Mexico City warehouses: what still cash-flows after real expenses?

pebble.honest

Market analyst
Market Reporter
The constraint is simple: I do not want to fund an open-ended monthly shortfall. The Mexico City warehouses I’m reviewing are around MX$12,960,000, and the numbers go below zero after vacancy, management, maintenance reserves, insurance and financing at 5.62%. Property tax and the cost of changing tenants add further pressure.

Putting in more equity would improve the cash position, but it would not make the warehouse itself earn a better operating return. Waiting preserves flexibility, while buying at the present price is much harder to reverse if rent or occupancy disappoints.

I’m leaning toward either negotiating a lower price or setting a firm limit on the equity and annual cash contribution I will accept. How would others distinguish a temporary financing problem from a property that simply does not produce enough after realistic expenses?
 
If the property’s return after operating costs is below the effective cost of the debt, leverage will generally deepen the negative cash flow. Adding equity can make the monthly figure positive, but it does not repair the underlying property return. Unless there is a defensible reason to expect higher rent or lower costs, waiting or negotiating the price down seems cleaner.
 
The missing figures are gross rent, expected lease length and whether the 5.62% financing is amortizing. How much vacancy are you allowing, and does management include leasing costs when a tenant changes? A warehouse with one occupant can look fully stable until turnover creates a long gap, so I’d model that separately from routine vacancy.
 
Also separate ordinary maintenance from major capital work so you neither omit large items nor count them twice. I would run insurance and property tax as distinct expenses, then verify the tax treatment for the particular Mexico City property rather than relying on a generic percentage. Those lines can materially change the comparison between similarly priced buildings.
 
I partly disagree that comparing the operating return with 5.62% settles it. An amortizing payment includes principal, so some of the cash leaving the account is building equity rather than being an economic expense. That distinction matters for total return, although it does nothing to solve a near-term liquidity problem. The investment can be acceptable on paper and still be too uncomfortable in cash terms.
 
That’s fair, but I would still treat the full payment as cash out when judging whether the property can support itself. Principal reduction can be shown separately in the return calculation. Otherwise it is easy to call a deal profitable while repeatedly contributing cash, especially when a vacancy or turnover cost lands at the same time.
 
After separating principal reduction from the return calculation, there is still a cash-flow question the model has not settled: what happens when turnover and a long vacancy occur together?

I would add three cases—normal operation, an extended empty period, and a tenant change that brings leasing and maintenance costs. Run each case with the proposed borrowing and with the higher-equity option, while showing principal repayment separately. More equity may make the payment manageable, but it does not alter rent, tax, insurance or the unlevered operating result.

The outcome would change for me only if the extra equity keeps the worst reasonable case within a fixed cash-contribution limit and the underlying return remains acceptable. Otherwise the attractive-looking monthly improvement is mainly a financing change, not a better warehouse deal.
 
One addition: set a maximum annual cash contribution before adjusting the assumptions. That prevents the model from being softened until the deal passes. If the MX$12,960,000 properties fail under reasonable vacancy, reserves, insurance, tax and turnover assumptions, waiting is a valid investment decision—not an absence of one.
 
Back
Top