wants to put money towards a capital call – especially an unscheduled one. It shows that the budget has likely been spent, and that a property’s future could be in flux. That said, it’s not necessarily the end of the world. Ask the manager how often they’ve done capital calls in the past, and that should give you a good indication of the likelihood of one in the future.

What happens if I don’t make a capital call? Typically, if you do not contribute to a scheduled capital call, then there are likely penalties such as aggressive dilution or the ability to be bought out of your shares at a severe discount. For unforeseen capital calls, the same penalties could exist but more often you will simply be proportionately diluted in the overall investment.  In either case, the manager may decide to treat the capital call as a member loan that not only has a high interest rate associated to it but it also will take precedence in the distributions; this can have a severe impact on your return.  It’s vital to know what happens if you decide to not make a capital call.

Can the members remove the manager? You should have the ability to remove a manager if a majority of the members elect to do so. This typically happens more often for funds rather than individual investments, and removing a manager is a drastic step that likely signals that an investment is in jeopardy. While it may seem good to have this power, as members are shielded from liability by being passive, so it is important to recognize that whoever is elected to replace the manager will incur some liability exposure.

What are the exact uses of the equity? As an investor, you want to know where your investment is going. You should ask for a business plan that goes into deep detail over where an influx of capital will go. X amount to buying the building. Y amount to construction costs. Z amount towards marketing the building. Ideally to avoid future capital calls, 5 or 10% of total equity will be put towards a contingency plan – for example, just in case construction costs are a bit higher, it’s nice to have both a financial and timeline buffer.

What are the primary risk factors? In asking this, you would like for the manager to be completely upfront. Simply a “There’s basically no risk involved, but the potential for huge returns” response is a red flag. All investments come with risk, which is to be expected. Ideally the manager will discuss potential headwinds, whether it’s construction costs, nearby rental rates for similar properties, or cap rates – and talk about how they are planning to address these concerns.

How much money can I expect… to lose? We know it’s enticing to always focus on potential profits. However, it’s equally important to focus on the risk. When investing, assume that you will lose your entire investment. Are you okay with that? Find out your specific risk threshold (a set amount that you cannot afford to lose), and do not go beyond that number.

How conservative or aggressive are your models? The world is a changing place, and a CRE firm that boasts potential returns of 3 times your money in 4 years maybe too good to be true. Ideally the company you’re dealing with is fairly conservative with their estimates. Don’t be timid to ask to speak with the company’s financial analysts – they hold the key to their investment models and should be fluent in their modeling decisions.

Have you done similar transactions or built the same developments in the past? Is the CRE company you’re dealing with an industry expert? If they have built 50 profitable self-storage facilities in the past, and this is their 51st, that’s a good sign. If they’ve built 50 multi-family units in the past, but this will be their first self-storage facility, then you should grow very skeptical. 

If the real estate project makes money, how do you (the Sponsor) make your money? Whether it’s through fees, commission, or a manager’s interest, it’s important to know how a company gets paid. If the advisor you’re dealing with is only paid based on your commitment, it could be a red flag that they’re incentivized to have you over-commit.

Does the CRE company have skin in the game? Any company in commercial real estate would love to simply facilitate investments with 80% debt, and 20% from outside investors – this ensures 0 risk, and only upside for the company. However, at Northstar, we believe that’s decidedly unfair. This is why in the majority of our deals, Northstar's CEO, Brian Watson, invests his capital alongside that of the company's capital partners in order to align interests. We don’t sell investments to investors – we think of it as co-investing.

At Northstar, we can’t stress enough that all investments come with a certain amount of risk. Especially with private real estate investing, it’s paramount to run your own due diligence. We hope these questions will help you vet a potential real estate investment.

This post was written by Northstar’s Director of Equity, Danny Mulcahy – you may contact him at danny@northstarcp.com. If you’re interested in Northstar’s current open investments, please visit our investor portal at: https://invest.northstarcommercialpartners.com/.

Posted on June 5, 2018 .

Questions to Ask Prior to Investing in Private Commercial Real Estate (Part 1)

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When evaluating a sponsor or private security investment, it is prudent to begin with conducting due diligence on the sponsor first, because ultimately the deals are only as good as the sponsor offering them.  A common mistake many investors make, is asking questions orientated towards the positive, when they should be asking questions that can elicit red flags.

Public companies make public filings with the SEC, which are supposedly seen and reviewed, but numerous other investors essentially allow for a crowd sourced due diligence.  If red flags are identified, the market price of the stock reflects the identified risk.  The are no such filings by private companies. Often there are not audited financials, limited track records, and if there are any 3rd party reports, chances are the sponsor paid for them; so if you are seeing it, it may represent what they sponsor wants to represent.

If you’re thinking about investing in private real estate, there are a number of questions you should be asking prior to making a commitment. If you find that the company does not seem upfront or forthright, it could be a potential red flag. Our next three blog posts will be a three-part series on questions to ask prior to making an investment. In today’s post, we’ll examine what types of questions you should ask about the sponsor.

Questions about the Sponsor/GP

  1. What makes you different from other commercial real estate companies? Every company wants to claim they’re “disrupting the industry” or “doing something different” – but that can not always be true. Many successful commercial real estate companies may have similar business models, but what makes one stand out more so than the others, can be prior relationships built, and the company’s team. Take a look at the commercial real estate company’s website and examine it. See who’ve they dealt with. Ask to speak with their development team, etc.
     
  2. Can I contact your referrals? Because many investments are built on relationships, this is a fairly common question to ask in commercial real estate, but also very important. When it comes to investing, a person’s word can go far beyond what’s on paper. Ideally the company will provide a list of both current and former investors.
     
  3. Send me your historical track record In this case, every prior win and loss should be documented. Not every company is perfect. If the company does provide examples of subpar investments, that’s actually a good sign of them being upfront, and potentially a red flag if they state they haven’t lost money. If that is provided, be sure to follow-up with “How have you learned from this mistake?”
     
  4. How long have you been in business? This may sound unfair to startups, however it’s a valid question. According to the Small Business Association, 30% of new businesses fail during the first two years of being open, 50% during the first five years, and 66% during the first 10. So as you can see – longevity does translate to success.  Has the company or any of its leadership ever declared bankruptcy? If so, why?
     
  5. Has the company ever experienced any violations from FINRA, the SEC, or other regulatory bodies, or is the company under current or expected litigation? These questions are of particular importance just to make sure the company you’re dealing with has a clean track record. A company that hires sales reps, directors, or managers should be under particular scrutiny. If they’re the ones who are selling you an investment, it’s important to know they have always acted in good faith. Additionally, pending lawsuits are important to note just to make sure the company isn’t in jeopardy of potentially going bankrupt.
     
  6. What’s your investment philosophy? In commercial real estate, there are 4 main asset classes to focus on – Core, Core Plus, Value Added, and Opportunistic (you can read more about them here). Ideally the company your working with focuses on one or two of them, rather than equally on all four.
     
  7. What returns do you target? Targets that are too high, and you should be skeptical. Targets that are too low, and you’ll be disappointed. As a general rule, we like seeing Core have annualized returns between 5%-11%, Core Plus of 8%-12%, Value Added of 12%-20%, and Opportunistic of 18%+. However, hold periods and risk preferences are also necessary to account for.
     
  8. Have you ever lost any assets to bankruptcy or repossession? This question is paramount to ask a commercial real estate company. Lost assets are not necessarily a deal breaker – especially if the company was around during the 2007/2008 financial crisis. If a company has lost assets, an important follow-up question is “Why did the company lose those assets, and how have you learned from it?”
     
  9. How many assets have you exited? Did you hit your proforma on all of them? Value added and Opportunistic developers/investors should have higher exit rates than Core and Core Plus. While exit rate numbers aren’t always the “end all, be all” – the more, the merrier. A company that has 100 exits will give you a better idea as to what you can expect in terms of historical returns based on IRR, multiples, and hold period. The less data you have, the more guess work and due diligence you’ll have to run.

    There’s no golden rule on a company hitting its proformas. However, a 90%+ success rate is ideal. Proformas also give a great window into how aggressive an analysts’ models are. If the company is consistently missing their proforma by 20%, then there are questions to be asked.
     
  10. Are you a registered investment advisor? If so, can you send me your Investment Adviser Registration (known as an ADV)? If the company you’re talking to is a registered investment advisor, then you should ask for proof.  It is mandatory for RIA’s to send you their ADV prior to you making an investment.

Investments should always be met with a certain amount of skepticism. As an investor, you should be suspicious in nature – it’s a good thing. It’s important to gather as much information as possible and ask questions based on what you know. At Northstar, we do our best to be upfront about our historical investments. We openly send all of our investors our historical track record, and love talking about our 18-year history. Like all companies we’ve endured tough times like the 2007/2008 financial crisis – but it managed to make us smarter and stronger. We encourage all of our investors or prospective investors to ask us about our history or current investments. Be on the lookout for our next two posts – Questions you should ask about the investment, and questions you should ask yourself.

This post was written by Northstar’s Director of Equity, Danny Mulcahy. If you’d like to learn more about Northstar’s potential investments, you may contact Danny at danny@northstarcp.com, or view current opportunities at https://invest.northstarcommercialpartners.com/.

Posted on May 21, 2018 .

Industries to Watch in Commercial Real Estate

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Like any other industry, commercial real estate is cyclical in terms of what has been built, what's currently being built, and what will eventually be built. Take Denver for instance – it’s a unique city in terms of proximity, growth, and industry. You have people who move here to be close to the mountains. Others who love the sheer amount of activities and amenities the city has to offer. It’s long been an energy, mining, and agriculture center and now is becoming a tech and financial hub where people are moving to in droves.

Commercial real estate developers no doubt recognized the rate of population growth a few years ago and pounced on the opportunity to build multi-family homes. This trend continues to explode – take a look around the city and you will see cranes hover over soon-to-be-finished apartment complexes. While the demand for these complexes exists based on 100,000 people moving to the area each year, look at Zillow, RedFin, or Craigslist, and you can’t help but notice these enormous complexes offering big move-in specials. It almost feels like these complexes have been or are being over-built. If that’s the case, what industries should you focus on in 2018 and beyond? Below we’ll outline a few commercial real estate property types to keep an eye on for the coming years.

  • Senior Care Facilities – We’re currently in the midst of tens of thousands of baby boomers retiring each month. Just because people are turning 65 doesn’t mean they’ll automatically need to go into a senior care facility, correct? While that is true, developers have already taken notice, and are beginning to build facilities across the nation. One segment of senior care that continues to fall behind, is the amount of higher-end facilities. Because of this, we’ve partnered with Balfour Senior Care to help facilitate these needs by building two senior care facilities near Denver, and one in Ann Arbor, Michigan. These are not “old folk homes” – these are truly state-of-the-art transitional facilities that lend themselves to the active adult looking for independent living and allow them to transition into higher levels of service over time. They offer things like farm-to-table dining, chauffeur services to help seniors get around town, wine tasting, aerobics classes, and movie nights. 10,000,000 people are expected to retire in the coming decade and they are demanding more quality of life options than ever before.
     
  • Self-storage – This might not be the sexiest investment in world, however it is one of the more efficient. Self-storage has the ability to thrive in both up and down markets. If the economy is going well, consumers amass more goods and they need a place to put them, while businesses need extra space for inventory and equipment.  If things are going poorly, consumers and businesses need to downsize and need a place to store their inventory, equipment, toys, keepsakes, and household goods.  

    Self-storage has the ability to adapt to nearly any land site; it can be in L shapes, rectangles, triangles etc.., it can be located in less expensive parts of town, otherwise less desirable plots of land which helps the bottom line.  It doesn’t need a beautiful view – it simply needs to be convenient.  But, possibly its best attribute is they have low operating and maintenance cost.

    Here's one example of how self-storage can adapt and take advantage of less desirable locations: Northstar recently began converting a 5-story suburban office in to self-storage.  For an office use, this location had fallen out of favor, but with a location on a major road, near a highway, and a large parking lot (for outside storage) this asset was a perfect candidate for self-storage. 
     
  • Industrial – Maybe the biggest industry to benefit from e-commerce other delivery services like the USPS and FedEx, has been the industrial real estate market; brick and mortar retail pain has been industrial's gain. From big box retail and small town main street, to malls and grocery anchored retail, they are all undergoing a massive onslaught of competition from e-commerce.  Interestingly, what e-commerce needs is industrial for inventory, distribution, maintenance and repair, not to mention the call centers that also inhabit industrial space.  In the years to come with autonomous delivery, we also expect centrally located industrial to fare well.  Similar to self-storage, industrial properties can take advantage of less desirable locations, are simple to construct and have low operating cost. 

    Northstar recently purchased land in Broomfield, Colorado (between Boulder and Denver), and we’re now in the midst of building a 315,000 SF of industrial warehouse facilities. In the end, we’re excited about the prospect to help provide jobs to area employees.

We’re not hiding our self-promotion of these three industries. Using Colorado again as an example, the state is currently ranked as the best state economy in the US, and as mentioned above, more than 100,000 people moved to front range this last year.   Even with all the growth, Colorado’s unemployment is only around 2%.  Population growth and low unemployment is driving increased investment and job growth.  The weather is ideal, the people are friendly, and being next to the Rockies is picturesque. We’ve made significant investments in senior care, self-storage, and industrial. We’ve done so because we have a team of 45 employees who work diligently to study markets, acquisition, and development. We believe in the investments we share with our friends, family and investors and we hope you’ll join us in helping the community grow and doing well along the way.

This post was written by Northstar's Director of Equity, Danny Mulcahy. If you'd like to see what investment opportunities Northstar currently has open, please visit our investor portal at: https://invest.northstarcommercialpartners.com/ 

Posted on May 3, 2018 .

How Interest Rates Can Impact the Bottom Line

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Anyone who reads The Wall Street Journal, Yahoo Finance, or Bloomberg may hear a lot about interest rates. Domestic events, job numbers, and spending bills can all affect rates by a few tenths of a percentage point, but what does this really mean? If you’re investing in a commercial or residential property, why should you pay attention to 3% vs. 3.5% vs. 4%? These are small numbers – they can’t make that much of a difference, right? Well, it turns out they can and do. Today we will discuss why it’s important to lock-in and get a good interest rate, and how much delaying or relying on a floating rate can negatively impact a return.

Some Money is Inexpensive

You may have heard the phrase “Money is inexpensive” since the 2007/2008 financial crisis. It’s an odd phrase, and left alone, doesn’t really make sense. It almost sounds like something a philosopher would say – so what does it mean? The phrase is referring to interest rates and the cost of debt compared to equity. In the 1980s, 1990s, and early 2000s, interest rates on a commercial loan or mortgage would cost the borrower far more than it would today. The LIBOR is what our analysts look at when calculating an investment. LIBOR is the London Interbank Offered Rate, and below is a historical chart of rates, dating back to 1988. Rates peaked in 1989, hitting double digits, and because of this, the economy slowed – it was expensive to borrow money. Now, the LIBOR stands at 1.88, which means a standard commercial loan will have roughly 4.88% interest (we get that number by adding a 3 point spread to the LIBOR) – generally more expensive than over the last decade, however, still relatively cheap when compared historically.

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Comparing Rates

Let’s dig down, and look at the specifics. Let’s assume we’re buying a building, and getting a $100,000,000 loan. We’re assuming the property is already pre-leased, and the tenants are paying $500,000 per month for rent. Below are two charts – one showing a Fixed Interest Rate of 4.84%, and another showing a Floating Interest Rate, which begins at 4.84%. When running an analysis on floating rates, you should always assume that rates will increase given the historically low cost of debt - at this time to be conservative, we’ll start at 4.84%, and steadily increase between .04-.06% per month, while maxing out at 5.47% (the floating rate projection is an actual forward LIBOR projection increase from Chatham Financial). Although just a prediction, this means that floating rates will eventually be a full point above our fixed rate.

What this graph ends up showing, is that if you’re able to lock in a Fixed Rate of 4.84% as opposed to the Floating Rate – your Internal Rate of Return is more than 3 percentage points higher! Roughly a 27% annualized IRR for the floating rate, versus about 30% annualized IRR for the fixed rate. Meaning, if you invested $10,000,000 in this deal, then A) not only should you celebrate, but B) you make approximately $300,000 more on your investment with the fixed rate in one year. Specifically, follow the Floating Interest Rate section, and look at the “Interest Rate” and “Investor Profit” rows – as interest rates continue to climb, investor profit steadily decreases. After reading this, don’t you wish you could have locked in the fixed rate?

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What does this mean?

This is a very simplistic view when it comes to interest rates, however it is telling. Long story, short – interest rates matter. Whether you’re purchasing a home, or investing in a commercial property, you should always pay attention to rates. A one-point percentage rate difference might not sound like much, however in the end, it impacts the bottom line quite a bit.

This post was written by Northstar's Director of Equity, Danny Mulcahy. If you have any questions, or would like to speak with Danny, please email him at danny@northstarcp.com. 

Posted on April 24, 2018 .

Why Invest in Self-Storage?

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Let’s be honest – self-storage investing doesn’t exactly have the most attractive ring to it. It doesn’t have the panache that senior living, retail, or office has, but what it does seem to have is consistent performance. In today’s post, we’ll discuss a couple of reasons why self-storage offers great potential.

Attractive in all types of economies

Self-storage has the unique ability to perform consistently in both up and down economies, which is a rarity.  If the economy starts tanking, businesses are forced to downsize and need space for their equipment, inventory, and files, while individuals need space for their furniture, tools, houseware, and cars. Likewise, in a bustling economy, businesses and individuals need additional space for the same. The National Association of REITs (NAREIT) reported that during the 2008 financial crisis, self-storage was the only REIT sector to post a positive total return (5%, including dividends). This is a pretty incredible statistic when you think about the thousands of businesses that went bankrupt during that same time frame.

Dynamic pricing

Self-storage is one of the more unique real estate investments that can adjust their pricing in near real-time depending on market demand. Because most leases are month to month, the operator has the ability to raise and lower rates multiple times in a given year as opposed to other real estate asset classes that are typically locked in for 3-10 year lease terms.

Location

When it comes to real estate, brokers love the phrase “Location, location, location!” – self-storage takes a vastly different approach.  Whereas, retail, office, and multifamily uses desire cool, hip areas, self-storage facilities simply need convenient and quick access to high density and/or recreation areas. Self-storage can use land that not many other asset types want to use, but a hidden and often overlooked benefit of self-storage is that it’s a great way to cheaply generate income and act as a land bank in areas expected to grow or gentrify.

Low construction and operating cost

All things being relative, self-storage is relatively inexpensive to build and operate.  Whether it is a single-story metal building with thin walls and roll-up doors, to a “fancy” multi-story air-conditioned facility they have very limited plumbing, no fancy flooring, little to no glass, very little parking, and so on. The interior build-outs are simple with the same doors, walls, and lighting. Modern self-storage facilities do not even need full time managers, as everything can be done online and with electronic access codes. All they really need is someone to regularly clean and repair.

Self-storage is a growing part of the Northstar portfolio, and one of our latest opportunities southwest of Denver, Colorado is a prime example. This investment is projecting a 33% IRR to investors. Before putting your money into self-storage investing, be sure to run your own due diligence on the company, self-storage operator, location, and any prior track record that you can get your hands on.

Today's post was written by Danny Mulcahy, the Director of Equity at Northstar Commercial Partners. If you'd like to discuss self-storage investing, or other potential opportunities, please contact Danny at danny@northstarcp.com.

Posted on April 19, 2018 .

Are Rising Interest Rates Good for Commercial Real Estate Investments?

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Even if you are not a finance person, it would be hard to miss the news about interest rates rising, whether it’s from pundits on news broadcasts to advertisements for home loans - it seems to be one of the hottest talking points of the day.  For real estate investors, rising rates beg the question: “What should I expect from my investments?”

To answer this question, one must first understand why interest rates rise. The Federal Reserve has a dual mandate of encouraging growth and limiting inflation. When the Fed lowers rates, it makes access to capital cheaper to spur growth, and as this growth gains traction, the Fed raises rates to keep inflation in check. Herein lies the problem with assessing the effects of interest rates on real estate values.

Overall, commercial real estate values are resilient in a rising rate environment because ostensibly, the economy is growing, which creates demand for commercial real estate. As demand increases, prices rise. In addition, this means inflation is on the rise which also means the replacement cost of the asset rises as land, materials, and labor are also rising.  Furthermore, commercial real estate also has a built-in hedge against inflation, as it often has rent escalations tied to inflation, which ideally allows the asset to maintain its cash flow value spread over the risk-free return.

Where rising interest rates hurt commercial real estate investors, is in the refinancing of assets.  If aggressive leverage is currently in place and the property is already at market rents, then in the short term the value will go down but the real property, less the cash flow, should technically still be rising.

Even though long-term trends show a 70% correlation between cap rates and interest rates, it is important to differentiate between causation and correlation. There does not seem to be any direct connection between the two - the primary driver of cap rate compression is based on real estate fundamentals such as vacancy rates, lease rates, geographic market conditions, etc… All else being equal, it would appear, having low interest rates could pose a more likely problem as it could enable too much new supply which would then lower demand and lease rates.

From my perspective, a rising interest rate environment could have a short term detrimental effects on values if the asset isn’t positioned correctly, but overall when rates are rising, the underlying factors causing the rising rates are accretive to asset values.

This post was written by Danny Mulcahy, the Director of Equity at Northstar Commercial Partners. If you'd like to reach out to Danny, you may contact him at danny@northstarcp.com.

Posted on April 9, 2018 .

Real Estate: Direct Investments vs. Fund Investing – What’s right for you?

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Every investor knows that putting money into any type of investment – whether the stock market, options trading, real estate, or startups – comes with a certain amount of risk. The key is to find the sweet spot of risk/reward that you’re comfortable with. Of course, everyone would love to put money in the next Facebook, Twitter, or Salesforce, however for each one of those, there are 10 Yik Yaks, Lilys, and Beepis (yes, those are real companies… well, were real companies). From Northstar’s perspective, real estate offers the best risk/reward profile. It probably won't ever result in a 10X return, but historically it has provided 1X-4X returns consistently. Real estate is one of the oldest forms of investing, and while memories of 2008 are still entrenched in our mind, it’s important to remember that it was a once-in-a-generation event. Today I’ll focus on investing in individual properties versus investing in a real estate fund – specifically weighing the pros and cons. Even in real estate you have countless types of buildings or properties to invest in, and with that, you still have the option to pick your risk appetite.

Real Estate Types

Prior to weighing the pros and cons of funds and individual properties, it’s important to note there are four standard investment types when it comes to real estate investing. For the sake of brevity, below are a few bullet points (though you can read more on these development types by reading our last blog “Are Core Real Estate Assets Worth The Risk?”).

1) Core – these are your trophy buildings where it’s not uncommon to have them valued at hundreds of millions of dollars. They have strong credit tenants, but offer investors very little upside. Expect 7-10 year holds, with 5%-11% annualized returns.

2) Core Plus – Similar to Core properties, but offer a bit more upside, along with slightly higher risk – many investors purchase these if vacancy rates are higher in order to fill up the building for a better return. Expect 7-10 year holds with 8%-12% annualized returns.

3) Value Added – these types of properties give investors high flexibility, albeit at a cost. Think of it as older buildings which can be flipped and redesigned into newer office spaces; or perhaps a poorly managed building that’s in need of a major update. Expect 2-7 year holds with 12%-20% annualized returns.

4) Opportunistic – these are primarily new construction developments, or highly distressed assets. They need a significant amount of work, which comes with inherent risk, but with major potential upside. Expect 1-5 year holds with 18%+ annualized returns.

Individual Investment Pros and Cons

Many investors typically pick investing in individual properties simply because the potential return is much higher than a real estate fund. It’s not uncommon to see projected annualized returns of 20-25% per year. Northstar typically focuses on value add and opportunistic plays, and just looking over our last three funded projects, our average project return has been 24% per year! Another pro when it comes to investing in individual properties, is information provided on the potential projects. At a minimum, companies should provide detailed financial statements, projected outlooks, Executive Investment Summaries, and a pro-forma. This information at a minimum should give investors a good idea as to what the investment offers, as well as potential setbacks.

While the upside may potentially be great for individual project investments, there are some reasons why it might not be for you. Depending on how many investments you own, putting capital towards one project might be considered “putting all of your eggs into one basket.” The less investments you have, the less diversified you are. Additionally, if you invest in a real estate project, you have very little flexibility if you’re in a crunch for money. While private securities can be transferred, there really isn’t a market or exchange to sell them, and if you are able to sell to another investor, the chances are you will be taking a loss. Finally, when it comes to investing in a single property, you have to understand that it is possible for you to lose your entire investment. You aren’t hedging your risk, and if a significant downturn occurs, then you should be prepared to take a hit.

Real Estate Funds Risks and Rewards

Real estate funds are a fantastic choice if you’re looking for 8%-12% returns a year, along with potential monthly or quarterly dividends. Depending on the fund size, fund managers traditionally spread their risk across a variety of different projects. A traditional spread could be 10% Core, 20% Opportunistic, 45% Value Added, and 25% Core Plus. Of course, this is a simple example, but it gives you a good idea as to how fund managers are able to hedge their risk. Funds are generally a good idea if you don’t want to have excess money sitting in a money market account that returns 1% per year, and your risk appetite isn’t prepared to directly jump into individual assets. Additionally, funds are much more liquid. Depending on the fund, you have more access to your initial investment. While it may take 90 or 180 days to exit the fund (which of course depends on the company running it), it is much easier to receive your initial investment when compared to individual projects. In the end, Funds are a good idea if you’re looking for monthly, quarterly, or annual dividends, alongside a bit more liquidity.

The main reason certain investors stay away from funds, is return potential, typically due to the heavy fees that some funds charge, and the fact they can’t select which asset they want to invest in. Good years may still have an 11% or 12% ceiling, whereas bad years might only net you 2-3%. When compared to individual properties, a great opportunistic investments may return 30% or 40% per year, whereas even a substandard one can still return 15% annualized IRR. Another reason why investors avoid funds, is the fact that property investments are solely reliant on either the fund manager or investment committee. You won’t have a say as to where the fund puts its money. While the committees and managers are subject-matter experts, your hands are not on the wheel when making a decision – something many investors do not like.

The good news is, prior data shows that real estate investing is a great hedge against inflation, and the market itself typically doesn’t sway nearly as much as the stock market. While hold periods can vary for both individual investments and real estate funds, home and commercial prices typically go up. In our 18-year history, Northstar’s average hold period for our properties is roughly 2.7 years, and we’ve been able to average historical, annualized returns of 26%+. With over 120 deals completed in our history, we aren’t weighted by outliers – we’ve shown a great track record, and we feel incredibly confident in both our individual deals, as well as our real estate funds. If you have any questions, then please reach out to investorrelations@northstarcp.com and we’re here to help.

This post was written by Northstar's Director of Equity, Danny Mulcahy. If you would like to learn more about Northstar, available investments, or current assets, then please contact him at danny@northstarcp.com. 

Posted on February 12, 2018 .

Why Invest in Commercial Real Estate?

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Why Commercial Real Estate?

It’s a question that we receive every day. Why should I invest in commercial real estate? There are hundreds of other opportunities where an investor can put their money. Stocks, bonds, startups, crowdfunding, options, cryptocurrency, lending – you get the picture. But why should you invest in commercial real estate? Even if you don’t know much about the industry, you probably know more than you think. In today’s post, we’ll outline the reasons why investing in real estate is seen as a smart, reasonably safe, investment.

A Physical Investment

If you bought $50,000 into the latest startup that focuses on IT cloud development, could you see your investment? Sure, maybe a website with a few glitzy features, but where can you see your money being put to work? If you buy one Bitcoin worth $10,000 (but probably $8,000 by the time you finished reading this post), do you know what exactly you’re buying? You can’t hold a Bitcoin. It’s not something you can feel or even see.

Commercial real estate is different. To date, Northstar has completed over 120 deals across the United States. One of our latest projects is a retail development just west of Denver, called Gateway. Every month you can see the progress on the development of the property that’s located in Golden, Colorado. You can physically see the progress from month to month. Your money is helping provide construction workers with jobs. Your money is helping walls literally get built. Your money has an impact from start to finish. Few investments are like this – commercial real estate is something you can touch and feel – it’s a tangible asset. It won’t evaporate into thin air, like a number of stocks. Not only is having a physical building good from an investment perspective, but it also gives investors peace of mind. If a building or structure is delayed, then investors can actually see what’s happening. Consequently, if you can see once-barren land turning into physical structures – then you’ll feel pretty good about where your money is going.

A Hedge Against Inflation

Inflation is one of those words that will take you back to your Economics 101 class in college, that maybe you forgot about. In short, inflation is a rise in the price of goods or services, while the purchasing power or currency is falling. The good news is, real estate is able to be a hedge against inflation. The value of your asset – whether it’s a residential building or commercial building – tends to increase over time. This is very rare, because the value of many major goods tends to not increase over time. Sure, the value of baseball cards, wine or art may increase, but think of other goods like clothing, computers, or cars. The second you drive your car off a dealer’s lot, you’ve lost 20% of your money, and you’re probably not getting that back. However, real estate is different.

A house you paid $100,000 for in 2008, could be worth 50%, 80%, or 100% more! There are a couple of few reasons for this – limited land in desirable locations, the sheer amount of effort and time it takes to build a new asset, wealthy people or investors moving to new cities, and neighborhood enhancements by state and local governments and the cost of the materials increasing due to inflation. Whatever the reason may be, real estate’s value tends to increase over time, and even with stock market corrections in 2000, or deep recessions like 2008, the price of a property will usually continue increasing.

Additionally, if you own a property, annual rental rates tend to increase each and every year. Nearly all rental contracts have a clause that allows for annual increases which are in line with the Consumer Price Index (CPI) or some other metric. This again is another way that real estate is able to adjust for inflation.  

Short Term and Long Term Holds

At Northstar, we’re very pleased that the average hold period for our commercial real estate investments is 2.7 years – by industry standards, it’s a pretty quick turnaround on your investment. However, different investors have different investment styles. What I mean by that is, some people prefer flipping a new property and making a quick buck, whereas others like to invest capital in a long-term fund that distributes dividends every month.

The beauty of commercial real estate, is that no matter your risk preference, there are always options for you. If you want to have a long-term hold of 10 or 20 years with monthly, quarterly, or annual dividends, then look into investing in Real Estate Funds, or Core assets. These two options give investors relative safety (of course this always depends on the market), not a huge amount of upside, but also, not tons of risk. Think maybe, of an 8-10% annualized return.

If an investor is searching for a hold period of less than 4 years, and is willing to accept a decent or substantial amount of risk, then investors should look to Value-Add and Opportunistic developments. These types of assets might be vacant lots that will soon house an office park, or a dilapidated structure that’s in need of a huge make-over. Major financial institutions tend to avoid these assets because it’s not worth their time. However, smaller and mid-size developers tend to lick their chops at these opportunities. Building a new asset in a relatively young market gives developers and investors the opportunity to achieve returns as high as 25% or 30% annualized, with a 2-4 year hold period. Once the asset is stabilized and cash-flowing, the original developer typically has the opportunity to sell the building to another owner – hopefully for a strong profit. But again, it’s important to note – these types of properties tend to have more risk than funds or core assets.

Commercial real estate is all about learning the industry, and understanding your risk profile. By directly investing in commercial properties, you need to take the information on the development and run your own due diligence. Don’t be afraid to ask or over-ask questions. This is your money, and you have a right to know where it’s going. Ideally you will find a development, asset, Fund, or REIT that is a good fit for you.

This post was written by Northstar's Director of Equity, Danny Mulcahy. If you would like to learn more about Northstar, available investments, or current assets, then please contact him at danny@northstarcp.com. 

Posted on February 7, 2018 .

Executive Spotlight: Interview with Northstar CEO, Brian Watson

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Each month we'll bring you interviews from executives around the country who are given the chance to talk about their background, and business impact. Today we thought there was no better way to start, than with Northstar Commercial Partners CEO, Brian Watson.

Q: Tell us a bit about your background – both personally, as well as the reason behind starting Northstar Commercial Partners.

BW: I come from a background of hard-working family of humble means, some of which were entrepreneurs. The idea of starting my own business really resonated with me. I grew up on the western slope of Colorado, and graduated from The University of Colorado at Boulder where I got a degree in real estate. After graduating, I took a job as a broker with Cushman and Wakefield in Colorado. By design 80% of my work was landlord representation where I represented some of the largest landlords in the world. The remaining 20% was tenant representation where I got to see how corporations viewed commercial real estate, and that really prepared me to start Northstar. It was tough work which involved 7 years of working many hours as a broker. But because of that, I was fortunate enough to start Northstar Commercial Partners 17 years ago. 80% of what we buy are vacant or distressed assets with sub 30 or 40 percent replacement cost values, and trying to provide a 25%-plus annualized return, pre-tax where we enjoy cash flow as we lease them up, and then sell them at some point. Our average hold period is about 2.7 years in our 17-year history. The other 20% of what we do is to work with corporations to help build or buy facilities across the U.S. They’ll give us a 10-20 year lease, and we’ll build assets and hold them –  and they’re risk-adjusted returns where we try to hit a high-teens, low-20s return.

Q: Why don’t you buy core assets?

BW: Our philosophy is, you make money on the buy. Real estate by nature is an inflexible animal – you can’t pick up a building and move it across town. It is where it is. The best way to create flexibility is by having a low basis. If I have a lower basis than the competition, and I’m below 30 or 40% of what it costs to replace, then I can be patient, creative, and flexible.

In the Core space, there’s so much capital chasing so few deals. This is because many buyers have a mandate for large amounts of capital deployment, as well as perceived safety and cash flow. Ultimately, they pay dearly for that perceived safety and often buy trophy assets because it’s their only option. They’re bloodying their knuckles over price. They have to get capital out the door. The only time to buy core is when a market is struggling or when you see value. When a market or asset is fully stabilized, the pressure on the asset is too much. You’re not going to garner the long-term type of return that we’d like.

Q: Why real estate as opposed to startups or individual stocks?

BW: If you take a look at wealth creation in the United States, as well as the world for that matter – investing in real estate has been a large component. I like real estate because it is a solid, tangible asset that I can see, touch, and feel. Unlike a company where you have to move the dial of EBITDA based on income, and sales, employees and marketing, and a host of other things where the stars have to align – I can go in and buy a vacant or distressed piece of real estate and increase the value multi-fold in a short amount of time with a lot less risk. Additionally, you then add on the benefits of leverage or things like tax write-offs – Real estate is a phenomenal vehicle for wealth and value creation in America.

Q: The 2008 financial crisis put a bad taste in peoples’ mouths when it comes to investing – what was your personal experience with it?

BW:  We got hit, just like everyone else. We had a few assets on one hand that were in some very tough markets, but the vast majority of our assets still did very well. We made it through 2008 and outperformed the S&P and NAREIT Index. During that time period we were actually able to do some of our best deals – some of the best that we may ever do. At the same time, we had some legacy assets that we had to deal with – we lost some money like everyone else.

 I always tell people, “If someone tells you that they didn’t lose money in 2008, they were either A). Not invested at all. They had their money buried in the sand. Or B). they are lying to you.” Everybody was impacted by the financial crisis at the end of the day. It was a very painful period for us all.

The reason we weathered the 2008 financial crisis so well was because our model was buying vacant or distressed assets from corporations. When the crisis hit – 80% of the market value fell through the floor. Because our average hold period was so short – 2.7 years – even including our long assets, we’re usually in and out in 12-24 months. Because of this, we mitigate our exposure to fluctuations in the market. The question is, what did you do with it? We were able to show that we could vastly still outperform the markets.

Q: 100% of Northstar’s Assets are based domestically – do you see that continuing, or would you like to potentially go international?

BW: We have stayed focused on the U.S. for a few reasons. As an investor, I have a fiduciary responsibility to our investors to make sure I know what I’m doing and that I understand the market. I’ve been working in the U.S. for a very long time and given the amount of opportunity and fiduciary responsibility – we’ll be staying in the U.S. In addition, the USA is still the biggest real estate market in the world, we have a stable legal system and political system, as well as property rights that many other countries do not have. When you add in the diversity, the size, the tax treatments – it’s a superior place to invest. I spend some time traveling abroad and speaking with foreign investors who are looking for US real estate investments because they see the same strengths as I do in the US market.

Q: Politics aside, President Trump is a real estate developer – can you see how that will potentially impact the industry?

BW: What I say to people is – whether you agree or disagree with President Trump – this is the first time in American history that we have a commercial real estate investor as the president of the United States. President Trump signed up for a four-year job, and he might get eight years but he’s here for at least four. I believe all of his policies are geared towards benefiting U.S. assets and real estate. After he leaves office, all of his family’s net worth and business interest around his children, are still tied up in real estate. So, all of his policies, the energy industry or controlling inflation, are geared towards generating value. We believe that bodes very well for the future.

Q: Can you talk about the philanthropic side of Northstar? Is this something as an aside, or is it tied into your business?

BW: We believe in doing well by doing good. We have this form of real estate and we ask, “How can we benefit the community at large?” We believe we have a social responsibility to our community – we can do something when we buy vacant buildings and empower Americans with jobs and opportunity – not to mention the construction jobs that are created in the repositioning of these assets. We can take something with low utility, and turn it into a highly productive environment that has a social impact. High tides raise all boats – if we can do well by doing good and give returns back to our investors and prove an asset and help achieve dreams in the community – then that’s a life well lived.

Are there any specific projects you’re proud of?

In terms of specific projects, we don’t have a mentality that we only want to impact one thing. We’re very open and thoughtful about what we pursue in our community. Some of the neat things we’ve seen at Northstar are buying vacant buildings to build schools to provide education for kids. Right now, education is a civil rights issue in America. Literally, our society depends on it. So, if we can buy a vacant building and empower our students – that’s what we want to see. We’ve empowered immigrant communities and business incubators – these are people who have left everything in pursuit of the American dream. We believe the American dream is alive and well, so if we can help facilitate an incubator, then that’s very exciting. Right now, we’re building a hospital for a company called Clinica. Clinica helps serve individuals who don’t have healthcare access. With all that’s going on right now, there’s a segment of society that doesn’t have health care. We’re honored to build the facility so we can empower people in the community, in order to help provide them with jobs.

Q: Do you see Northstar ever go the more crowdfunding group – focus on smaller investors? Or do you want to go the institutional route? Do you see a middle ground?

BW: Every deal that we do, we always allow outside investors. We never cherry-pick deals, and only offer it to ourselves or certain people. As for crowdfunding, the term “crowdfunding” has been hijacked a bit, but we have been syndicating investments with groups of individual and institutional investors for more than 17 years and will continue to do so in the years to come. The nature of our strategy, too big for most sponsors to do on their own or with friends and family and too small for most institutional investors, lends itself well to having a mix of individual and institutional investors. In addition, a large part of our success is owed to the individual investor, and we’re honored to have people trust us and want to continue to build relationships with these people. We always welcome different levels of investors. As we grow we may work with more institutions or international investors, but we will always accept individual investors.

Q: You’ve talked about co-investing alongside Northstar before, as opposed to simply putting investors into the company’s deals. That means you have your own capital at stake – can you speak a bit more about that?

BW: Correct – we’re not here to sell anything. We consider opening an investment to investors as an opportunity for them to create wealth as opposed to a sales opportunity for us; after all, we don’t make our money buying assets, we make our money by getting assets to perform and selling them thereafter. For nearly all of our opportunities, I invest my capital alongside our capital partners in order to align interests. Our incentive is most often based on getting a share of the profits after we have given the investors a preferred annual return and their initial capital back. People invest with us because they appreciate and value having an investment manager with expertise and years of experience.

Q: A number of investors right now might think “Prices are too high right now – the sky is sure to fall soon! It’s just like 2008!” – What are your thoughts on the market right now?

BW: We come from an opportunity-rich mindset – you can make a good or bad investment in a hot or down economy. After almost two decades, we can source and execute deals in strong markets like everyone, but we’ve shown that we can do an amazing job in distressed markets. Our goal is to look at the entire landscape and scoop cream from the top and only do the best deals. In the end, we are primarily value-add and opportunistic investors.

Why Colorado? Do you see yourself leaving here?

BW: We’ll always be headquartered here. I love the quality life and mindset of Colorado. We attract a great talent pool – I’d stack up people in Colorado to anyone in the world. Most people here have such a positive mindset and healthy standard of living. We want to build a world class organization to compete head to head with anyone. Right now, we do have satellite offices in Los Angeles and New York, and down the road we may go international. But we’ll always be headquartered in Colorado – the minds match the mountains of Colorado.

Q: While no two real estate deals are the same, are there certain aspects you look at? Maybe two or three in particular?

BW: Well for starters, the old real estate adage of “Location! Location! Location!” is true. Clearly location is important. Two, good buildings with good bones. Through some creativity, we can make these buildings become something even better. Three, cost basis. We are cost basis investors. We believe the lower the cost basis, the more flexibility, patience, and creativity we can employ. This helps us implement our strategy. Finally, we want to look for a reasonable population base. When combining all of these together, alongside a great team, we can return amazing results.

Q: Outside of work – what do you like to do for fun?

BW: I’m a big family guy. I’ve been married almost 20 years here in September, and I have 3 kids – so anything involving them. I also love most anything in the outdoors – hiking, fishing, golfing, boating, horses – just spending time out there. I’m an avid reader and I love learning new things.

Q: What’re you reading now?

BW: Chasing the Scream – it’s about drug policy in the United States and how we’re handling the war on drugs. Another book, Just Mercy which is about the prison system in the U.S. – how it’s been unfair to certain minorities.

If you'd like to participate in Northstar's "Executive Spotlight" section, please contact investorrelations@northstarcp.com.

Posted on July 14, 2017 .

A Layperson’s Explanation of IRR (Internal Rate of Return)

Investing can be intimidating, especially if one is not comfortable with finance.  Even though we may not understand how different metrics are calculated, or worse, how they correlate, most of us key-in on a couple of metrics to use for comparing investments.

In the public markets, the most common comparisons the average investor uses are the simple rate of return (ROR- gain or loss in stock price over a period), or the P/E ratio. In real estate, the most common metric used is called Internal Rate of Return (IRR), but unfortunately this metric is often confusing and misleading and should not be used alone in comparing investment options.

With stocks, you buy at one price and hold it until you sell, so it is easy to calculate the rate of return, but because real estate investments often take in equity over irregular time periods, and pay out cash over irregular periods of time and in irregular amounts, a more complicated formula is needed.

Many people make the mistake of assuming IRR is the same as compounded rate of return, it is not. A common definition is: The Internal rate of return (IRR) for an investment is the percentage rate earned on each dollar invested for each period it is invested.

The biggest problem with using IRR by itself for comparing investments, is accounting for the periods of time, return of principal, and return on investment. Two investments, each with an IRR of 10%, can produce a materially different return on investment.  Unless you know when and how much both investments are going to pay out, IRR is not a prudent metric to use for comparing investments. 

It may be easiest to understand by looking at a side by side comparison of two investments that each have a 10% IRR; one where the return is paid entirely at the end of 5 years and one where the return occurs each year over 5 years.

The first example assumes the 10% annual return is reinvested and will compound, but the second assumes any amount paid above a 10% annualized will be considered a return of equity, thereby reducing the principal amount invested for subsequent years.  

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In conclusion, as demonstrated in the example above, it is not prudent to simply use IRR as the only metric for comparing real estate investments. IRR is a good starting point, but understanding the time periods and amounts distributed is integral for an accurate comparison.  Using the additional metrics of ROR, Annualized return, and Multiple will ensure a more accurate comparison.

This post was written by Danny Mulcahy, Director of Equity at Northstar Commercial Partners. If you have any questions, feel free to comment below, or contact him at danny@northstarcp.com.

Posted on May 31, 2017 .

Investor Tip- Are Core Real Estate Assets Worth The Risk?

Are you looking to make modest investment gains, play it safe, or create wealth? All investments come with risk, but ideally the return is a direct reflection of the risk.  I submit that Core real estate investments, despite their perceived safety, present similar risk as other real estate asset classes; and maybe even more in the current investment cycle, but their modest returns do not reflect their risk.

In the world of commercial real estate investing there are a multitude of product types and asset classes, but for the newly initiated, there are four primary asset classes to consider:

  • Core- There are nuances, but it is it easiest to think of Core assets as being Class A office buildings or trophy buildings usually located in core urban markets, with very low vacancy, high rents, low tenant turn-over, and with national credit tenants.  These are often considered the safest real estate assets to invest in because they are typically in good condition, easily marketable, usually in demand, cash flowing and provide steady distributions to investors.  Core investors are typically seeking regular income distributions and expect a holding period of 7-10 years and 5% to 11% annualized returns.
     
  • Core Plus - Core Plus assets are very similar to Core, except there may be opportunity to increase the value through modest additional investment, or because it is being purchased with more vacancy which allows the new owners to fill the vacancy with new leases ideally at higher rents. Core Plus investors are typically seeking regular income distributions and expect a holding of period of 7-10 years and 8% to 12% annualized returns.
     
  • Value Added- Think of valued added as assets that may be past their prime, have poor management, high vacancy, or their current use is not the highest and best use. This gives the new owners the opportunity to invest in remodeling, putting stronger management in place, sign new leases, or re-position/ convert the asset to a different use i.e.… turning a single tenant office building into a multi-tenant office or a warehouse into a self-storage facility. Value Added investors typically do not expect much, if any, cash flow the first few years and only expect to hold the property for 2-7 years and hopefully achieve 12%-20% annualized returns.
     
  • Opportunistic- The most common way to think of opportunistic is as new construction, highly distressed, an asset in foreclosure, with financial or ownership issues, or in challenging locations.  Except for new construction, the investment strategy for opportunistic is very similar to value added.  With new construction investors get the chance for significant returns because they are creating the income from scratch. These are typically considered higher risk, speculative investments and use leverage, but often the risk can be mitigated with pre construction sales and leases. Opportunistic investors do not expect cash flow and recognize a majority of their return will come from the back-end sale of the property, only expect to hold the investment for 1-5 years, and are seeking 18%+ annualized returns.

    At Northstar Commercial Partners we have provided institutional and self-directed accredited investors with annualized returns of over 43% over the last 17 years and that is largely due to staying away from Core asset investments and staying true to a disciplined and methodical investment strategy.

    If you think about it, there are only two things that can happen with Core assets: they can chug along and barely beat actual inflation, or they can fail to keep pace with inflation.  Core assets do not have many options to remain competitive in a changing market without reducing the return to investors. If things go awry, such as increased competition from new building’s coming on the market, then there is an increased chance the national credit tenants will jump to the newer shinier property. The only option for the landlord is to provide rental incentives to keep them; meaning lower rents, free rent, or dollars to improve the tenant’s space. When a tenant does vacate, it is likely the landlord will forego rent for short period but also has to spend money for leasing commissions and possibly redesigning and/or refurbishing the space. The landlord was probably already charging the highest rent the market could support, so with each turnover the properties investment performance suffers.

    If you are looking for relative safety and modest income, then a Core Asset may be a good decision, but if you are looking for growth and/or income beyond just trying to stay ahead of actual inflation, then you may want to consider the other asset classes defined above.

    This post was written by Brian Watson, Founder and CEO at Northstar Commercial Partners. If you have any questions, feel free to comment below, or contact him at brian@northstarcp.com

Posted on May 8, 2017 .

Northstar Commercial Partners Facilitates Grease Monkey Expansion In Atlanta

Six Assets Purchased by Northstar will Create Jobs and Add Productivity to the Market

Denver Business Journal

DENVER, March 31, 2015 /PRNewswire/ -- Northstar Commercial Partners announced today another major acquisition for Grease Monkey International, with a six property expansion in the Atlanta, Georgia area.

Grease Monkey, one of the nation's largest franchisors of automotive preventative maintenance centers with over 290 locations, will utilize its partnership with Northstar to engage its business growth and further invest in local Atlanta communities.

"It is truly exciting to see continued, successful involvement with our friends at Grease Monkey," Northstar Founder and CEO, Brian Watson, said. "Every one of our past experiences in assisting Grease Monkey across the nation, has brought with it positive results for their business as well as lasting change for the areas where these properties are located. I am fully confident our Atlanta partnership will continue this trend."

The Atlanta-based acquisition is another time Northstar has successfully met real estate needs for Grease Monkey. In 2013, 11 properties were purchased by Northstar to help grow the company by 10%. Just last month, an additional two facilities were secured by Northstar for new Grease Monkey locations in Illinois and Wisconsin. This latest acquisition brings the total to 19 assets.  

For years, Northstar has been a leader in acquiring vacant and distressed commercial real estate, as well as purchasing real estate for and from national corporations. This has built strong trust and ushered in a host of new clients and partnerships. Northstar is always expanding their efforts to serve individual corporations nationwide with beneficial real estate opportunities that provide real estate expertise and value participation for companies, without the hassle of owning or tying up their capital in facilities.

Watson emphasized the strong impact Grease Monkey's increased presence in Atlanta will have: "This is more than just another real estate acquisition. At Northstar, we seek to build long-term relationships with those who seek to bring good to local communities."

"This latest opportunity with Grease Monkey in Atlanta will repurpose and reestablish foreclosed properties and make them productive once again," Watson concluded. "This will create local jobs, build infrastructure, and open up exciting prospects for local residents and neighborhoods where these facilities are located."

Founded in 2000 by Brian Watson, Northstar Commercial Partners is a privately held commercial real estate investment company headquartered in Denver, Colorado. Northstar acquires and operates attractive commercial real estate opportunities throughout the United States and orchestrates all aspects of the investment from initial concept through to completion.

Northstar has purchased assets from a multitude of Fortune 500 companies including: Shell Oil Co., GE, Columbia House, Ball Corporation, Loomis, Cargill and a national portfolio of real estate from Benjamin Moore Paint Co., in addition to many individual assets from other owners, lenders and companies.

To learn more about Northstar's positive community impacts, or to contact Northstar to build a strategic partnership for real estate, please visit www.NorthstarCP.com or www.BrianWatson.us.

Contact: Kyle Forti
(719) 377-0646
kyle.forti@gmail.com

Posted on March 31, 2015 .