I thought I wasn’t investing in any real estate equity deals this year. So far this year, every equity deal that I see, essentially is a 10–15 second review before I delete it. Given where interest rates are, most cash flow deals are negatively leveraged, and depend on future projections to do well. This essentially turns traditional cash flowing asset into much riskier investments. Then this deal came across, and with a 10–15 second review, caught my eye. In fact, I saw it within 1 hr of the email being sent, and upon immediate soft commitment, I was told I was waitlisted. Not surprised. However, a few days ago, I was informed there’s a slot for me. I spent that whole day analyzing this deal, and committed. This is to record the reasons.
This deal is a multi-tenant industrial flex complex, which, like multifamily, is generally doing well and still considered “hot”. The original deal was between sponsor and 1 JV institutional partner in 2020. The story is, the institutional partner needs to return funds to its investors within timeline, so the deal is a partial buyout of that partner.
Now what I immediately don’t like is the self-dealing aspect. Meaning the same sponsor, did this deal in 2020, and now recapping the same deal and collecting another set of fees. The mitigation is that the JV partner, who originally owned 85%, is still in for 25%. This at least suggests the price paid is fair and that perhaps the “needing to return investment dollars” story is true. However, because this is a buyout, what this means is that the loan stays in place, and the property does not undergo a new property tax assessment. So although the price being paid is higher than it was in 2020, the loan and tax stays the same. The loan originally a 3.4% 10/25, which means it’s still fixed for 7 more years. 3.4%!
The purchase price for the buyout is effectively 6.7% cap, which again is fair, and in my opinion, on the lower end. Most industrial flex buildings are trading at caps in the 5–6% range “on the market”. This building is currently 97.5% leased, and cash flowing. The cash flow of this property out the gate is 6%, which caused some people I know to pass. Their mistake. What they may not have realized is that the loan is amortizing, where most new deals are interest only. To put it on equal footing, the principal payback needs to be included in the immediate ROI. So, effectively, this is an immediate 9+% return based on in place/current metrics. No special forecasting needed. Of course, there’s upside since this is a hot asset class in a market with less than 3% vacancy. Furthermore, this property has a very conservative 55% LTV and 2.0 DSCR. Phenomenal risk/reward ratio.
I usually have more downsides to consider. However, other than self-dealing, I couldn’t really find anything major. That is actually unusual, as for most deals I invest, I find myself wrestling with the downsides. Yes, macroeconomics can always be a concern, but that’s not possible to forecast with any accurancy.
In 2018–2019, this would have been a good, but not terribly great deal, given at that time, interest rates were low, and deals like this were a dime a dozen (although even then, multi-tenant industrial flex were hard to find). However, in 2023, this deal is a needle in a haystack.
