How to Invest in Commercial Real Estate

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Episode #054- What We Love About These TWO NEW PROPERTIES in St. Louis!

by Criterion, Braden Cheek, Brian Duck
March 28th 2022
00:00:00
Description

Today our hosts Braden Cheek & Brian Duck from The Criterion Fund and Joel Thompson from Precision Equity discuss The Criterion Fund's closing on both the Gordon/Farber and Marketplace Commons ... More

Yeah, that I mean that deal, like I said downside if you don't lease any space whatsoever and you're just going in and you have five or $600,000 in excess cash to pay, leasing commissions to pay tenant improvements to pay, you know, for a new roof, whatever happens, you don't lisa single space, you're gonna get 10% a year. It's pretty good if we do our job, we do what we think we can do and we have plenty of money to go in and get those senates and and lease those spaces. Then you're looking at 2021 22% ir are in 3 to 5 years, which is a great little deal. I mean it's hard to find a 20. I mean how many people do you know that told you about a return? They got in 20%. That wasn't a crypto or real estate recently at all? I don't know anyone, how's it going? Everybody welcome back to how to invest in commercial real estate. Today is an exciting day because we are completing our biggest equity raise today. It's already done. Closing on the first property by the time you're seeing this probably today, probably tomorrow.

Um They're both in ST louis Anyway. Today is just a deep dive and a thorough review of why we love the ST Louis Retail Fund one. Tell us Brandon, what what would you say is the number one thing that attracted you to these two properties. Yeah. So I think you've got great downside protection, you know downside. You're looking at 10, cash on cash which I think is is a great reasonable return for being in real estate right now. No big boxes to worry about. No big boxes. No 10ant bigger than you know 10% of the gross leasable area. So you know you can lose tenants I think they're great locations and then you've got a clear path to upside because these are in great parts of town. Great traffic counts. Great little retail thoroughfares. Um Several little vacancies that you can go in and and lease up right because you're going to get the value of that when you go to sell it later on. Um And I think they're great little property. Let's take then let's take them one at a time. Gordon Farber that's the one in west ST louis. Yeah Studios Gordon Farber's the one on the west side that's 75% of the fund.

Um That one we're picking up at a 7.5 cap on day one. Ny um Little bit aggressive from what we normally do. It is it is and I would I would say we did that because it's really well located when we went out there. I mean the traffic counts are just buzzing by that road. It presented really well. Um Good tenants. I think Sherwin Williams is one of the bigger tenants uh nine or 10 years left at least term on that D. M. V. That's looking to take more space. Yeah they were in the middle of expanding. Um You have an Andy's frozen custard that's like five years old. They've already accept exercised their first option with another option. So you could probably spend that off for you know to me that was a couple of the factors that I like that that allowed me to get to the 77 a half cap a few things first. The deal was good enough. We were able to get 85% debt which is super strong. Another one is the vacancy that we can lease up. And then like you just mentioned the Andes frozen yogurt uh spinning that off if we're buying it at 7.5. But we spin that off at a six with a renewal.

There's there's arbitrage to be made there. Yeah that I mean that deal like I said downside if you don't lease any space whatsoever and you're just going in and you have five or $600,000 in excess cash to pay leasing commissions to pay tenant improvements to pay you know for a new roof. Whatever happens you don't lisa single space you're gonna get 10% a year. It's pretty good if we do our job we do what we think we can do and we have plenty of money to go in and get those tenets. And and lease those spaces then you're looking at 2021 22% Ir are in 3 to 5 years which is a great little deal. I mean it's hard to find a 20. I mean How many people do you know that told you about a return they got in 20%. That wasn't a crypto or real estate recently at all. I don't know anyone. Well we were able to lock in dad uh with rates going up we we put a little pressure on ourselves to go ahead and take advantage of this deal because we could lock it up because we had a great debt quote and we're not sure you know what's gonna what's gonna be happening. I mean debt is going up and it's always there's always going to be a lag between the debt going up and captivates appropriately adjusting.

So to get this under under contract and close it before we see a big impact on debt is a big deal. Yeah, let's since we're talking about the debt, let's stay on that for a minute. Um a lot of people ask us where we're getting the debt the debt is a big value we bring because we can get more aggressive debt terms. It was a local bank here in in broken arrow, Oklahoma First National Bank of Broken arrow. They couldn't even do the whole thing. They found a participant bank to pick up half of it in ST louis and you know, so we've got a deal in ST louis, we've got a borrower in Tulsa, we've got a broken arrow bank doing half of it in the ST louis bank doing half of it on great terms. And I'm saying that to say if if you're not actively working and shopping the debt then you're not getting the best deal. I mean the amount of banks we talked to you on this and the amount of time we've spent getting this debt is probably the most on the whole deal is just getting the debt involved. So when I say that's a big piece, it's a really big piece. Well, I would say another big piece of the debt. And how we get the terms we get is we're personally guaranteeing it. And there's a lot of sponsors that are never going to put their signature on the deal and they may not even put any of their money in the deal.

Uh so what does that do for our investors? You may say, well Joel getting an 85% LTV doesn't that increase the risk? It does, but mainly for the guarantors correct because if the deal doesn't isn't working, we're going to step in with our own cash because we're not going to be foreclosed on on a deal this small compared to our portfolio size. So we really are committing to the deal when we sign on the debt. But we think it's our investors benefit from that because it allows us the less capital we have in the higher the cash on cash and especially the higher the I. R. R. On the back end and this low rate that we're getting that's less debt service that we have to pay. So that's more money we can return to the investors. Yeah you're acquiring Gordon fiber at 142 $150 for less than 100 and $50 foot. I think it's 100 and 42 which I mean to replace this shopping center in this location would be easily double that cost. So you know that's one protection you have um you're paying down the principal obviously anyway great deal.

The second deal in the ST louis retail fund one is on the east south east side of ST louis right? It's in Fairview Heights Illinois. Um This one we're picking up in a nine cap. Great little deal. It's in a it's in a great you know retail thoroughfare. I would say it's a non cap because it's maybe pushed off the main, you know the main drag, so to speak. Um 40,000 ft 45,000 ft picking it up in a nine cap. The the anchor tenants are Hooters. I think they do a few million dollars worth of sales there year and Sherwin Williams which has eight or nine years worth of lease term on it. Again. Small mom and pop local tenants outside of the you know Sherwin Williams. Um they've got leasing momentum. They just leased 5000 ft back in December, that's being built out now we've still got two vacancies to lease and, and going to add some value. Um, You know, one thing I didn't love about center, it's got a 20 year old roof, but We went back to the seller and we were able to negotiate a full roof replacement with a 20-year warranty. So we feel really good about that.

And we're going in with $450,000 on this deal. Now, when you say that and I'm genuinely curious here, you mentioned an amount on Gordon Farber and then you mentioned a separate amount, Is that for the fund or is that just for marketplace for the fund? We've got almost $900,000 and Capex reserve tenant improvement and leasing commission excess cash ready to execute our plan and get those tenants. Okay, now that's, that's quite a lot actually. I think that's, that would be more than, than we would normally take. But I think we've got new roof going in on the marketplace. We've got some parking lot repairs. We're gonna do, we have some, you know, vacants that we wanna be aggressive on, we may offer T. I leasing commission costs so that, that helps protect us on the back end to have that cash And it helps protect the volatility of the investment, helped protects um, you know, if we were going in and we were saying, Hey, we're gonna lease all this space. We only had $200,000 in cash to do it. It's just not enough money to do it. Um, you know, if an economic downturn or some sort of weird pandemic were to come across, you know, that's not enough money to do it.

So we feel like we're being super cautious, but at the same time we did go get 85% ltv, you know, debt on, on both of these were pitching a reasonable cash on cash return and the value is leasing that space. So you know, we need to have the cash and I want to be go back to the location on the second deal because there's always a, you can always talk yourself out of any deal that we buy and, and the way I could have done it on this one is it, it is, it's like, I mean think like if you're in Tulsa 71st, you know, in more Memorial Mingo, but then, you know, maybe go back a block off that or two blocks off that where you're not really on 71st. Um, okay, we've got a picture here. Yes, you can see it. It's right across from a big regional mall. You've got, I mean anybody and everybody right there. So The top, top left, you've got 90,000 cars a day on the highway and then you exit the highway right in front of the main retail and that's it. That's 40,000 cars and, and some really good tenants, um, you've got hobby lobby, you got Petco, you've got walmart home depot.

Everybody's here and we are literally just behind the front row. Even that road in front of us is almost 15,000 vehicles per day. So, right. And so for me, I wouldn't buy it at a 7.5 cap. But what we did is we negotiated a new roof. They had good leasing momentum. We have decent traffic counts. Uh, so there and we got a nine cap, I mean, which is, which is really, uh, pretty good in today's hot market to be able to get a legitimate nine cap. And then when we blend the two, I think it, it provides good returns and diversified risk. Yeah, I mean the show is called how to invest in commercial real estate. So I think we can give a little bit of transparency. But I think our first offer on, on marketplace was an 8, 8.5 cap. And we went out there and we were like, hey guys, this is not an eight cap deal. This is a nine cap deal and it's a nine cap deal with you giving us a new roof. And I think so often we, we get to committed. We get too emotional. You're already flying out there, you know, if you've got hard sunk costs and airline tickets, whatever you're excited, it's so easy to say, okay, well, I'll do it.

But no, you know, you saw things, you, you, you know, the roof was 20 years old, the parking lot needed to be replaced. It was off the beaten path a little bit, you know, and these things came back and we were like, yeah, It's a nine cap deal. We sent an offer and boom, we got it. No, it's important to, to kind of go through the emotional aspects of buying and uh, you can't wait until you get into an emotional situation where you've flown in, you have time invested. You've worked on the L. O. I. To then try to decide what your standards are. So for us, there are population metrics, we have to hit, there's traffic count metrics, we have to hit, there's price per foot on the rent and on, on the purchase that we need to hit. And so all of those factors come into play. And if it deviates from those, let's, let's say this is off the beaten path, then you've got to get something in return. And in this case it's, it's a new roof and it's a nine cap deal, which, which is better than what we can get generally for a better located property.

Maybe that's an eight capital 7.5 cap. Yeah, yeah. So, um, a big value being created here is, is annual rent renewals and, and, you know, rent growth through, through leasing vacant space and annual rent increases on lease renewals. I mean, it's, it's very clear, right, We're assuming no cap rate compression whatsoever, which means if we're buying it at nine, we're selling it at nine. If we're buying out of 7.5 cap, Then we're planning on selling it at a 7/2 cap. So we're not just creating fictitious value through cap rate compression. Um, we got great debt terms locked in for five years. I won't spoil the interest rate, but it's sub for its extremely low for today. Um, and its rise for 25 years. Now. We can't get in that you can't get in this deal because once we launched it oversold in a matter of days. Uh, but we want to do this video so people can learn how we analyze the deal. What we like about what we don't, but also to encourage you is, if you want to get involved, you have to get on our list ahead of time because the deals they fill up pretty quick. Yeah.

And, and, and again, that's an important point is we have to fill out documents. You have to fill out documents as the investor that says, how you heard about this deal. Right? And it's really important that your answer to that question is because you knew us because you're on our email us because of something you can't put, you saw it from a facebook ad, we're not allowed to advertise this deal. So guys, if you're not on the investor list, if you know somebody who might be interested in this, you've got to get them on our investor list because once the deal is launched, you can't come in, it's going to fill up immediately and then you missed out on another one. Anyway, ST Louis Retail Fund one. The first deal is closing. It's probably already closed by the time we released this. The second deal is closing shortly. Great Little Fund. It filled up in a week, $2.6 million dollar equity raise. And we are super excited for that. Last point I'll say is if you you think in your mind looking at this or seeing it on our website, man, I wish I could have gotten in on that deal, let us know because we're always looking for the next deal and it helps us to know what are investors want to invest in and how many that we have out there with capital that will help us go find the next deal. Absolutely. Alrighty guys. Well, thanks for joining us on how to invest in commercial real estate and until next time.

We'll see you then. Thanks. Mhm

Episode #054- What We Love About These TWO NEW PROPERTIES in St. Louis!
Episode #054- What We Love About These TWO NEW PROPERTIES in St. Louis!
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