Whenever I come across a deep value-add deal where the buyer claims the property was grossly mismanaged, I can’t help but wonder if the smarter party is actually the seller.
Sure, there are plenty of cases where the seller really is clueless. But at the end of the day, they still know more about the asset than the buyer, no matter how thorough the buyer’s due diligence may be.
A similar dynamic appears in the public REIT space, where you can find plenty of highly leveraged REITs that appear to be priced well below NAV. NAV is a subjective thing while debt is not.
For this deal to work, the operator has to be incredibly skilled. I foolishly invested in a deal like this in 2018 and even with severe caprate compression, it has not done well.
So much depend depends on what else is out there in this submarket. Likely the property has a very bad reputation so you have to overcome that as well. You need skilled on-site people to make this work and they are hard to come by.
I don’t think the return justifies such a huge risk. Hard pass.
The projected returns are too low for this type of deal. I like to see value-add deals with IRR >20% with 40% of the IRR coming from cash flow and 60% from sale and equity multiples >2.
This park is a real mess. I would want to understand why the occupancy is so low. Location? Home quality? Nuisance tenants? Or what?
And no matter what, I'm probably not up for that preferred return on something this risky.
Also, is any land included that can be developed in the future? That can be a significant source of earnings growth.
Whenever I come across a deep value-add deal where the buyer claims the property was grossly mismanaged, I can’t help but wonder if the smarter party is actually the seller.
Sure, there are plenty of cases where the seller really is clueless. But at the end of the day, they still know more about the asset than the buyer, no matter how thorough the buyer’s due diligence may be.
A similar dynamic appears in the public REIT space, where you can find plenty of highly leveraged REITs that appear to be priced well below NAV. NAV is a subjective thing while debt is not.
For this deal to work, the operator has to be incredibly skilled. I foolishly invested in a deal like this in 2018 and even with severe caprate compression, it has not done well.
So much depend depends on what else is out there in this submarket. Likely the property has a very bad reputation so you have to overcome that as well. You need skilled on-site people to make this work and they are hard to come by.
I don’t think the return justifies such a huge risk. Hard pass.
The projected returns are too low for this type of deal. I like to see value-add deals with IRR >20% with 40% of the IRR coming from cash flow and 60% from sale and equity multiples >2.