I got an email today about this new fund. It is an investment in a building hosting a Sonic Health Care lab.
At first glance, it sounds attractive. They are advertising a 13% projected rate of return. Before performance fees. Performance fees would only knock 0.5% off that, so still sounds attractive. But actually, the 13% target is based on the capitalization rate declining from 5.25% to 4.75%. 5.25% is already a lot below current office cap rates. If that change in cap rate doesn't happen, they expect a 9.4% IRR. Of course, if the cap rate rises, the return will be less than 9.4%. They project that the distribution rate will be 7.5% per year. Only half of that will come from net income. The rest will come from increasing the loan against the property as rent rises (it rises at CPI with a cap of 3.5% p.a.) and distributing some of the unrealised capital gains in that way. They do seem to have a very low interest rate on the mortgage. Don't know how. This is tax deferred income, but means most of the expected returns on this investment are capital gains, which will be subject to a 30% minimum tax rate going forward. The fund is locked up for 5 years, after which, if they decide to stay invested, some liquidity might be available. The tenant has a 20 year lease.
After all these considerations, this looks a lot less attractive to me. To lock money up I need to think there might be an above market gain. Like 13%. I am pretty doubtful of that outcome here. The minimum investment is $100k. So, I will probably pass on this one.
No comments:
Post a Comment