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Episode #050- A Deep Dive Into Criterion's Latest CRE Acquisition in Wichita, KS - Plaza West Retail

by Criterion, Braden Cheek, Brian Duck
February 21st 2022
00:00:00
Description

Today our hosts Brian Duck, Braden Cheek & Joel Thompson from The Criterion Fund talk about their most recent CRE acquisition in Wichita, Kansas and how to effectively evaluate deals in Commerc... More

Alright, hey, welcome back to how to invest in commercial real estate. Today is a super exciting episode because we are reviewing our latest offering For our latest property acquisition um a super exciting deal out of Wichita that we've been working on for a few months now and we have closed on it by now. We closed on it on January 12 and we're super excited to have it in the portfolio. And one of the biggest questions were always getting is, you know, how you found the deal, What you like about the deal um you know, future plans for the deal, you know, you own it, what now, how long are you gonna hold it? What are distributions look like? So today we're gonna take a deep dive into Plaza West and why we love it. Yeah, good, good intro. We do get a lot of those questions because that's the main thing people want to know is tell me how to find the deals, tell me how to evaluate the deal's, what'd you like about that deal so I can feel comfortable pursuing my own deal. Uh So let's start in. This one was a random email on a list that I was on. You know, I we've encouraged you guys before to get on brokers list, just finding who's who's listing deals and getting these guys are out of the West coast.

They really don't have an affiliation with Wichita, but I saw it come across my desk and I think it was the the ask cap was like seven and three quarters. And so for me, okay, there's some potential there because we like to be at 8, 8.5 where debt is today kind of gets us, where we need to be on cash, on cash and the price per foot was pretty low. So I, I gave it a call Like, like $62 a square foot or something or just just north of that. Yeah. And I mean for for which taught today, if you were to try to replace that would probably be three times that it probably 100 and $80 to replace this or, you know, 2, 2.5 at least. So, you know, that was attractive right off the bat. But I mean the fact that it was a southern California, I think it's southern, it's California listing broker, they didn't really know much about it. They were, I mean, you talked to the broker that I asked him a bunch of, a bunch of questions, hey, what's the going rents? What's the average uh, you know, price per foot for the rent and all, what's the current occupancy in the area. And really they didn't know a bunch of stuff. But for me, if you find a deal at 60 bucks a foot where retail's going anywhere from 100 to 2 50 a foot, let's say for me there's opportunity there, it's either in a really bad area and you're gonna know when you get there or there's something else that's going on there that's allowing it to be pretty low per foot and there could be an opportunity there.

So that's why we kinda initially pursued it. Yeah. We look at so many deals, it's, it's hard to, you know, act on every single one of them. But this was remember this was a specific time where we needed to deal and we were looking at a ton and we came across a list of like a dozen and I kind of mentally decided, you know, one of these, one of these needs to needs to work and we looked through the dozen or so. Om is all kind of, you know, resonated with this one. It was super cheaper foot. The rent roll was, I mean a really great mix. You actually got the pads in front of the shopping center, which is kind of rare. Um, you could probably flip those off. But anyway, we drove down to Wichita what, a week later. Yeah, I think we had put an L. A. Y. In. So I had no idea if we were going to get it, but just kind of in the range of where we wanted to be drove in town and it wasn't a bad corner at all. Uh you know, for 60 bucks a foot. I was expecting way less and the traffic counts were great. It was about 20,000 per street. So combined 40,000 at the intersection, which that's good. And then there was a decent grocery store opposite corner, a couple of restaurants, some nice out parcels, uh, Walgreens.

So I really felt like, okay, this, this should be even a discounted retail. Like we purchased in a little bit lower income workforce housing areas and we've paid 100 ft, so we're still at 60 ft here. I don't know if we're gonna bring it up and let people see part of the center had been renovated. Uh, if you can see the picture there, the layout, the dollar tree there in the corner and that section had kind of been researched, re faced and it looked really nice. So it gave us some, you know, some options that maybe we could do that with the rest of the center. Uh, instantly you can see that very rarely do you see these older shopping centers where they own the out parcels? And so here we've got, we own three out parcels that come along with, uh, this center. And so if we're buying at 8.5 cap, yeah. Could we spend the out parcels at a 6.5 7 and really get a good return on those. Yeah. And then another thing is we found out this church's chicken pad. If you don't pull up cycling again. Um, that church's chicken pad had just sold before we got in contract.

So that showed me, you know, new development in the area. Somebody's willing to come in here and buy a piece of land and build a church's chicken, You know, that's obviously good enough area for brand new construction. They're going to be a way higher basis than the tenants that are already there. So that was promising for sure. We, you don't often see, um, national chains putting brand new stores in bad locations. They're just smarter than that. They have a lot of metrics they use. Uh, and so that was a great sign. I'd rather have owned the pad, but it was still a good sign to us that brand new construction was going right in front of the center. Yeah. Some other things we liked. Um, well, the demographics were really good. I think the 13 and five mile accounts were 20,000, um, homes within a mile. I think it was like 75,000 within three miles and 200,000 within five miles. Um, Also when we got up there, it was like a Tuesday morning and, and it was really crowded and as we walked it and it started to get lunch time, lots of people were coming in.

So, um, and there used to be a, what a neighborhood market and so walmart, you know, they're not done when it comes to demographics and they felt like it was worth their time to put something in there and then ended up building something else down the road and pulled that neighborhood market, but well, and it's not the demographics when you say they're they're really good. I think they're good for the style of center that we have. Uh they're not an average household income of 120,000. Uh Okay. There may be 60,000. Um But that's that's actually ok. It's it's, you know, a little bit above workforce housing. And yeah, for the tenants that we have and for the rents that were charging. So the next big thing is when we I started looking at it is now we have a low price per foot, we have a decent cap, but some of these rents are ridiculously low. Uh And we're talking to three bucks a foot, some of them a year. And and to me, that's crazy. And for those that are listening when, When I go to evaluate a deal, we have some some retail that's in $25 $30 a foot A year.

Okay. And businesses are making it and you have some other areas that are a little tougher and and they may be at $15 a foot. But what I know about retail from all of our experience is if a business is viable in a spot, they can afford 8 $10 a foot minimum unless it's, you know, the 40,000 square foot space. But if it's 234, 5000 square foot, they can 8 to 10 bucks they can afford. So for here, what we had, we had was an owner that had owned this for a long time had some vacancy through Covid and they had been over backwards to get tenants in there, putting a minute 234 bucks a foot probably with little to no T. I at that. Yeah and their their goal was probably to flip it. Which we we we we see that they got it filled up with what I call really low rents and then they put it on the market and try to maximize the value. Well for us, the good news is if those tenants make it, if they have a successful business then not only can we get 3% increase, 5% increase, we may get a 50% increase in rent, 100% increase in rent go from three bucks to six bucks over a five year term.

And that is where you really conduce the returns. And so that that was really what we got excited about. Yes there's risk because there's some bigger spaces but you're not having to replace any rents. The bigger spaces have super low rent so it doesn't just totally impact your cash flow. But if you do get a business that works you can really maximize well if for some reason a couple of tenants don't work out the rent so low, we should be able to backfill pretty easily. Yeah. Yeah and that's the thing, I mean when you're talking about a seven or 8000 square foot space and that going vacant you know that that could hurt, that could be a lot of money but at $2 a foot it's like $15,000 a year you're losing and you can return at that for Put it on the market for five. You know, It's classic just like we did on on village south owner has owned it for 20 years, maybe their basis is nothing. They they have just kind of been taking the cash flow and now they're ready to move on from it and so they're not trying to ink out every last dollar, they're not trying to, you know, to get the highest rents, they're just trying to fill it and sell it and that's a great opportunity for guys like us to come along and buy it second generation.

Yes, you can see here on the um you know the dollar tree and the restore that anchor it are pretty nice. They resurface those are re facade those I guess both of those are great 10ant's discount retailer. Um and then the rest of the tenants really play into that. This buffet city was, you know, it's an asian, asian buffet, probably popular super Um at lunch but we went there at like 11 and it just seemed like people were lining up in the parking lot. Yeah and the exterior is a little bit tough to look at but it's a real simple exterior and so it can be re uh, facade, it pretty easily, I mean it's gonna take Capex dollars to do, but to resurface that like the dollar tree, like the restore, uh, it's going to turn that center into what looks like a brand new center and, and you know, with the low rents that will help us increase those over time. Yeah. And again the demographics, I mean the $50,000 a year household income, you know, that's the type of demographic that's going to come in and get a little caesars, pizza, get their nails done, get some stuff at sally beauty discount clothing store, dollar tree rent a center.

I mean those are all really good co tenants, um, for, for the center. Well, so what do we do on lending? Uh, you know, that's, that's the second piece. Once we get excited about the deal, we went and saw it, everything's falling into place. So the next thing is, okay, well how do we maximize leverage? And we ended up going with a lender out of little rock. Um, that had done a couple of deals for us on the precision side in Memphis. And so they've got a great program where if the cash flow is strong enough, they'll do up to 85% lTV and thats reliance bank. They've been fantastic to work with super competitive rates as well. I mean when, when you're talking about 85% of the capital stack of a property like this, you know, seven a half million bucks, the majority of the money is coming from debt. So I mean if you're saving half a point on on $6.5 million that's $30,000 a year in free cash just Right there. So finding a lender that you can partner with and is giving you a competitive rates.

I mean they're obviously making a little money but they could, they could make more. I mean when we're quoting a deal out like this, we're getting rates in in within 60-70 basis points probably. I mean we actually had that super low one. So it may have been higher. But anyway, um ran the traps with the lender. You know, not every lender works out the first time. You know, this this particular one had some, you know, existential circumstances going on at the bank. We picked it up and kicked it back over to reliance and um they closed it great. I mean they were super easy to work with. The key to remember on, on the lenders is you've, you've got to have some competition to leverage. So we got three or four, you know, bids for one reason because some people aren't going to, some lenders aren't gonna like the older center for whatever reason. And and then another guy will look at another girl will look at it and they'll say, hey this is great and they'll give you the quote and then you need at least two quotes to try to, you know, leverage that rate and say, okay, just being upfront. We gotta rate at 375, you're at four and a quarter and really try to leverage that out to get them to kind of bid a little bit against each other.

Yeah, We had one lender that we went to here in town and, and they didn't want to quote it at all and that's okay. Um, like you said, it was because mainly because it was an older center, but, but that's okay. Other others will and uh, we found someone and got a, got an excellent, uh, got excellent terms. Yeah, I mean spend some time on it when you get a deal in contract. It's really important that you're, you're getting the most competitive mortgage. Um, you can, I mean, you owe it to your investors. If you have investors, you owe it to yourself. If it's just you, I mean you can make a lot of money and lock in a lot of guaranteed cash flow for the future by negotiating a really good loan today. And I think we did that on Plaza West. We got a great loan. So there were some risks and I'm gonna talk about a few of those now has a lot of large spaces. Um, you know, the restore is a big space, although they're doing well at the, at the space and you know, a couple of the sections are really deep and so they, you know, you're looking at 18,000 square feet. That's a lot for a retail center. So really every deal is gonna have risks that can, that can, you know, put you off the deal and say, well, yeah, this is why we shouldn't buy this.

So you need some, some other counteracting factors to convince because I always tell people, you can always talk yourself out of buying every single deal that you look at and for this one older center, low price per foot with, with some bigger tenants. Um, so then let's talk about what talked us into it or what counteracted those risks And the first one was the out parcels. I think you did some math on the out parcels. If we're able to spin off, uh, the out parcels at a market cap rate, what does that raise us? Um, from a cash flow perspective $3.3 million. Is that the, is that the total? Yeah, you could sell three pads for 3 to 3.5 million bucks. Pretty easy. And so then minus if you take it at a, let's say we purchasing them at an 8.5 cap roughly. What is that? What is the difference between those two? Was it a million bucks. Was that a million and a half? Yeah, I mean each, each different piece. I mean the windies, you're going to get a different cap rate than the taco store and you're gonna get a different cap rate on the loan max.

I mean blended, you're probably a 6.5 cap between the three of them and we bought it on an 8, 8.5 cap. So you're, you're making two points on, you know, a couple 100,000 and you know, I just immediately, okay. I think it's, I think I don't have the math in front of me, but it seemed like that if we sold all those and you subtracted what we paid for them at 8.5 versus what we sold them at, it raises about a million or a million and a quarter in profit. Yeah, I figured you would probably pay down the debt some. Yeah. I'm just saying in general for for us, that's over half of the equity raise. So if the deal works and we're able to sell those out parcels, even if we pay down the principal in the interim until we re fi that cash out, that's a 50% plus return up front On our capital, not 10% a year. We're still going to the castle is still going to make the investors 10, 12, 13% a year. But if we can get an additional 50% return that really counteract some of those negatives that we were talking about.

Well, you talked about some of the risk with the bigger spaces. So, um, we looked into those a little further right. Didn't you write and look into some of the statistics on the restore and, and some of the surrounding restores and this particular one as far as how well they were doing on sales and yeah, there's a company out there called Placer. Um, and they, they used cellphone data through third party apps on the app store through, you know, Samsung and apple without getting into too much of the intricacy of how the app works there basically, you know, through some sort of algorithm and ai software that they have a contract. Um, your spending habits based on how long you're at the store where you're going, they obviously have authorization for the location through the app. Um, but anyway, they, they put together these, these retail data reports and can say, hey based on the location of, of cell phones going to the store, they should be doing this in sales and then you can at least get the raw location data. You can say, Hey, there was 45,000 people that visited this store and on average spent 60 minutes while they were there. And then you can rank those not only throughout the city and the region and the state, but, but nationally.

Um, so we got that report on restore, which is owned by a nonprofit habitat for humanity. Um, and the data suggests it's the top one in the state out of four and it's in the top 10% of the country out of a couple 100. And it's a fairly new concept. It is a new concept from them. Uh And you would say, well what kind of story is it? If I had to describe it. It's it's kind of like uh a thrift store version of a home depot or Lowe's hardware or something. Yeah. Where people can go and get get discounted building and construction supplies. Yeah. And um you know, there's, I live in a pretty affluent area of jenks Oklahoma in South Tulsa and they put one like a mile and a half from both of our houses. And so it's a concept that that can work in a bunch of different markets. So we felt pretty good about that. That concept. Yeah. And and just looking at the center um we did our site visit and everything seemed um relatively tight condition. There wasn't a bunch of trash everywhere. Things were falling apart. The parking lot was hell.

I mean it was crack field. It looked like it was recently sealed. The property condition report came back pretty well too. Yeah, relatively recently replaced roofs um had some wear and tear some ponding, you know, nobody ever plumbs the condensation lines in the H. V. A. C. Units out to the back of the roof. They just, you know, plummet to where it puddles underneath it. So I mean it's just a bunch of little things you can do. Um But that really comes from the seller profile. You know when you're going up front in the beginning of the deal and asking the broker about seller profile which you should if you're not doing that. This these are the kind of things. You can learn how long is the seller owned it. What's the motivation for the seller selling? You know these questions can give you some insight into what you may be looking at at a property If somebody's on the property 10 or 15 years. I'm telling you they don't care and they're not caring about plumbing the condensation lines of the H. V. A. C. Units. They just don't care about that. I mean yeah I think about this scenario. Someone just purchased this property three years ago And they have had to fill units at $2 rents.

Vacancies at two or 3 or $4 rents. And they're struggling to make their mortgage payments. They need out. That's a whole different set of problems than someone that purchased it 20 years ago. Their cost basis is nothing. Uh They're making money whether they feel the vacants or not. The vacants is just gravy, they're getting ready to sell it and they want to maximize income. So they throw they throw tenants at whatever it takes to quickly get them least. Um And so there's less risk on those lower rents than there was in that previous scenario. Um, Well, so let's talk about, okay. We talked about how we found the deal. We evaluated the deal. We, we got a lender on board. We did, our site visit, everything's looking pretty good. We have some risk, but we've counteract those risks with some upside. Now. We launched, how did the equity raise go? Uh, and I don't know when people will watch this video, but we launched, I think right before the end of the year, two days before christmas, two days before christmas Launch the 23rd. So you not only have the down payment, you know, as far as, you know, you're getting 85% equity loan, you just have to come with that 15% of the purchase price.

No, you're gonna have closing costs, you may have fees associated with getting the deal done, you're gonna have inspections, you know, all of that stuff. You're gonna have operating capital, You know, we typically have a month of operating capital. We typically over raised for capital expenditures, deferred maintenance tenant improvement dollars, leasing commission dollars because we want to go in and be able to act if we get tenants, we want to have that cash, we don't wanna stuck and, and do a capital call or have to sweep half of the cash flow to fill up a reserve account, you know, the first year. Yeah. Let me, let me mention that too because I, I invested in a deal in um in Colorado is a two to tenant um hotel deal. And Covid hit. Which Covid was bad. It was it was bad but um you know they literally it was we we had a bunch of properties that got shut down. Okay. I didn't go capital call one of my properties. We have 20 of them. Okay. And and precision. We got several criteria. We I went to know investors to ask them for cash uh and if they don't participate to dilute their shares, you know, for me we it wasn't a perfect scenario but I had hundreds of thousands of dollars in each properties operating account for a type of situation like this.

Well it wasn't, you know, Covid kinda got serious in april with shutdowns and it wasn't may a month. Then they say we are out of cash and we have to do a capital call if you don't participate, your your shares are being diluted. So they literally walked in with no cash. It'd be one thing if they had occupancy on the hotels were down four months into Covid. This was literally at the beginning they did not prepare for anything. And so for us, I just wanna point out is that that we are bringing Capex into the deal because you might lose a tenant if you lose a tenant, what do you what do you have to do? You're gonna lose the rents, you're gonna have to pay for potentially tenant improvement dollars to entice a tenant to come in. You're gonna pay for leasing commission. Uh at least three, maybe six. Uh And so part of what we're raising here is all of that money, we could project higher returns. Uh You know, if we didn't raise for all that because the more money you raise, then you have to divide that money, the cash flow by that money. Uh And so it dilutes your returns, it shows a lower return, but the deal is safer.

Uh And if you never use that cash, then you're going to beat your projections. Uh And so that's what we've done here Got a great loan, 85% LTV, but we're still walking in with several 100,000 in cash potentially to re re facade the exterior, but also in case we have vacancy uh T I dollar leasing commission. And so I think we're pretty well set up here, but we over raised in seven days and seven days with seven days, two days before christmas. So christmas was one of those days, New Year's is approaching rapidly. I'm out with covid in the middle of all of this. Um, you know, hey guys, can you take this call? Hey, can you take? Hey, so, and so wants to talk, can you chat with him real quick. But yeah, it was like a week over a weekend over one of the biggest holidays of the year. And you know, the $1.85 million dollars we were wanting to raise, sold out. And it was, it was nice. And they didn't wire us the money that week. They go to our, they go to our web here. Tanner, pull it, pull this up, keep me logged in. So this is what it looks like. They go to our portal, they're gonna get an email and they're gonna say, hey, criteria has got the latest investment opportunity for you to check out.

Here's some highlights, click this button and check it out. They're gonna come here and and scroll through pictures. Um, you can see, you know, some highlights. We've got a brochure in here. You can go check out. It gives you some, um, you know, the, the fundraising status so that, that's kind of a gauge of time for some investors like, Hey, you know, they're, they're already 90% full. You know, I better get in my commitment after. Yeah, we show that because we, if you are interested, uh, this is for future deals to call us and say, hey, put me down, get me in because we do fill up quick on, on these both precision and criteria and we fill them up quick. Yes. So it just goes through rough terms. You know, you've got to buy shares and $1000 increments. We're raising 1.85 million. We are targeting close on the 12th. We are asking for funds. We do a couple days before that minimum investments, 25,000 investment period 5 to 7 years, There's an 8% preferred return all the money and we expect quarterly distributions. We prepare a ton of documents. There's hundreds of pages of due diligence documents.

All of our potential investors can go in and look and that's probably a reason why we, uh, fill up these subscriptions so quickly is because we go ahead and have everything prepared from the day we launch. Um, and they can see all of the subscription agreements, the private placement memorandum, the Phase One report, the environmental, the condition report. And so they can get really comfortable in a short amount of time. Right? Yeah. And we ask for commitments. Again, it's not like we launched a deal and it's a race to see how fast you can wire us money. It's a process. We have to make sure we're allowed to take your money. We have to ask you some basic questions, you know, have you ever been? Um, you know, anyway, anyway, there's a bunch of questions in there. Um, but you have to be vetted, you have to be accepted and you have to be on our investor list. You know, we can't advertise this deal to the random podcast listeners say, hey, get in on this deal. We can advertise us as a company. We're an investment company. You can go and sign up on our investor list. It's at the criterion fund dot com or how to invest in CRE dot tv And it says sign up.

If you were on that list on 23 December, you got this investment opportunity. I had some people ask, hey, I didn't see this. Well, um, you weren't on the list and we don't put people on our list. You've got to sign up. Um, and so make sure that you're, you're getting access to this stuff because once we send it out, it does fill up pretty quick. It does. And you know, people forward emails, I was blown away at the amount of people that hey, so, and so forwarded me to this. Can we hop on the phone and talk? And you know, I love those opportunities. I love this time of year because all of our investors are calling me asking me questions about the deal. They're verifying wire instructions, they're sending it. They're excited. They're asking me what's coming up for the year. It's an exciting time. People love these opportunities and it shows. Well, last thing I want to do. Um, and it's a little bit of a plug, but one of the, the things that helped us fill this thing up so quickly is that we kind of had a success story. Uh, we closed our first ever development with criterion Kiddie academy in, in Denver. Yeah, super exciting stuff there. Why don't you just give us a 32nd on that.

Yeah. So it was a development of a pre lease kiddie academy in, in columbine. It was an infield spot. There's not a lot of land and development opportunity in that part of Denver. Um, you know, it's Rocky Mountains and then Denver, so there's not a lot of excess area there and it's growing like crazy. Yeah. Population growth is off the charts. Um, we partnered up with would mock company and Kiddie academy and they've been great partners. Um, we built the deal had a little bit of delay upfront in some weather issues in Denver. Yeah, but got the deal built, it was, you know, perfectly fine. The deal looked great. Um, as far as the physical construction tenant took occupancy and I think they had rent for our free rent for 6, 12 months. Um, and we took it out to market and sold it for, You know, 50 basis points better than what we thought we were going to sell it for. Yeah, it took a little longer than we originally thought, but we sold it at a better price. Um, so Yeah, and the investors on that deal got a 1.37 equity multiple. And then there was, that was just in a little less than two years, a Little less than two years and there's more coming.

There's a, uh, we had escrow, $100,000 at closing. So, um, that'll come back to the investor to and boost their ir are even more, but it was a great one. We've got another one under construction right now in Dallas, that's about to be finished up. Um, we're looking at another one in New Jersey, I believe. He told me. Um, and that kiddie academy literally said, hey, there's this building used to be something else. We've got a franchise. You need to buy that building. It's like, okay, well that's similar to what we did in in Vegas where they, we had an old restaurant and he's like, we got a tenant that wants to go in this restaurant. You need to buy that restaurant. And so we did. And so yeah, we had money to him within a couple of weeks. I mean it was, that's why we're great partners for them. Um, you know, it's, it's rare. You can call somebody and they were, you know, pretty quickly, really quick. So just to recap, this is a great deal. Um, you know, we once again, very random how we found it. I was just literally sifting through the hundreds of emails that I get from brokers, saw the cap rate saw it was Wichita, it was close. I knew we'd go look at it pretty easily started digging in low price per foot.

Okay, Is it in a bad area or is there an opportunity, we established that there was an opportunity and then you just keep pressing on the deal, uh each and every day and something is going to either continue you down that path or it's gonna knock you off. So there's gonna be a deal killer that comes up or you're going to continue. And we didn't see any deal killers. We continued. And now we're closing in a few days with an oversubscription. So anyway I just thought it would be interesting for people to hear kind of how we found it, how we looked at it and uh and how we funded it. Yeah. And you know again we're gonna launch another deal here in another month. Probably into february. So we'll probably launch that first week or two february. I'm working out some of the final details right now. We're about to go down a plane. Oh check out the site. Um So get on the list. There's gonna be more opportunities. Um At the after that one there's gonna be another one in another month or two. So there's tons of opportunities to get involved. Um Sign up for the list on our website. How to invest in CRE dot tv. Sign up and we'll see you next time.

Thanks. Thanks. Thanks

Episode #050- A Deep Dive Into Criterion's Latest CRE Acquisition in Wichita, KS - Plaza West Retail
Episode #050- A Deep Dive Into Criterion's Latest CRE Acquisition in Wichita, KS - Plaza West Retail
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