STRATEGY
Exit
The decision to acquire a property must be accompanied by the strategy on how it will eventually be sold. Most people agree that the longer a property is held the more it is ultimately worth. However, this does not take into consideration the opportunity cost of using potential sales proceeds at an earlier date to reinvest in a higher income producing property nor does it consider the actual operating cost during the original holding period. Furthermore, the financing decision must be carefully weighed against the predicted holding period to avoid excessive debt service or refinancing risk - either of which can put the entire property in jeopardy of foreclosure.
Our focus is presently on value add properties where we observe an opportunity to achieve higher rents by improving the interior & exterior features and stronger management. As a general rule it takes 12-24 months to execute the capital improvements and achieve the desired rent levels. Therefore, the initial financing term is set at 5-7 years (10 years in the current environment) with the right to sell or refinance starting in year three free from lock-outs or excessive prepayment charges. This gives us a "first look" at refinance or sale presumably when most of the initial improvements and therefore added value has been achieved. The longer base term of the loan provides an added level of safety to refinance or sell the property in later years.
One other important factor in determining the exit strategy is the predicted future value and purchase economics to the next buyer in later years. We take market forecasts into consideration to stress test the cash flow, cap-rate, predicted financing terms, and buyer preferences to arrive at a realistic exit price. This, in turn, allows us to set expectations with investors and partners about project returns.
