Thursday, February 02, 2006

Cracks in the Armor
Last month I saw my first Tenant in Common offering that had negative leverage. The sponsor was purchasing the property around a 4.9% cap rate (inclusive of all fees) and had debt with an interest rate around 5.7%. Ouch - a 70+ basis point negatvie spread. So why would anyone invest? Make the loan interest-only for the first five years and project annual rental growth rates of around 4% and that pesky negative leverage disappears. Presto! Oh, and hold the property for twelve years.

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