Buying out neglected CRE from family members vs listing in the open market
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[{"id": "fsxfjqy", "text": "Couple question:\n\nHow big is center?\n\nWhat fraction of the centers space is take up by the anchor?\n\nCould you buy the other 75% out right? Do you have the cash to do that? If not do you have the cash to sign for the bad boy carve outs on the loan that\u2019s going to be incredibly difficult to obtain?\n\nWho owns the other 75%? What\u2019s your relationship like with them? \n\nWhat do you know about retail?\n\nIs there any def maint?\n\nThe fact that leases are below market will help you get someone\u2019s that\u2019s interested in value add in a normal world, but we aren\u2019t in a normal world. Leasing is going to be very slow.\n\nI\u2019d consult with a reputable retail leasing guy to see if they\u2019d could even fill the anchor. Without that your kinda SOL.", "replies": [{"id": "fsxis76", "text": "Upvoting is not enough ... felt like I had to comment. Great comment here. \n\nOP: Your personal financial capacity, liquidity, and cash flow will also play a large part if you try to lever the property to buy the remaining 75%, be prepared to sign a personal guaranty if the property isn\u2019t stabilized, but theoretically you could get the appraiser to use an \u201cas stabilized\u201d income capitalization approach to valuing the property, and if recent sales comps are similarly priced then there will not be a lot of delta to reconcile and you\u2019ll have a good LTV. Unless you\u2019re planning on paying cash then this is all irrelevant.", "replies": [{"id": "fsxmsi8", "text": "Thank you!\n\nAn \u201cas stabilized\u201d valuation on a retail center in the age of COVID-19 isn\u2019t gonna happen. \n\nComp sales approach doesn\u2019t hold a lot of water right now since there is a literal epoch shift in valuations going on right now. Cap rates have blown out due to decreased investor tolerance for risk in most asset classes. Due to the lack of sales in the past few months the only \u201ccomps\u201d would be high water mark, PRE-COVID, sales. \n\nAlso OP, what\u2019s the desire to transact now? I mean the ground is moving beneath our feet. Is the rest of the trust looking for liquidity to cover other interests? That could be good for you.", "replies": [], "depth": 3}], "depth": 2}, {"id": "fsxrmof", "text": "These are all great questions and I think its going to come down to asking myself what is the objective with this investment and how the fuck is a bank going to finance this. \n\nObjective wise, I prefer a short term (12-24 months) flip to stabilize the property, but I'm not entirely afraid of holding longer term or 1030'ing and so on. Lets ignore COVID for a second and imagine the property sells/appraised for 2mm right now. For me to be interested in taking on this risk, I would want to at least sell it for 2.2mm in 12-24 months as a stabilized property with an anchor and appropriate leases. But back in reality we have this COVID thing, which throws in the possibility of the property being worth even less 12 months from now as leases remain constant to maintain tenants while inflation eats away at your profits. COVID has made an already challenging task of finding an anchor more difficult, almost forcing myself to find the cheapest interest only loan to provide buffer in the event an anchor can't be found. \n\nSo first I need a stabilized future date appraisal to see if the increase in value is even worth it. I have no idea what these appraisals look like in a COVID world or if everyones afraid of doing them now.\n\nFinancing would be creative to say the least. One option would be seeing if the bank would count my current 25% stake as a 25% \"down payment\" for the loan to buyout all other parties. The other parties would gladly take a cash buyout from me with an appraiser's current day evaluation. I have access to roughly 120k in absolute easy to access cash for closing costs/attorney fees/etc and could secure more funds through creative means. I would seek a short term variable interest only loan until I stabilize, then evaluate from there. \n\nSo far as I understand, every potential buyer is going to acknowledge there is significant value add here from both stabilizing and raising rents, but they will of course weigh the risks and COVID appropriately. There is no \"secret\" or lack of institutional knowledge concerning the history of the leases and unused office space, they will know what those spaces should be renting for. The only competitive advantage I have is intimate understanding of the property/maintenance/tenants as well as leverage to possibly buy out the other shares at below market price. Meanwhile potential buyers are well capitalized, have years of experience, and (usually) can diversify across multiple properties (unlike me). \n\nTo me its sounding like the unstabalized and stabilized value may not be as much of a difference as I thought it may be (at least risk adjusted), but I definitely want to talk to an appraiser to pick their brain on this subject more.", "replies": [{"id": "fsxt3ok", "text": "Listen contrary to what most people think, appraisers don\u2019t know shit. Even MAIs take huge value clues from the PSA. \n\nTalk to some leasing brokers.\n\nDepending on the asset, it could actually be worth more in a post COVID environment due to a flight to quality. That\u2019s why speaking to brokers is important. They\u2019ll give you all the info you want so they can get your LL biz. \n\nDon\u2019t worry about covering legal, CCs, that can be wrapped into your loan as a soft cost. Your cash on hand is going to count towards the liquidity covenant in the loan. A lender will typically allow you to collateralize other assets for the personal guarantee. If you go non recourse, don\u2019t commit fraud, and haven\u2019t had a dry cleaning plant on site, it isn\u2019t an issue. \n\nAnd you ONLY want a $200K delta after 2 years after bringing the deal up to market? Shit man. Is that really worth the effort/risk? That kinda IRR doesn\u2019t get investors outta bed.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fsxg4e1", "text": "Might be a bigger question here; do you think rent prices will resume previous Covid-19 levels? I don\u2019t think so. Going top down, big box anchors are wrapping up their run (long overdue), many tenants in every sector will not completely recover from the shutdowns, back rent, lease defaults, business slow downs are all things landlords will have to deal with for the next 12-18 months. You mention office space, many companies are realizing they can keep employees home and do without the overhead. Let\u2019s say you fill up the space at market rates; your family buyout will be based on what they\u2019re willing to accept, will they run their own numbers? After you subtract the cost for buying out plus rehab the building (I\u2019m guessing), plus TI cash for new tenants, potential prop tax bill and brokers commissions to fill it up, what\u2019s that final number? Could be a year of work and no telling what the world looks like 12 months from now. Plus, tenant brokers aren\u2019t dumb, they\u2019ll know the current market and squeeze you. I\u2019d knock 10% off what you think market rent currently is. I\u2019m both a tenant and a landlord, the whole market could turn into a house of cards. We\u2019ll see. Gotta ask yourself if it\u2019s worth the risk, if it is, go for it. If you have to lever up to buyout and then there\u2019s a risk the bank takes the building because you can\u2019t fill it or sell it for more than your family is willing to take will be real. Just make sure you have the stomach for it. Good luck!", "replies": [{"id": "fsxra3n", "text": "This was more my thinking.  OP is going to have to reposition this in a big way.  Four months ago I probably would have said it was worth it.  Retail was dinged up, sure, but there was still money to be made.  Now...well it's all about weathering the storm.\n\nThe data suggests that about 40% of retailers are paying their rent right now, and that's institutional.  Who knows what the figure is for non-institutional, with non-credit tenants.  OP needs to approach this with a lot of caution, but if he's confident he can get market rate tenants in eventually, than there could be value to unlock.\n\nMy guess is that if this goes to market, the sellers are going to be very disappointed with the price that comes back.  Nothing's transacting right now because the bid-ask spread is pretty wide.  With a property that's already in the doghouse, I would bet the bid gets pretty low.  If OP is competing against a low market quote, perhaps disppointingly low, his offer to purchase looks a little better. \n\nFor the general investor, I don't like this. I try not to underestimate people who know their market.  Local investors and owners know how to make money in markets and on properties that look awful from most traditional measures.  But this kind of feels like a no-win situation.  With real estate you're selling the dream, but the retail world feels rather nightmarish at the moment.  So your potential buyers all see downside, and if you buy, you're facing a ton of risk, particularly if you have to lever too much.  Unless OP has deeper pockets than they're letting on, I don't like it.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fsxh09p", "text": "I have similar frustrations with my father with rent prices for tenents and would imagine myself possibly increasing those when It is my time but he always has less than 5% vacancy. I built a new two family and went for market value and it was horrible finding a good tenant. I understand I am crossing commercial with residential but it is more of a cautionary tale. \n\nBut the big problem is the new common question we ask on ALL of our commercial AND residential application... are they Covid proof? If you are going to buy out make sure you and the complex are Covid proof.", "replies": [{"id": "fsxn573", "text": "If your management company can\u2019t get you good tenants at \u201cmarket\u201d then it isn\u2019t market. Either that or the combo of quality/location/rent price excludes any decent renter.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fsxlxnk", "text": "Assuming you and the property meet other requirements, your 25% ownership stake may enable you to buy it without bringing (much) additional cash.  Talk to some lenders.  \n\nWorst case, see if your family will agree to a master lease + option.", "replies": [], "depth": 1}, {"id": "fsxm3wm", "text": "To me the big question is filling the anchor space, if you can\u2019t find something that drives traffic then it will difficult to push anyone\u2019s rent", "replies": [{"id": "fsxmbcl", "text": "And investors will take into account the potential upside but will also price in the risk. Comes down to how confident you are you can create that upside vs how confident potential investors are", "replies": [], "depth": 2}], "depth": 1}, {"id": "fsxmskw", "text": "Is there currently a loan on the property? LTV for\nCRE can be 65% so you\u2019d have to bring 10% to the table and it\u2019s all yours. If you can pay that loan for the remainder of the share, with the current or pro forma NOI then you should just swallow it up and it\u2019s all yours. Where are you located?", "replies": [{"id": "fsxnt9j", "text": "Dude? What? No. LTV can be whatever you want it to be. It\u2019s typically 65% amongst PE funds because they\u2019re conservative in the downside, and want to get money out the door so they can start drawing AM fees. Debt funds will give you up to 70-80% LTV if you wanna pay L+1000+ layer in Mezz and Pref for more leverage.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fsysry3", "text": "Go with an option to purchase for the same price offered by a ready and willing buyer. This lets the family see what is the value based on market interest. Then maybe you can sweeten the deal a little.", "replies": [], "depth": 1}]