How to Invest in Commercial Real Estate

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Episode #063 - HOW And WHY We Chose Our TWO NEWEST CLOSINGS!

by Criterion, Braden Cheek, Brian Duck
May 23rd 2022
00:00:00
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Today our hosts Braden Cheek, Brian Duck, and Joel Thompson with The Criterion Fund discuss the metrics they used when analyzing their two newest closings, and what investors can expect from these ... More

the upside in this deal. It's, it's severely over parked and we think if you, I'll put up a better picture on that. But if you pull up the map, you can see every other shopping center in the corridor has carved out their pads for, you know, a canes or a Wendy's or or a little pad site in front of the shopping center. And we can easily fit three if not four pad sites in front of this property just like you'd see up there where the chevron is, you can bring those all the way over to the right of the screen little pad sites. Um, and those could be worth a million or more apiece. And the lender is not requiring any principle pay down to release those sites, which is huge because that means that cash is coming straight in our pocket, what is up and what's going on. Welcome back to how to invest in commercial real estate. And we are back with another monday episode And we have been crazy busy this month, this month of May in 2022. We've had, we've got lots of deals going on right now, tons of deals and we always get feedback from the investors or people listening to the show that they love it when we go through deals that we just bought or were about to close on or deals that we've had and just say, you know what we liked about them, What caught our eye, how we went through the process of it, how it's going maybe now post closing and just really take a deep dive into that property we just bought to maybe give somebody some help.

Yeah, I think that's the big apprehension with most new investors is they got all these deals, but they just don't know which ones to buy or why we, why they like one deal better than the other deal. So today we've got a couple of deals that we're working on with criterion and we thought we'd just go through those and just give our thoughts to help people see why we picked these deals. What we liked about the underwriting and see if that can help them find their own deal. Yeah. So let's start with, the first one is called village at North shore and it's um in slidell, which is right outside of new Orleans Louisiana. So this one, um, initially I think this was our fifth closing with the wood, not company. So a joint venture with them. It was $12.5 million dollar purchase price deal. A pretty good sized deal for us. Yeah, 100 and 44,000 square feet anchored by Ali's marshall's dollar tree, Joann. Um, there's a brand new Aldi next to it, there's a walmart Supercenter next to it. There's a SAm's club next to it. Okay, so that's the first point on, on why we like this location is we've got a nice strip center with decent tenants.

Some national credit, but we're shadow anchored by Home Depot and Supercenters SAm's Club, all these, all these great tenants and those retailers don't go to, you know, bad locations. And so if you've got that kind of support around your center, you're gonna get good traffic, good advertisement. And so that was the first reason why we liked it. Yeah, those those companies, they have teams based on looking at the demographics so they can figure out where to go. Right. I mean, yeah, so a lot of those successful companies, you can't and all this is just opening. So they just decided, hey, this is where we want to be in it. But right up to the north side of the center and all these an interesting one because they have such a massive trade area. They don't have stores, you know, in every little podunk town, they have a store and they may draw from, you know, tens of miles into that location. So I mean that could be referred to as a co tenant. I mean if you're going into walmart Supercenter or SaM's or all day or Home depot shopping at one of our tenants. Stores makes sense. It's, it's, it makes sense that you do it on the same trip to go to dollar tree or Marshalls or Joanne or something like that.

Um, So yeah, we love that. Right away. All right, good. What was one of the other things we liked about it. Um, traffic count, which is right on the main thoroughfare, right on the corner, right, I can't remember what the traffic counts are there, but they were high, They were, I think 25, total or, or on I think they're on just one of those Just on the main road. I think the other one was like 13,000 Cars. Okay, so you're pushing about 40,000 total, but you're, you're right off of the highway and once again you have all those other tenants drawing, drawing. So I didn't, I didn't need just super high traffic, 40,000 cars at the intersection is not too bad. You know, I would say, you know, there's a, there's a brand new canes right across the street, there was that brand new, all these, so there's new development going into the area, there's some redevelopment of trampoline park back filling a vacancy right across the street. So those are all really good signs, you know, when you're going to an area of town and nobody's there and everything is vacant and nothing new and exciting or anything is going on, you should ask yourself why, but it's also true the inverse, you know, if you see new tenants going in, if you see spaces that are in their second or third generation, you know, with a new exciting concept and and all of this momentum, you can be trying to take advantage of that as well.

Yeah, I think all of that was, that was good to see new retailers opening up was a big was a big key for us. So I think another solid one is the, the acquisition cost. I mean when we're looking at deals, there's an unlimited amount of beautiful what I would call a trophy deal. You know, you want to put this thing as a trophy on the corner of your desk and let everyone know you see it and this may not be that that center. I'm not saying it's a bad looking center but are you gonna put it on the home page of your website? I don't know those centers just full disclosure. They probably don't make a lot of money. This is not a five cap deal. This is not a six cap deal. This is About this at what an eight cap right North of an eight cap. I think it was like an 815 North of an eight cap with upside But also the price per, per foot was not out of line. I think it was about $100 a foot Less. I mean we're $12.5 million 144,000 ft. Okay. So yeah, we're we're lower than $100 a foot which is good for an area with growing retail with new retail going in right next to Lowe's Home Depot, brand new Orleans.

All that is a pretty good sign. Right? So what I'm hearing so far is we've got good downside protection. You know, we've got steady cash flow and a cap. There's no reason why you shouldn't be cashing a good loan. A cap you're gonna, we've done shows on it, you're gonna be able to cash flow pretty well. Yeah, you mentioned good loan. I I think that's a great point of why we got center, we got a loan from First National Bank of Louisiana I believe. And it was 80 82 a half percent I think LTV LTV. Um, so almost a $10 million loan on a $12.5 million purchase price, great deal. They gave us a little bit of interest only to get our new management systems in place, get some leases renewed and this is a, this is a big one. The upside in this deal, it's, it's severely over parked and we think um if you, I'll put up a better picture on the map, but if you pull up the map, you can see every other shopping center in the corridor has carved out their pads for, you know, a canes or a Wendy's or or a little pad site in front of the shopping center and we can easily fit three, if not four pad sites in front of this property, just like you would see if there where the chevron is, you can bring those all the way over to the right of the screen little pad sites.

Um, and those could be worth a million or more apiece. And the lender is not requiring any principle pay down to release those sites, which is huge because that means that cash is coming straight in our pocket. That's a big one. And when you, when you look at how the site is laid out, there's six ingress egress areas. So there's plenty of ways to get in which helps convince pad sites to to go in there because lots of traffic flow, there's not just one way into this center. And, and so that helps us as well. And like you say, on the lender, not requiring us to pay down the loan. That's, that's another thing. When we look at these centers, uh, there may be some initial metrics that we like, but then everything else is gonna fall into place. And so when we look at out parcels. Okay, well do we have the ingress egress we need for those out parcels? Do we have the space? Yes. Okay. Now, uh, can we get, can we get to the upside and here the lenders allowing us to get to that upside? When we sell those pads, we get to pocket that cash for the investors. What about rents? Is that another upside? Is that are the existing rents pretty low on this. That that is a great question.

That is a great question. The rents are, I wouldn't say they're super low, but they're definitely under market. You know, they're a little low. I don't see over the next few years they could be pushed over the next few years for sure. Yeah. You've got some strategic renewal's. I know marshals is renewing soon. Our partners know the Marshalls real estate guys really well. So I think we'll get a renewal there and we've got some T. I. Um 10ant improvement dollars marked for these renewals. Um How let's tell people, how much cash are we taking into this deal for protection? You know, I don't have an exact number. It's 6-$700,000. Okay. And then we and then we have, I mean there's no doubt we're going to do at least 23 pads, maybe four, correct. And so that'll, that'll increase our cash to once we, once we offload those, there's really not a lot of deferred maintenance on this one. Right. So we're not gonna have to dip into that. We don't think too much. Yeah. I I think you may have maybe up to 100,000 of roof repairs. Maybe realistically it's probably 50 you know, thousands of roof repairs. Um, maybe a little landscaping cleanup. Maybe, you know, touch up the signs a little bit um, get some better visibility in their overall structure and parking is in pretty good shape.

Yeah. And and another hot point is we got we leased space while we're in contract to a mattress store. So the end cap of the center is leased and, and that was taken into account. But what's really interesting is without any pad sites, without any out parcels sales, that anything starting day one, just assuming everything is as it is now, The investor is going to get 11-plus% cash on cash, return into their, into their mailboxes. What what's the I. R. That we plugged in without any pad sales. Do you know, I think without any pad sales, I don't know with the pad pad site sales, it was like 22 23%. Um, but what I would say is after we do one pad site sale, um, those funds or return of equity. So it pays back like a third of the equity. So then are 11% cash on cash goes to 15, almost immediately. So the cash on crash is aggressively increasing because of the return of capital from the outside sales. Nice. No. So overall what we do is when we find a deal, uh, we, we begin to go through our, our metrics, We want to know what the traffic counts are the price per foot.

How does the rent? Are the rents in line with market? Is there any cap Capex that's needed? Do we have a good loan? All of these things? We just keep checking the boxes and if nothing derails it, uh, then we just keep going forward and on, on this deal, there weren't, there wasn't anything that caused us enough concern to stop the process and we think it's gonna be a great opportunity, both for us and the investors. Yeah. And, and this is one I think. Um, we closed on a few weeks ago, we went down to New Orleans. Check it out. It looked great. Um, it was, it was a great deal. Yeah. Alright. So we got one more that we're gonna to go over really quickly for you guys. Hopefully we'll also put pictures on this one. But Atlanta or outside of Atlanta, outside of Atlanta. Stone mountain Georgia. What did I even just say? I don't know. Outside of Atlanta, it's in Stone Mountain Georgia. Um, this one looks almost like every other center we own. Which is good. They should start to look alike. Otherwise you don't have your investment criteria home enough. If you go to our website and you look at the stuff we own, you're gonna find like two different pictures and every center could look like those two pictures and that's good people call us and they say, hey, I have something that looks like everything else you buy.

Do you want another one? And it makes it very easy for me to say yes, this is in Stone Mountain Georgia. You may ask guys, why are you buying stone mountain Georgia? Because we found the center. That's it. Yeah, that's it. That's it. I mean the center checked a lot of boxes. The number one thing I liked when I first saw it is it is right on a very hard corner intersection across from a super super center walmart Supercenter. Yeah. And so that right there. I really liked it. It has it's right on the hard corner, both sides of the center, you'll be able to see it in the pictures, traffic counter are like north of 50,000 cars a day. So that was the number one thing I liked about it. So what's next? Yeah. What what I loved is I love you know I love a little bit of vacancy to lease it up but at the same time there's nothing like a proof of concept like a 100% occupied center and this one is not only 100% occupied, it is 100% occupied with not only one but two ground leases and a billboard which is saying this is the spot to be if you want to rent parking, if you want to sign, if you wanna get visibility, if you want to own a small little business, this is the spot to be.

They don't have any availability left. And then when you're looking at the rents, the rents are not they're not super high. I think I could push them. Let's give a couple of examples on the rents just just so they know what we mean by low or high. Yeah, so let's let's go with the Super Common $1 general. You'll find them in almost every of the 50 states. You'll find them everywhere. And the reason why is because they will always move Right if their rent gets too high in a specific market and a developer can build them a building that's brand new for nine or $10 foot and a reasonable trade area, dollar general is going to say, Okay, let's move. So their rents, I would say most of my experience is $8-12 a foot, yep. For about 10, square feet. This dollar general is right in line with their footprint. You know, we're I think we're less than 10 or 11,000 square feet and our rent is 435 per foot per year. There is 0% chance anyone could get close to this site with these traffic counts with this visibility anywhere close to that rent. It's just not gonna happen Now. We are limited a little bit limited on the upside because they have built in options with some increases.

So we're not gonna be able to pop them to $10. But what we like is that the security that they're at such a low rent at such a high traffic count center that they're not going anywhere or at least most likely are not going to go anywhere. Yeah, you've got another anchor which is a beauty supply place. I love beauty supply stores. They've got, you know, a great, they should have great margin. They've typically got a shipping container behind every single one of their stores packed to the brim full of more product that they can sell. I think their cost of goods is is nothing. And and they're they're busy. We were on site on a Wednesday at 10 a.m. And there was half a dozen people walking in the door when we were poking our head and another almost dozen just walking around the store looking for beauty supply stores. I think it's one that uh is not gonna be taken away by amazon just because of the nature of, you know, trying on looking at it. And this is the perfect demographic for for one of those um stores. So let's talk about some of our other metrics uh deferred maintenance. I think the parking lots in pretty good shape, good shape. Uh We have, we had a property condition report that suggested that we needed uh, you know, 100 $200,000 in Capex reserve.

So we raised that. Yeah, I think we raised almost double with the property condition report said Reports said just because we hadn't gone and visited the property yet. We were buying it on an auction platform, which we've discussed, which was, you know, inherently risky because of your inability to get out of it. You know, your wiring them these massive deposits and everything. So we're going in with $350,000 in day one cash It's 100% occupied, it's gonna be cash flowing literally the day we on the day of closing we made tons of money the day after closing we're making money. What are we buying it at? Did you write that down? 8.45. Okay. Yeah. I mean guys in the hot real estate market we're in it may change with interest rates going up but 8.5 cap deals are not easy to find unless there's some real risks to them. And we feel like this provides a pretty low risk profile for that kind of a cap rate. And so then let's let's segue that into the loan. We were able to get an 85% loan at four and a quarter. We almost got a three a five guys. Yeah I mean they raised 75, they raised the rates half a point on us and we have been at 375.

And remember brian and I just did a show on how to make 40% of your money and remember what was the model? It was an 8.5 cap deal with a four and a quarter uh interested on an 80% LTv. So here we're at 85. And so when I said we do these deals every day. We do them every day. Yeah we didn't know about this deal when you guys filmed that episode. Yeah we didn't uh so you know the proof is in the pudding and I hope, I hope we're motivating somebody out there. These properties, it's, I mean, put it, put it back up again, it's not new and shiny. Um, it's not in Tulsa, it's not in some of the fastest growing sub markets that you can google and commercial real estate online, it's there's there's nothing fancy about this deal. We formed an investment criteria that we agree on and we buy properties all over the country. And if you do that, it works right because you're paying attention to things. You're not just buying some random property in some random city. Yeah. And don't get caught up with with new and flashy. Uh, some people do that and you can, if you have money to spend and you want to buy the trophy property because you know, sometimes they advertise that trophy property located in Miami, if it says Trophy, I'm out, you're not because you're not gonna make a ton of money or if you are, you're going to have to really take advantage of long term appreciation because of the location.

But we're, we're cash flow buyers were day one cashflow buyers and that's what these properties uh, deliver and it's about risk return profile. So you say it's not the sexiest steal. It isn't. But for the risk that we're taking versus the return that we're getting, that's the profile we're looking for, I can get less risky, but it will lower my return. So there's a sweet spot that we're looking for to deliver above average returns for lower risk to our investors. And this this center check that box for us, you know, because this center have doesn't have the upside without parcels. Right? But what about a ground lease? Can you uh can you make some money off of the ground lease? Do you sell the ground lease? Um The waffle house is on the ground lease? Right. Yeah. You could easily carve that off. Somebody's gonna pay us more than an 8.5 cap. And by more, I mean, maybe a seven cap, maybe a 6.5 cap. You can make two points on the waffle house. And, you know, I just by carving it off and and putting it on the market for sure. We try to do that with a lot of our other centers. It's it's it's a great little strategy. What? Maybe I could do this real quick. What is the uh the ny on the waffle house, what is the rent?

Do some quick math. If we can if we can get that, I don't want to get too much time. Right here, waffles ground lease pays 16,500 a year. Ok. Not a ton. So that's pretty cheap actually. So when how many years are left on that? A Year 1/2. So that means that the waffle house at an 8.5 cap. We paid 100 and 95,000 for that. That income, strangely. And so what if I take that same? Was it 16 5, 16 5 And I put that on a six cap. Well that's that's 275,000. So right, there's 80,000, not a ton of money, but if we raise that income when their lease is up, I don't know about the options. These are all I mean little upside. But once again, 80,000 80,000 and the equity raise wasn't wasn't huge on on this. So that's That's probably 4% return on the equity just in, you know, potentially doing something without ground lease. Yeah. And I love just the thought about that, right. We had a guy come on who buys rent houses that are too big and sells access land.

I mean we looked at the deal today with the guy who doesn't spend any money. He signs a bunch of free rent tenants. I mean everyone's got their their stick, everyone's got their business plan. Everyone's got their perception of how they look at deals and where they see the value is. But the idea is everyone's got a plan to to do something right? Nobody's just coming in and saying this looks fine. I guess we'll just sit on it for a couple decades. See what happens. Well you say that, but like on the village of North Shore they have the largest parking lot in the area and didn't do any any out parcels. I don't know why we bought a deal here in Tulsa from a read, uh, you know, a really big real estate investment trust publicly traded. Ah and You know, as soon as I bought it from my started carving out the out parcel and I've already got an offer for 700,000 for a patch of parking lot on a deal that a bigger company better smarter, more experience owned and they never did it. I don't know why they didn't do it. But once again, that's one thing that, that we we do and we look for for deals as those out parcels for, for value add. So what I would say is if you're listening to this, if you're watching this and you're saying, man, this seems interesting man, I I would love to be involved in a property like this or understand how to do it.

You should, you should sit back and appreciate. We we just raised over just under, Just under, it was like $3.8, million $4 million 11% cash on cash. I mean pro rated just through the quarter. But this year, this, this quarter this quarter these two properties they're gonna pay our investors over $100,000 this quarter. And there's so many people out there that have money in the bank That don't know what to do with it. It's not earning 11%. And once again that's just the cash on cash we're delivering, you know, 17, 18, 20, 22%. And we've already discussed how important it is to get a high rate of return. And so the idea is these deals exist whether through us or buying them on your own or with another sponsor. But don't wait to get that money invested because you don't know what to do if you've listened to this podcast, you know what we're doing, You know what other people are doing?

Get your money in the game. If you want to get your money involved in properties like this. The first step you need to do is go to our website. The criterion fun dot com. There's a big button on the top right hand corner that says join our investor list. You're gonna hit that button, type in your name and email address and then boom, you will get sent every deal including these two including the ones we're gonna close on next month and the month after that you're gonna get into your inbox and it's gonna say, hey do you want to invest in this? And you can say yes, you can ignore it. Like most of the people on there, but most people that invest invest within the 1st 24 hours. A lot of deals are filling up fast. The village at uh North Village at North Shore that sold out in 17 hours, 17 hours. We hit the email out to the limited partners at Friday at five. And by Sunday morning it was completely full. And and before we close, I'll tell you, we got a couple of deals in the works. Got a big deal that we're working on with criteria. It's not finalized yet. But that will be coming if we can get it finalized in the next 30 45 days, precision equities got a deal. It's a smaller deal. It's gonna fill up very fast in Overland Park Kansas, which is a fantastic suburb of Kansas city.

Uh, and so if you are interested, get signed up on the list because you want to be able to see those. All right guys, make sure to like and subscribe share with somebody who you think might be interested. And we will catch you next week on how to invest in commercial real estate

Episode #063 - HOW And WHY We Chose Our TWO NEWEST CLOSINGS!
Episode #063 - HOW And WHY We Chose Our TWO NEWEST CLOSINGS!
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