Here’s a question for you – what weight do you assign to the going-in cap rate in this day age? For us, it turned out to be very heavy. We recently looked at an amazing deal – 2016 built class A property in one of the major metro markets. The seller was a very well known (globally) institutional seller. The pricing guidance pointed to a very attractive basis (significantly below replacement cost) so we decided to dig deeper into it. We ran a full underwriting, comp study, got live debt and insurance matrix from our advisors/brokers and even verified that we could incorporate a corporate housing element into the building which would have boosted our returns to above 20% IRR (on a core asset!!!). The going-in cap rate based on the pricing guidance was 5.7% - a bit uncomfortable in a 6%+ interest environment but given the other advantages the deal had, still made sense. Lo and behold, when we got to the next stage we were informed that in order to win the deal we will have to pay a few million dollars more – not insurmountable - but as we updated our underwriting the going-in cap dropped to 5.3% and even though the deal still made sense in terms of terminal IRR and current cash flow returns we felt very uncomfortable, or rather, if prior to that moment we thought we had a home run, now, we were not so sure about it and decided to test the water and contacted some of our investors. It made sense because at the end of the day, if your investors are not on board, you don’t really ignore them and do the deal anyway. The investors we approached are very familiar with our strategy, approach and underwriting (including our level of conservatism in said underwriting) and the almost unanimous feedback we got was “a great property, we believe in the underwriting and the execution but in this day and age, 5.3% going in cap rate is not something we feel comfortable with. Get it for a higher cap (5.5% or 5.6%) and we’re definitely interested”. As it turned out, the humble going-in cap rate which in previous years plays second violin to area rent growth, area demographics, cost basis, renovation cost etc. became a deciding factor for a class A core deal at a great basis in a growing submarket with superb tenant demographics. What would you have done?