COMMENT OF THE DAY: WE JUST RUN THE NUMBERS “If you dig a bit deeper into the Milhaus proformas, what the developer is REALLY saying is that there won’t be retail because: 1. lenders don’t like it; 2. buyers don’t like it; 3. adding retail reduces my return on cost somewhat; AND 4. mostly because of #1 and #2, it kills my numbers. If you look at the overall return on cost (NOI/cost) you get 7.7% return on cost with retail vs 8.7% return on cost without retail. That’s a substantial difference, but not eye popping. If the Midtown TIRZ really wanted some retail in the deal, they could easily toss Millhaus a bone and bridge this 100 basis point gap with ease. The real problem, at least according to Millhaus (not that I disagree), is that the lenders and buyers treat mixed use differently. In the example comparison, Millhaus assumes the non-retail deal gets a permanent loan underwrittien to 1.25 DSC [debt service coverage] vs 1.30 DSC for the with-retail deal. This means a larger permanent loan upon completion for the no-retail deal (more cash in Millhaus pocket). He’s assuming lenders will get more aggressive on a apartments-only deal. He also thinks his eventual buyer will prefer a non-retail deal. He calculates the as-completed value using a 7.00% cap rate for the non-retail project, but uses a 7.25% cap rate for apartments+retail project. What he’s really saying is, ‘Don’t blame me for not including retail in my development. Blame the lenders and buyers.’” [Bernard, commenting on Nixing Milhaus Retail: Why These New Midtown Apartments Won’t Have Shops on the Ground Floor]