A Deal That We Cleaned Up On
/This is Part 1 of a 2 Part Series
Because this is an active deal, with both an existing tenant and partners, I can’t reveal certain deal terms. However, I will do my best to share what I learned.
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In the summer of 2010, my investing partner cold-called the owner of a small office building. It was located on Trent Avenue and had a small, clean warehouse with it. As the area changed over the past forty-plus years, it had become eclectic. Industrial users are mixed in with ethnic restaurants, specialty retailers looking for cheap rent sidle up next to little office buildings.
The subject property was a brick building constructed in 1922 that originally had been a post office. After a period, the use switched to one of the first Rosauers grocery stores in the city.
In 1979, a cinder block warehouse with an over-sized roll-up door was added. The previous owner was able to park his car and store his RV in the building.
The owner, “Bob” (not his real name), had run his insurance company out of the building since the mid-1970s. The building was in great shape with nice mill work inside. The basement was partially finished with a private restroom and sauna. (Side note - I’m surprised at how many saunas I’ve seen circa mid-70s when touring commercial properties. I saw another one last week.)
Kevin asked if Bob might be interested in selling his property. As luck would have it, Kevin called at the right time. Bob had just sold his book of insurance business and indeed wanted to sell his property. Then Kevin asked a great follow-up question, “Would you be interested in carrying a contract (a.k.a. seller financing)?”
Bob thought this was a fantastic idea.
An Opinion of Value is Just That
Kevin and Bob agreed to get a Broker’s Opinion of Value (BOV) to set the sale price. A couple weeks later, the BOV came in much lower than either side expected with a recommended valuation of $165,000.
Remember, the market was still suffering from the Great Recession and the building was vacant after the owner had ceased operations and moved out. Capitalization rates were high and since there was no verifiable income from the building, the broker had to build a proforma on the property.
Bob wouldn’t agree to sell at the recommended price. Kevin and I also felt the BOV was too low for the property. We knew it was a temporary blip to market value.
Kevin and Bob had further discussions and a purchase price of $195,000 was set (this is now public record). Since we were using seller financing we could deviate from a BOV and still get the deal done.
Financing terms were set at 20% down and 6.5% interest with a balloon payment due in five years.
Please realize we wouldn’t agree to take these terms today. However, it was 2010 and we had just purchased two properties earlier in the year. Getting the second loan had its difficulties as explained in part one of The Little Property That Could. These terms were attractive for the market we were in.
Realize Good Fortune When You See It
About the same time, I’d been asked to help find a new location for a regional janitorial company. National Maintenance Contractors was in a rough, industrial part of town and in a building that needed upgrades. The road to their building was unpaved and filled with large potholes. It wasn’t uncommon to bottom out your car when visiting their office.
I’d developed a relationship with the company over my years as a property manager. Besides janitorial, they did all sorts of work including handyman jobs and painting. If you could think of it, they could do it. They became my go-to company while I was a full-time manager.
Their regional manager expressed interest in relocating one afternoon and I jumped at the opportunity to help them. I was still a property manager, but had begun my transition to brokerage.
We spent several weeks touring locations without any luck. Most sites were either too expensive or in worse shape than where they were currently located. It was a frustrating process.
When Kevin called to talk about the Trent building, I said I might have a tenant for it. I explained who I was working with and he thought it was a perfect use.
“I think we should offer it to them, though.”
“What do you mean?” Kevin asked.
“We should see if they want to buy it.”
Kevin didn’t like my suggestion and I understood completely. It was a great building with owner-financing already in place.
Since I represented the tenant in their relocation, I had to put their needs before mine. Ethically and legally it was the right thing to do. Since he had it under contract, I told Kevin if he didn’t want me to show it to them, it was okay. However, after some discussion, he agreed to let me present it and get their take on it. If they wanted to buy the building, he would step out of the way and let them purchase it.
I showed the building to the regional manager who really liked it.
Beyond the physical attributes of the property, it was well located. It was only a couple minutes to the freeway and about five minutes to downtown. From their current location, it took fifteen minutes to get to either destination.
It was clear it was a perfect fit. I told them it was under contract and they could buy it if they wanted. The regional manager said they’d consider it, but they didn’t normally buy real estate. However, they were interested in a lease.
“If you don’t buy it, do you have a problem if I jump in the deal?” I asked. I wanted to make sure there wouldn’t be any conflicts of interest.
“As long as you don’t charge us more rent than the other location, we won’t care.”
“What if we keep the rent the same as your other location?”
The suggested rent was less than market for the area and substantially less for the quality of the office and warehouse. However, it would still make the deal attractive for us.
He agreed and with that we had the initial discussion for a deal.
Kevin, to his credit, quickly lined up two partners for this deal. They were both solid investors who decided to throw a little money into the pot. We each decided to take 25% of the deal. I’d really gotten the investing bug and was shuttling as much of my deal commissions to the side for further investing. For this deal, we were going to need to raise $39,000 ($195,000 x 20%) or roughly $9,750/each. It was a scramble, but it’s amazing to me how I’ve been able to raise cash when it’s need for investing.
Operating Without a Net
National Maintenance Contractors is owned by a larger conglomerate. Due to this, any decision-making concerning leasing takes time for corporate approval. Sometimes that doesn’t always work out as fast as you want it.
Our deadline for removing contingencies was approaching and the closing would occur quickly after that. Bob didn’t want to extend the timeline. He wanted to sell the building and get someone else responsible for the day-to-day maintenance.
Unfortunately, we didn’t have an executed deal with our prospective tenant.
This was a very uncomfortable feeling.
Everyone at National assured us the lease would get done. The partners talked and we agreed the building was too good to pass up. We decided to close on the property in November 2010 without an executed lease.
We didn’t finalize the deal with the janitorial company until January ‘11. It was two months of sweating it out, worrying if we were going to execute the lease.
Once it was signed, however, all involved took a collective sigh of relief. The National Maintenance Contractors office turned out very nice and is one of our favorite properties.
The dynamics of the deal, which we can’t share since it’s an active deal, ended up very positive for both sides. The tenant ended up with a far better location and we ended up with a deal that more than justified our agreeing to the purchase price above the Opinion of Value.
It’s been six years and our relationship continues.
LESSONS LEARNED
Know Your Market
A Broker’s Opinion of Value (BOV) is just that: one broker’s opinion of value. The same thing occurs with an appraisal. It’s one appraiser’s opinion of the property’s value. If you ask someone else, you will get a slightly different value.
If you are one hundred percent reliant on BOVs or appraisals to tell you that you’re getting a good deal, then you’re sunk.
When the BOV came in low on this deal, Kevin and I still knew it was a good deal at the higher price. We felt confident that we were making the right buy.
Had we held to the BOV value, the seller would have balked and we would have missed out on a solid property.
Sometimes You Have to Put it on the Line
We always want to minimize the risk involved. It’s what we strive for in every deal. However, we couldn’t do that this time. We had to close on the property before we had a fully executed lease.
We were in the middle of negotiations and everyone was committed to getting it done. However, I’ve seen a lot of deals die that were further along than this one was.
We believed in this property. It was a solid building and centrally located. We had spread our risk among four partners so carrying the property without a tenant, while uncomfortable, wouldn’t have been fatal.
Would you have purchased the property
without a lease in place?
Would you have bought the property
over the value of the BOV?
Or are you ready for more?
Here's the second part of the series
