Negative Cash on cash return but positive levered IRR
Negative Cash on cash return but positive levered IRR...Can Cash on Cash be negative when IRR is positive? I have been trying to model this office building and the sale is big compared to the basis which I believe makes the IRR positive. Year 1 NOI is much lower than Year 5 NOI and then exit
[{"id": "gxfc14s", "text": "Are you projecting a sale? Maybe adjust the sale price, if you\u2019re selling a stabilized building with a negative cash on cash that\u2019s probably an unrealistic target sales price.", "replies": [{"id": "gxfca38", "text": "Year 1 NOI is much lower than year 5 NOI which is date of exit. I had pretty much the same exit and going in cap. There were a lot of TI/LCs throughout", "replies": [{"id": "gxfdbt9", "text": "How are you calculating cash on cash - are you using an average, 1st year, or exit? Might be an instance where cash on cash isn\u2019t the best metric, if you\u2019re putting in a lot of capital expenses you won\u2019t be getting good cash flow but your creating value for the next owner who will benefit from a stabilized cash flow without having to pit in as much capital. Equity multiple might be a more applicable metric here.", "replies": [{"id": "h0a7vyf", "text": "Why not use max equity?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "gxfgz2s", "text": "Or a high hurdle rate or not enough cash flow", "replies": [], "depth": 2}], "depth": 1}, {"id": "gxfq7op", "text": "Consider modeling your initial investment to include the TI/LC outlays and don\u2019t include these particular extraordinary expenses them as year one operating expenses. Use your average annual accumulated TI/LC liability for the annual expense figure. The higher investment will lower your IRR, but it will give you a more stable and realistic CoC.", "replies": [], "depth": 1}, {"id": "gxgmief", "text": "I see this pretty regularly. If it's a value add office then cash-on-cash isn't really the best metric because the cash flow can be negative up until the point the property is stabilized and sold. Your returns are being driven by the ending disposition value not the cash flow.", "replies": [], "depth": 1}, {"id": "gxgnnl9", "text": "Is it negative upon acquisition but then cash-flow positive after year 1? With a value add it's common to see NOI increase substantially as you lease up vacancies, bump rents, decrease expenses, etc.", "replies": [], "depth": 1}, {"id": "gxgv8hn", "text": "Yea definitely, negative cash flow in the first few years and then project a sale...would deff give you what you're asking", "replies": [], "depth": 1}, {"id": "gxh2bfg", "text": "They\u2019re not mutually exclusive. You can have no cash flow (or negative) for years and then sell the property for 4x and get a positive IRR.", "replies": [], "depth": 1}, {"id": "gxihc1u", "text": "Sure. The case of a value add asset requiring big $ capital costs to lease up and then a big exit is a good example.", "replies": [], "depth": 1}, {"id": "gxiruqp", "text": "I suppose if you had a great selling price with a short holding period you could get positive IRR while having negative cash flow. Also IRR doesn't include debt service", "replies": [], "depth": 1}]