The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
The typical level of debt or leverage to apply within the industrial real estate space really depends on your leasing and your leasing profile. If you have a shorter triple net sort of lease, you may choose a different level of debt than you would for a lease that goes on for 10 years or longer. However, 50 to 60-66% is a conservative average for many multi-tenant industrial leases.
Richard Wilson: Great. What is the typical level of debt or leverage to apply in the industrial real estate space? Is it the normal 66-65%, is it higher? Lower?
Robert Borris: It depends. It depends really – it’s a function of leasing and what is the leasing profile. Everything in the commercial real estate investment business and real estate business has to do with the rent, rent terms, and lease terms. If you have a building where you have a long term lease, 10 years let’s say, strong tenant, kind of like a triple net kind of a deal, I would have a lease term that basically amortizes the mortgage over the term of the lease. So, when the lease is up, the mortgage is zero. The reason for that is pretty simple, and that is – at the end of the lease term, if the tenant doesn’t renew, or even if the tenant does renew really, you can refinance the building, whatever improvement dollars you need if you need any, or brokerage commissions that you need to spend you can finance those, and you can finance your equity out. So, over 10 years, you’ve been getting some cash flow, you’ve been getting some depreciation and some tax benefits, but you paid off your mortgage, and now you own the building free and clear and that’s just cash flow. Big time.
Richard: Right, right, yeah.
Robert: So, in that case, in a multi-tenant situation, here again depending on the leasing, but I would be a lot more conservative than that generally speaking I’d probably do 50% because then when tenants vacate, you don’t necessarily turn it over instantly to the space. You can carry the building without any without a whole lot of stress I wouldn’t go any higher than 75%. Most banks wouldn’t let you anyway, but I wouldn’t go over 75%. 50 or 60-66, pretty conservative, that’s what I would do.
Richard: Okay, great.