We will be looking at a property in the Boyle Heights neighborhood of Los Angeles. This is a strip retail center with a couple of vacant units giving some upside potential to the new owner. The property is located on a major street that connects downtown LA and Echo Park to East Los Angeles with 22,058 per day traffic counts. It should be noted that the OM cites that these stats are from 2011, so it's likely the traffic count is even higher. Boyle Heights is a gentrifying area of Los Angeles. For this reason, this investment could also be part of a nice land banking strategy for future redevelopment.
The OM did not provide any market leasing assumption, so we decided to use $25/SF/Yr (2.08/SF/Mo). There are no lease comps provided, so we are using the last signed lease and increasing it slightly. We are using this assumption uniformly throughout the center. Any potential investor will have to make sure that the lease comps justify this rent. The units themselves might be different, so further adjustments might be needed. It is also unclear if the leases have annual escalations, so we went ahead and added 3% annual escalations to the in-place leases. These increases will have a huge swing on the returns, so verify this is crucial. With these assumptions, the Unlevered IRR is 6.85% on a ten-year hold. However, looking at the rolling IRR data, we can see that years 6–9 are more optimal exit years, with the highest IRR being 7.77% in year 6.
We added debt to this report to take a deeper look at the information that the report gives us and see how we can make real life decisions. In year one, we can see that we have essentially zero Cash Flow After Debt in year 1. In this case, we did not model an Interest Only (IO) period. The most straightforward thing, in this case, would be to ask the lender for an IO period during the first year while the property is stabilized. Most lenders will be agreeable to this arrangement. Another alternative is to add interest reserves to the deal. In this case, we can see that the Debt Service Coverage Ration (CF) for year 1 and 6 are 1.00x. Most lenders will demand this to be higher, and so an interest reserve is likely needed.
If an investor wants to shop around for loans, he can either send the PDF report to his lender, or he can also simply share the model with your lender. Underneath the property name, you can see the share property option as shown to the left.
By doing this, the lender gets his own copy of the model and can manipulate it as needed. No time wasted with the lender having to load it into his own system or messing with your proprietary excel model to size up the loan and see if the deal makes sense. This can save countless hours by not having to recreate the same work.
This is a pretty solid investment opportunity in a rapidly gentrifying neighborhood. The investor also has the optionality to use a land banking strategy and have cash flow while going through the entitlement process. There are unknowns to the deal, such as lease escalations and market leasing assumptions, so the investor will have to be careful and verify that.
If I have piqued your interest, take a look at the model for this property. The first link is the full report in PDF form. The second link is the live model already loaded into Investart. You’ll need to sign in to your account and then click the link, and a copy will appear on your account. It is completely free to sign up for an account at Investart. For any questions regarding the property, please contact the listing broker, which can be found in the last link.