How would you consider structuring this multimillion dollar deal?

Question

Good day everyone! How would you consider structuring this deal?

The narrative...

We currently have a successfully operating retail based business. Recently, rather than continue to lease properties we operate our businesses out of, we are looking to purchase the real estate to add value and build equity. The first couple deals we've completed were rather straightforward, because we (the operating business) personally made the investment, and used more traditional bank commercial lending/mortgage. We've just recently identified a new location we'd like to expand into, and the current owner is willing to sell the real estate, for $8.5 million.

Because we are currently tied up in other deals, and have to close on this deal rather fast, we are looking for outside investors.

With that being said, our plan would be to purchase the real estate, and make approximately $4 million dollars in capital improvements and expansion. This should easily increase the value of the real estate to upwards of $15 million. We then want to operate our own business out of the space, so could essentially complete a lease agreement with ourselves+investors who would now be the landlord.

A few additional notes:

*We do have capital and could contribute a portion of the investment into the real estate, if this would be necessary

*We personally own a development.construction company, so would be completing the capital improvements ourselves

While there are a handful of ways to structure this, how would you personally tackle it, and tends to be the best way to approach this type of deal?

Thanks!

Ronald Rohde · Answer

You should be asking your lawyer and CPA, not the internet. My $0.02

Brice Hall · Answer

Thanks @Jeff Kehl. To clarify, we have, and are getting high level attorneys and brokers involved, who will most certainly provide guidance. My goal here was to create dialogue for the purpose of additional supporting discussion/ideas.

Amit M. · Answer

I’m not an expert on the loan options, but perhaps an SBA type loan? Perhaps a knowledgeable commercial loan broker can chime in on this.

If mitigating the capital risk is  very important to you, then you can also seek silent equity partners, which is of course different than active partners. For that you will need to present a complete case, or investment scenario where you will manage all aspects of this, in exchange for an attractive ROI to a private party. I’d personally prefer that route than an active partner, unless you have a proven symbiotic partner already in place.

Jeff Kehl · Answer

@Brice Hall What type of retail business is it? Are you buying property in NYC for it?

I'd agree with the comments that you need to discuss this with your own advisers and more specifically find experts in exactly what you're trying to do.

With this deal you're probably thinking you are creating a lot of value (and that is likely the case if you have a strong business in a great area) and that you can provide that opportunity to investors and that would help them as well. That is likely true as well.

But, I would suggest, given that I don't know much about you, that you're probably not the right person to achieve that. You need an expert in NYC real estate that already has a network of investors to partner with to do it right and maximize the returns for everyone.

Who are the brokers involved? If you have someone like CBRE, JLL or Marcus & Millichap involved I'd be surprised if they have not already provided you with the names you need to put it together.

Brice Hall · Answer

thanks @Amit M., this is certainly an option. Any suggestions in terms of where you’d suggest finding such a loan, and what LTV would be required, along with the typical recourse?

While I agree, and try to limit partners whenever possible, we would also like to mitigate risk by working with capital partners.

Amit M. · Answer

It sounds like you have assets, so why not get a shorter term private loan to make up the difference you need and buy it yourselves? Refi once you add the value to the property with long term financing. Having partners, especially in a asymmetrical deal like this sounds like a greater PITA than it’s worth IMO. Earlier in my investment career I did several deals with partners, as I had no choice. They worked out ok, but I can guarantee you that you guys will run up on *unanticipated* scenarios, which are a challenge enough for one owner to deal with, let alone a partner who may have a differing POV.  I’d avoid partnering if possible.

My2c.

Omar Khan · Answer

@Brice Hall Hard to come up with averages (the typical 8-10% preferred return, 15-18% IRR advice is only applicable to C-type value-add multifamily properties) as they differ by product type and market.

In your particular case (assuming this asset is in NYC), you will, in all likelihood, be positioning this as an appreciation play vs. the typical yield+appreciation play. Doesn't mean you won't get yield (income) but you'll be more heavily focused, IMO, on capital appreciation.

Furthermore, your investors, will rightly ask, about conflicts around leasing part of the property to your business and how you plan on compensating equity partners for this conflict.

I would consult with a local broker/agent. Most folks on these forums are not concentrating in the big markets - NYC, LA, the Bay Area, Boston, Chicago, Seattle - as they are perceived (rightly or wrongly) as over-priced.

PM me if you like more details or have questions.

Brice Hall · Answer

Thanks for the input @Omar Khan! In general, i'm also hoping to understand the current yield investors are earning / expecting to earn through such deals, and for different scenarios.

Whether the investors come on as capital partners of the real estate entity and/or the operating entity for this particular location. Or if the investors are simply providing some form of bridge loan.

While an attorney and accountant who has experience overseeing such deals will have some comps, it's also helpful to get a preliminary understanding, so we can start putting together projections. Thanks agin!

Omar Khan · Answer

@Brice Hall Solid advice on offer by @Ronald Rohde

The average advice people will give you on these forums is "do syndications... they are awesome... yada yada yada".

That might not work for you considering your overall business plans (leasing back to yourself, might have related party/conflict of interest issues... consult with your lawyer/CPA).

My 2 cents: What's your biggest pain point? Solve that and outsource the rest.

Ronald Rohde · Answer

Sure, I have clients who are in a similar owner/tenant situation. They have a separate RE LLC that owns the real estate that leases to their operating entities. Lease has to be completely custom since they want flexibility for the PM. For any financing, you still underwrite the tenant no differently than if it was a 3rd party tenant.

Talk to your CPA about allocating capital costs between LL/tenant, whoever has a higher rate will probably absorb more of the costs.

How would you consider structuring this multimillion dollar deal?

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