Does Mixed Use Really Work? (Part Two)

Today, we are following up with Part Two of our pro forma analysis of two different building types with a focus on operating income and permanent financing. See Part One here for an introduction and a look at the construction costs of both buildings. Download the pro forma for today’s discussion here:

Milhaus Mixed-Use Proforma Compare Part 2.pdf

We are assuming retail rents to be a conservative $14NNN at a neighborhood commercial type location. The residential rents average $1.42 per square foot. The “apartments-only” building yields an 8.71% unleveraged return versus 7.70% for the “apartments over retail” building. To arrive at the revenue numbers for each type, we have assumed a typical vacancy amount and some additional income such as parking and premiums. The NOI is fairly similar in each type at about $500,000. However, as you can see, that difference of about $850,000 between the two project costs as mentioned last week has significantly affected the return by 101 basis points.

Now, this is where it gets even more difficult. Upon permanent financing there is a major difference in how much of the invested dollars can be taken out of the project (about $1,000,000 difference). This dramatically lowers the cash-on-cash return, not to mention the fact that you can’t pull your money out and use it for the next project. Since the mixed use building had about $644,000 higher construction loan, there is that much more to pay back. So, the NOI and Cash Flow are similar on the two buildings; but the coverage ratio, expensive construction, lack of sufficient retail rent create a busted pro forma on the mixed-use side. We don’t have to ask our investors which building they want to have their money in: 8.6% versus 26.3% cash returns.

Next Friday we'll summarize the analysis and present the value of each building type after a sale with their respective cap rates.