A Layman’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.  

IRR Graph.png

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 .

Academy 360, Denver's Health and Wellness Charter School, finds new home in Northstar Commercial Partner's Building

DENVER, March 3, 2015 -- Academy 360 Charter School, approved by Denver Public School District to serve students in the "Far Northeast" region of the District, has found a permanent home in a building purchased for the school by Northstar Commercial Partners. The building located at 12000 E. 47th Street, Denver, Colorado, provides the space for Academy 360 to build out their full cradle-to-career program in the Montbello neighborhood. Sally Sorte, who founded Academy 360, has teaching and business experience through her tenure with Teach for America and Google. Ms. Sorte believes every child should have the choice to attend a 4-year college and is committed to providing the wrap around services students need to assure they are prepared for a successful future.

Academy 360 offers unique programming and currently serves students in preschool through third grade as a "Health and Wellness" school. The school is committed to developing the whole child: mind, body and character, as healthy students learn better. At Academy 360, health and wellness is a key lever to propel students' academic achievement. By using proven practices adopted from Namaste Charter School, a comprehensive health and wellness school in Chicago, and other schools integrating aspects of health and wellness into their curricula, Academy 360 is on the cutting edge of whole child development through its design, culture, and instruction.

Academy 360 currently shares space with The New Life Christian Center at 12505 Elmendorf Place in Denver, but lacks the space to grow and provide the services critical to the program's success. When Northstar's Founder and CEO, Brian Watson, heard the school was having a difficult time securing a permanent location, he offered to help.

For over 15 years, Northstar has had a strong track record of buying vacant and distressed assets from lenders, corporations, and other owners throughout the United States, improving these assets and placing them back into productivity to create jobs, opportunities, and empowerment for people in their local communities. When Brian Watson heard Academy 360 was looking for a new home, he put his team to work on a facility that would meet Academy 360's needs and be financially viable for a charter school. After lengthy negotiation efforts, Northstar was able to acquire a 29% occupied 56,610 square foot building at 12000 E. 47th Street, located just off of I-70 and Peoria, on January 20, 2015. This will allow the school to continue to grow by a grade level each year until they serve Early Childhood Education through fifth grade students.

Watson stated: "We are passionate about creating opportunity for all citizens of Colorado and the United States, as we work to enhance the business and educational environments in each community.  We are honored to help Academy 360 secure a new home, and know that this investment in the Montbello Community will make a positive impact, empowering the Academy 360 students and their parents so they can pursue their dreams."

Brian Watson is so committed to creating equitable educational opportunities for students that he has started the Education Opportunity Fund to raise $100 Million to acquire properties for charter schools.

"We plan to buy and improve buildings for schools throughout Colorado," said Watson. "Public and other forms of quality education create a foundation for our children that allows them to succeed. As enrollment grows in Colorado, there is a growing need for adequate facilities. We will continue to use our real estate and investment expertise to help provide lasting benefits for schools that will have a positive impact on current and future generations."

Northstar Commercial Partners will invest additional capital in the property to meet the needs of Academy 360. The school's staff will move in this summer and the new building will welcome students when school starts in August 2015. 

To learn more about Academy 360, please visit http://www.academy-360.org. To learn more about the Education Opportunity Fund, visit www.EducationOpportunityFund.com. To learn more about Northstar Commercial Partners, Brian Watson, and/or their various community initiatives, visit www.NorthstarCP.com or www.BrianWatson.us.

Media Contact: Jaime Jones
720.240.0624
jjones@northstarcp.com

MarketWatch by Dow Jones: http://www.marketwatch.com/story/academy-360-denvers-health-and-wellness-charter-school-finds-new-home-in-northstar-commercial-partners-building-2015-03-03

Posted on March 3, 2015 .

Northstar Commercial Partners Sets Milestone with Latest Acquisition for Grease Monkey International

With another beneficial real estate opportunity for two new Grease Monkey locations in Illinois and Wisconsin, Northstar continues its effort to serve corporations nationwide.

DENVER, Feb. 26, 2015 -- Northstar Commercial Partners announced today another acquisition for Grease Monkey International, one of the nation's largest franchisors of automotive preventative maintenance centers. With over 290 locations throughout the world, the purchase of the two buildings in Illinois and Wisconsin facilitates further expansion for Grease Monkey and adds to Northstar's national presence.

"We are always looking for creative ways to innovate as we grow and build relationships," Founder and CEO, Brian Watson, said. "This latest strategic partnership confirms our investment and continued ability to meet the real estate needs of individual corporations like our friends at Grease Monkey."

Northstar already has a record of proven success with Grease Monkey. In 2013, eleven properties were purchased by Northstar to help grow the company by 10%. This latest acquisition consists of two oil/lube facilities which were purchased on February 18, 2015. Each location will be re-branded to the Grease Monkey concept, including new building paint, signage, and interior finishes to match their colors, branding and image. The properties are located in excellent, high-identity areas in Janesville, WI and Bolingbrook, IL.

For years, Northstar has been a leader in acquiring vacant and distressed commercial real estate, as well as purchasing property 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 profit participation for companies, without the hassle of owning or tying up their capital in facilities.

Watson emphasized his confidence in the acquisition coupled with optimism for the future: "Our goal is unchanging - In all our transactions, we strive to build community, create jobs, and empower people," Watson said. "Real estate just happens to be the platform that we use to make a positive impact in society. Fostering this particular relationship will continue to uphold our vision here at Northstar, while bringing lasting benefit to Grease Monkey as they grow their business model."

About Northstar Commercial Partners: Founded in 2000 by Brian Watson, Northstar is a privately held commercial real estate investment company headquartered in Denver, Colorado. Northstar acquires and operates attractive commercial real estate opportunities throughout the nation 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, but not limited to: Shell Oil Co., GE, Columbia House, Ball Corporation, Loomis, Cargill and a national portfolio of real estate from The Benjamin Moore Paint Co., plus many individual assets from other owners, lenders and companies.

To learn more about Northstar's positive community impacts, or to contact them 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

Yahoo Finance:  http://finance.yahoo.com/news/northstar-commercial-partners-sets-milestone-151300728.html

Posted on March 2, 2015 .

Northstar Commercial Partners Launches $100 Million School Facility Fund

Denver-based real estate investment company Northstar Commercial Partnershas launched a $100 million fund to benefit charter schools across the state through assistance with real estate needs.

The Education Opportunity Fund is a real estate investment fund that will be used to find and purchase vacant schools, or to find other properties that can be converted into schools, said Brian Watson, founder of Northstar. Watson's money, as well as capital from other private investors will make up the fund.

The properties will then be leased to charter schools, which will have the option to buy the property from Northstar whenever they want, Watson said.

This method will save charter schools the hassle of finding properties, completing due diligence and other elements of the real estate buying process.

Northstar and the Education Opportunity Fund are currently working with 10 different charter schools, Watson said. Northstar has under contract a 60,000-square-foot property for use by a charter school in the Montbello area of Denver.

Vacant school properties are difficult to find, Watson said, coming along less than 10 percent of the time one is sought, so the company will also take into consideration vacant office and retail buildings for conversion into a space that is appropriate for a school.

The fund will operate statewide.

Original Denver Business Journal Article: http://www.bizjournals.com/denver/blog/real_deals/2014/10/northstar-commercial-launches-100-million.html

Posted on February 26, 2015 .

Northstar Commercial Partners Supports Aurora Police Department Training

Jan 13, 2015 Aurora, CO – Late last year on a cold, snowy morning Aurora Police Department cadets staged an active shooter exercise at 830 Potomac in Aurora, a 113,000 square foot Northstar Commercial Partners property that is for sale or lease, giving the cadets’ invaluable training and experience in keeping us safe.

Northstar Commercial Partners has a long history of helping many causes, and a particularly strong belief in supporting local police efforts. Last year’s exercise is just the first, as there is already one more scheduled for next month as Northstar is happy to provide access to vacant properties to help with such training.

“Given the Aurora theatre shooting and everything going on today throughout America, we thought it was especially important at this time to step forward and support the Aurora Police Department” said Brian Watson, Founder and CEO of Northstar Commercial Partners. “The work that local police do to protect the public is incredibly important, and we want to do what we can to support their efforts. Providing this building for the training exercise while it’s on the market, was an easy decision for us.”

Dozens of cadets participated in the exercise, which lasted for several hours. While they were not able to comment specifically on the details of the exercise, the officer in charge of the training did note that without the donation of the space the cadets would not have been able to receive such useful, life-like, live action training.

Northstar Commercial Partners and its Founder and CEO Brian Watson are deeply committed to the community. You can learn more about their efforts at www.NorthstarCommercialPartners.com or at www.BrianWatson.us


Media Contact: Ben Gelt
720.838.8592
bengelt@gmail.com
www.NorthstarCommercialPartners.com

Posted on February 26, 2015 .