Advice on Deal

9 Replies

Hey guys, I’d like to ask your opinion on a potential deal. I’m going back and forth on this one and would like some opinions from people who have some more experience than I do.

Some background: 

I am a small business owner that needed an office, so in 2012 I started searching for properties that would be less expensive now but more desirable at a future date. In 2012, I found and purchased a one acre property with a 2 unit, 3,500 square foot building on it, between a major university and the city’s downtown. I knew that the university was pouring money into the area around their end, and the city was pouring money into the downtown area on the other end. I had a good idea that eventually they would meet in the middle which is where my 1 acre property is located.

There is a dilapidated 1 acre, 5 unit, 6,000 square foot building next door. In 2014 I asked the owner if he’d sell it to me and he did. I now own 2 acres, 7 units, and a vacant lot between the university and downtown. In 2012 I had a good idea that redevelopment would eventually reach my properties. Now I know it will.

I’ve already started rehabbing the strip malls, I reached out and got a couple awesome tenants to take a chance and move in, but I still have a ways to go to get these properties the way I’d like them.

Several weeks ago, a developer asked me if I'd be interested in selling the properties. He asked for my rents and NOI. My current NOI is $60,636/year. I know that within three years, with the renovations and reaching out that I'm doing, I know that I could get NOI up to $79,200.

Property Fact: Zoning on the 2 acres allows for about 100 residential and 50,000 of commercial space.

So if I were to set a price and sell this, does anyone have any insight into pricing this based upon them approaching me, current NOI, NOI in three years, and knowing it's highest and best use?

FYI: my original exit plan for the property was to sell it to a developer, but not now, in about 10+ years. I'm not in a hurry to sell. If I did sell the property, I would eventually reinvest in real estate.

Any comments would be greatly appreciated. Thanks!

That is a very high density for 2 acres.

Your current NOI really has nothing to do with future value.

The developer is going to take the rents they can get with new development upon completion and their hard and soft costs and work backwards. That will help them arrive at a cost they can pay for the land with a maximum price and an optimal price. Optimal is the target they will try to buy from you and maximum is where if it goes above that the deal is no longer viable to pursue.

Now since you have a business there you can negotiate as part of the sale that the developer finish out you a space and gift it to you where you do not pay rent or a reduced rent. What can be done depends on if the developer is doing a condo retail type development selling the spaces off to businesses or keeping it NNN leases with cam reimbursement and owning the spaces. You can also JV with the developer for an upside stake in the new property plus get so much for the land.

You need to know if this is a new or experienced developer for this deal size and if they will be partnering with a national company that is a larger developer if they are local. You need to look at your existing leases with the tenants to see if you can break at anytime. Sounds like the area is turning around and booming. The time to sell might be now and 1031 your proceeds tax deferred into something else.  

Ok so your in Gainesville, so I am assuming your talking about UF, in this case, do not sell at all. If your land is adjacent to the university, construct a mid-rise apartment complex with a 100 units. Student housing is doing extremely well. I would see if you could get that 50,000 commercial rezoned to residential. Assuming UF needs more off-campus housing, you could develop 2 acres into housing and achieve great returns. At this point, not only did you build a profitable asset, but also diversified into multifamily. In my opinion, I would do this since you mentioned you are not in a hurry to sell. 

A developer that asks you to provide your current NOI to base an offer on is either trying to take advantage of you or doesn't know what they are doing. Like Joel said above current NOI/future NOI has no impact on the current value unless the site is currently fully built and being operated at its highest best use which it doesn't sound like it is. I think before you do anything else, including putting more money into additional improvements, you should reach out to an architect to help you do a zoning analysis to confirm exactly what you can build on the site. If you already have a relationship with an architect they might help you a no to little cost. Once you know exactly can be built you price the property based on a buildable $ psf. You can get this value by speaking with local real estate agents.

The fact that you have the vision to see what's to come in the area means puts you in the same vein as a developer AND you own the land...

I would do as Jimmy is speaking of by seeking ways to develop this property yourself. Having the land already lowers the risk immensely and allows for you to develop a good project.

Generally I would agree with Joel and the others. Though I would recommend involving either the developer willing to buy your site or another student housing experienced developer to work with you either on a fee development basis (you keep all equity and developer just takes a fee for going through development process) or determine a market value for your site (via an appraiser or broker) and contribute the site to the development as equity and JV the deal with a developer, so you both see upside.

There are a ton of good student housing developers out there, don't limit yourself by talking to just one or two.

Ok, I’m back in town. Thanks for all of your input. 

@Joel Owens Owens @Tim Rutledge Thanks for your advice about NOI not influencing the sale price at all. That's what I suspected, but when the developer asked, I was having second thoughts. Also, I don't need my office there. It could be anywhere - I just use it as office/storage/inventory for my business. I have no street sign so I would just relocate if I sold.

And thanks for the tip about being taken advantage of. I'll definitely take it slow and seek advice as the process plays out. 

@Dave Fontana That's what a lot of other people have been telling me. If it's worth X today, it's going to be worth X + X in 5 -10 years. If some developers have already asked me to sell, how many more will ask in the future. I'm just not sure. 

@Tyron McDaniel @Mark Robinson It never occurred to me to JV with a developer by contributing the land as equity. Thanks for that idea and I'll definitely consider it as I move forward.

This was never going to be a "forever" buy and hold. The two strip malls are from the 60s, I'm only spending a minimal amount to get them turned around and attractive, and they do cash flow every month. If I sell now, I wonder how much I'd be leaving on the table as opposed to selling them in 5 to 10 years. On the other hand, if I did sell now, I'm sure I could find deals and undervalued properties to purchase from the proceeds. 

Right now cap rates are strong for retail development. The lower an exit cap rate for the developer the more they can pay for your land.

In an environment where the exit cap has to be higher the value is less. I think right now there is still value add in many asset classes so selling now makes sense to capitalize on other properties. If you wait five years to sell and every asset class is peaking out top of the market it's not a great time then to buy. So I would want the money today in this cycle versus 5 years or more from now.

@Mav Larson what is keeping you from developing the site yourself? Banks are now opening up again and have the appetite for construction loans. To develop yourself you would need a good real estate attorney that is familiar with construction contracts & lending, an architect, engineer, GC, and a construction manager. If $$$ is your problem that is easier to come by than you think. Good projects sell themselves. 

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