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Episode #074 - What We LOVE About Our NEWEST RETAIL DEVELOPMENT!

by Criterion, Braden Cheek, Brian Duck
August 22nd 2022
00:00:00
Description

Today hosts Braden Cheek, Brian Duck, and Joel Thompson from The Criterion Fund discuss what they love about their newest retail development in Owasso! Tune in now to hear them discuss the required... More

All right. Welcome back to how to invest in commercial real estate. And today is an exciting day because we are talking about a new deal, we are funding, love new deals and it's been a little bit of a slower time, you know, interest rates going through the roof. It's interesting how deals are penciling out. You know, you obviously need to hire a cap rate or something. It's gonna give to make the increased cost of the debt work. Right? So anyway, this new deal is, let's get on with it. Tell us where it's located. Okay, So new deals in Owasso, Owasso, which is exciting because we're based in Owasso, do a lot of work all over the country, but we're based in Owasso. So this is an Owasso deal and we're buying two acres to develop a multi tenant strip center and a ground lease. So that's kind of exciting. Um, we got the opportunity through the Woodmont company. It's not with the Woodmont company. We got the opportunity through the Woodmont company. So another massive plus to that relationship. Um, but this group is called retail partners and they do retail development a lot in Dallas a ton in Dallas actually.

But all of the countries located in Dallas, Yeah, and they've got a pretty big leasing team and they're bringing some, some, you know what I would call heavy hitter tenants to the field here. So what's important about this deal is that just like retail partners or new partner in this retail deal with us is they don't like taking on the lease at risk, right? So with this deal it's it's a high development budget when you look at what we're building. But when you look at the quality of the tenant and the brand new lease that we're getting in the location, it really starts to make sense so we can dive in a little bit. Now at this point are all the leases signed for every space, All the leases are signed, they're supposed they're supposed to all be signed, we're gonna double check that, but they're supposed to be signed before we fund the deal, 100% released prior to start of construction, correct, yep. So there's four tenants in the strip center and you have a ground lease. So the ground lease is salad and go um it's a drive through concept, You get a salad and you go very simple, simple.

Why don't you explain how ground lease works? Yeah, that's that's a great concept. And Joel's done one or two ground leases as well. But generally speaking, you provide the land, you provide some sort of pad. Typically, You know, it could go either way, but typically with utilities on the pad and then once you deliver them that pad, they typically have some sort of time period of 90 220 280 days to build their building. And then rent commencement starts on this specific deal six months after we deliver the pad. So it'll take us a few months to deliver the pad, it'll take them about six months to put their building on that pad. And it's really interesting how these work because sometimes they're almost completely prefabricated buildings that they set on top of this pad, right? It's very fast um to get it up and then they're gonna pay us $75,000 a year um for rent for the ground. And then just like developed building. You can go sell that ground lease, correct? Yeah. So they're gonna have costs and obviously putting their building on our pad significantly less and they're gonna pay us rent in the form of ground lease rent.

And we're gonna sell that. Um Just like you would a building and the beauty about ground leases they typically sell, I would think, I think they typically sell for a better multiple, a bit of a higher return because of the inherent security of the deal, right? You can think about a ground leases is the best form of an absolute net lease deal where the owner owns the land and every other responsibility is on the tenant to pay all costs, utilities, taxes, insurance, everything, all you do is just own the dirt and what's good about most ground leases and why they might sell for a little lower cap or a higher price. Is that any of the improvements that are made to the property above and beyond the land. Well, whenever they stop paying or whenever the lease is up, you get that, they don't just get to rip the building down and take it. Uh those stay with the property. So sometimes it can be worth more having those improvements paid for by the tenant, right? Because when when you have a building right?

And the tenant comes up for renewal, you're negotiating over that specific space. If you have a building on my ground and your ground lease expires and you don't renew, like you said, you don't get to take anything with you. So your risk of loss is probably higher right on the tenant side. And uh you know obviously the tenant has the basis of the building, but the ground rent, you know, let's say they paid cash for some of the improvements. The ground rent isn't super high comparatively to, you know them going and renting another building. So it gives you some upward momentum on the rent. When and if you have to renew it, you and for us we probably got, you know, 7 $800,000 worth of land costs we're buying to put the ground lease on. Um But it's it's, it should work out. So that's that's on about half of the land or a third of the land. Tell us about the other four tenants, yep. So the other part of the deal is an 11,000 square foot four tenant um retail deal. The first tenant is cava, which is the new concept that bought Zoey's if you've eaten there kind of a mediterranean quick service retail type of vibe.

And when Kava bought it it turned into like a mediterranean chipotle, interesting. So you get that, that's great credit. Great little tenant. Um The next one is Floyd's barbershop. You have a franchise of Floyd's barbershop out of Dallas, they've got a ton of locations down there, so you'll get that guarantee, the corporate guarantee from the franchise. It's kind of a high end or barber. I've never been to it to be honest, we need to figure that out. It's probably not like super cuts I've heard it's not a super, they're paying some pretty decent rent. It is, it's it's more like an elephant in the room. Okay, Boardroom maybe, yep. The next one is called Hollywood feed. I had asked about this when I didn't know anything about our buddy brian knew all about the upscale dog place. Well there's 12 miles away from here. Yeah, there's there's 101st memorial. Yeah high end dog food and dog food. High end pet food, 91st and high end pet food and but and and animal supplies basically. And uh this guy told us on the phone, apparently one of their claim to fame is they deliver, they deliver the dog food for free.

So that's you know how you know you're paying way too much for dog food and the next one is mod pizza, which is like uh I don't know if it's like a blaze where you're actually making the pizza or if it's just to go, I think it's more of like a blaze where you're going in and and actually making the pizza there pretty quick super quick. Their personal pizzas and you're eating it there, yep. So it's not like a papa john's or dominoes or something like that. Okay, so tell us what's the equity raise uh And then what's the structure of the investment for the investors? What kind of returns are we expecting? Great question. So the equity raises $1,450,000. That's being injected into um the deal with retail partners were getting an 80% loan to value, so that's our equity due at closing. Um That'll fund the $6.8 million total development cost, so that will be locked up for a year. It'll take us, you know, 68 months to build the building, get everyone open, get the ground lease delivered, make sure everyone is open and operating, build the package, put it up for sale very similar to how we do with the Kiddie academy's or the El luchador restaurant that we did in Vegas very similar to those.

Um The return profile. So were evaluated on an I. R. R. There's not gonna be any distributable cash until the sale. We're assuming to exit the ground lease at around the five cap and exit the building at around 6.5 cap ish. You know, there's, there's margin to this on either side. It could be better. It could be worse. Um, and our returns to the investor on the million 45 equity raise is 18 to 33% Okay, 18-33%. That's over a one year Over one year 18 is obviously selling way closer to a seven cap. 33 is selling way closer to a six cap. I, my guess would be that you're going to get closer to a six cap than a seven cap on the brand new four tenant retail deal. I imagine there's a little bit of risk at hitting a five cap on the salad to go, I mean, you could hit a 475, 5.5. Uh, so I think there's probably more risk trying to hit the five than there is hitting the six and a quarter. Do you think those two would sell together or independently the strip and the ground?

I think independently they're, they're two different returns. There. Two different risk profile. Yeah, I would agree. It's probably a 10:31 buyer for sure on the ground lease. And the multi tenant retail is like, it's just a little different return profile. So what I love about this deal, I'm from Owasso, I've been in 20 years now. These are new concepts to also write, it's not some chicken place, like everyone's got like 50 chicken places, some new way to fried chicken and some fancy sauce that sucks and tastes like the others. This is not that right. It's new, interesting tenants. Another thing I love about its fantastic location. It's located right behind J. C. Penney anchored power center, massive big box. They're killing it these days. Yeah, solid. So, So it's, it's in a great location. So that's the biggest retail trade area of Owasso? You've got an olive garden bricktown brewery in chick fil a each of those $25 million dollars a year in sales and they're less than half a mile away from this property. Okay. So locations, good location is great.

You know, I like this brand new. It is quality tenants. Do the leases have bumps. Um, I believe so. I think it's two or 3% annual bumps. I believe so. Okay, what else do we like? Um, it's, it's fast. What I, what I like right now is, um, what is the schedule on it? Uh, as far as getting it built, I think they're trying to be open with the multi tenant strip center at the end of the first quarter of next year. Okay, that's pretty fast. So they won't, I mean, will this deal will have launched the investors by now? Most likely will filled up by now. Right? Yeah. I mean it's only a $1.45 million dollar raise. It's gonna, it's gonna go pretty fast, it's gonna go very fast. Um, so as many deals around, we've had investors calling us actually and emailing us asking what our next deal is. So is there any interesting upside, is there any potential upside in the construction costs? Absolutely. So right now, um, the developer, retail partners is out of Dallas.

They've got a construction company that they use a lot. They're supposed to be great out of Dallas and they've bid guaranteed maximum based on the elevations and site plan and tenant work letters we have obviously if they're worth a crap at all, they're, they're gonna have bid high on this and have room to wiggle down. We still have to do a little bit of architectural work. Um, So yeah, there's room for savings in the budget. We're having our general contractor look at it as well. We think there could be some savings there just with him being local. You know, he's already doing a project for us up in Owasso. So he should be able to be very competitive for sure. Um, so there's a little bit upside there. Alright, What, let's talk real quick about potential downside risks for the investors. Yeah. So I think the first biggest, I mean, most obvious low hanging fruit is what happens if you don't sell the building, Joel, What happens if you don't sell it well, if we don't sell, I think our all in cost is based on a 7.5 cap. Uh, and so we have a construction loan going in, but we'll refinance that. And I would say 68 months from now expect interest rates in the, you know, probably what they are today.

They may come up, they may come back down 5.5%. So cash flow will be a little skinny. I think you'll still cash flow some, but but that's a risk that that you have to hold on to it. You don't get your big Ir are and maybe we're covering the eight pref while we rent it out. So the rates are expensive. You've got very expensive tenants, you've got national brands and you've got brand new leases. So if these brands default on the lease of a clear path to suing them and getting it remediated shy of, you know, some chapter 11 bankruptcy I guess. Yeah. I don't think that's, that's the risk um is, you know, you have tenants in there that are strong enough that even if they are concept isn't working, they're gonna stick it out for a few years because they have money and why shut, why shut the location and get sued right. Um But I uh do we know how long the leases are? Um I don't know exactly, there'll be at least five years, but there's a decent chance some of them are 10, Yeah, 5 to 10 years. So, you know, I think the bigger risk is if you have to hold this thing for whatever reason for a full five years and some of the tenants don't renew, uh you're gonna have a hard time replacing that rent because this rent is for a brand new location.

It probably includes T. I. Uh for the tenant to build out the space to their specifications. So yeah, the risk is if you happen to own this thing five years from now, Uh you may only rent it for $30 a foot and maybe you're right now is $35 or $36 a foot or maybe 28. Um and so I think the location is good enough and with inflation, five years from now you're gonna be getting a decent rent. But that'll be a hit to the cash flow. I'm gonna guess we probably have at least 10 year lisa's on This thing. I'd like to think so I just I don't want to say it because I personally haven't haven't verified that. But the probability of them being 10 years, especially from the tenant improvement build out perspective in the fact that it's a new store. I mean we're fronting that cost to build it out. So it's it's way less of a burden on the tenant winterizing that over 10 years and we'll make that obvious what the lease is that when we send this out to the investors. So absolutely. By the time this comes out we'll probably known and we'll put it up on the screen, I would think, um, and just thinking about that, this isn't one that you, you keep, because we don't buy, you know, brand new six and a quarter cap deals, we don't buy high rent deals.

Uh, so even if we took less profit, I think our goal would be to exit this as soon as possible, get our money back plus whatever profit, whether it's 25% ir or even 12% Ir take it and be ready to do the next deal. I think this thing gets riskier, the longer you hold it. Uh, and so I think we'll be looking to exit at whatever the market wants to, you know, purchase of that, I agree. And I think a lot of the values in this specific deal is from spinning off the ground lease. I think you've got way more margin in the ground lease than you do the building, um, which, you know, should, should help you because the ground lease I would think would sell faster. Um, so that gives you maybe a little bit more flexibility on your basis in the building when you go to sell that. And then I also think it, it fits the same risk and rent profile as a kiddie academy. Very, very similar, right? The kiddie Academy's, we have mid to low 30 per square foot rents, you know, 32 33 I've seen a 36 on a Kiddie Academy El luchador, very similar concept of that, we're going in and we're developing this new building for the tenant based on the fact that we have a signed lease and the corporate credit, you know, which is giving us comfort that they're gonna honor that lease right to, to answer your question about them dropping out.

Um, exactly the same as the kiddie academy. Right? I, I agree. I agree. It's brand new. I think people always want brand new and they always want security. So I imagine we do have long leases on this and I don't think that there's too much risk that we won't get a buyer, whether we get a buyer at six cap versus 6.5. I mean, we still make money at 6.5. We make money at six and three quarters we make money at seven. It's just a matter of how much, uh, and so, Uh, you know, our investors are gonna find out nine months to a year, how much they're gonna make and then we're gonna give the money back to them and then we're gonna go do another deal. So I think the downside risk is relatively low given the short exit and you know, if we can make our investors 25, on their money in a year, well then that's a huge win. You know, I think to your point about it gets riskier, the longer you hold it, I think when we go to evaluate the sale and we get that, you know, six and three quarter cap offer. I mean, if we, if we can't make that work, I mean, we may just sell that and deal with a 20% Ir are knowing that, hey, you know, we haven't got another offer or whatever.

Anyway. That is the new deal in a while. So multi tenant strip center development with retail partners out of fort Worth or out of Dallas, not 14. Um, we should be closing here in a couple of weeks and the equity raise is probably already full well, but if it's not come to the website and check it out, make sure you get a look at it. Yeah. And while you're there, if you haven't already, make sure to sign up to the investor list, the, um, the equity from this deal literally came from that investor list. We type up an email to the people on our investor list. Same thing in precision say, hey, we've got this new awesome opportunity. Here's the deal. Here's the metrics, here's the upside. Here's the downside. Here's the link to this video, here's previous performances. We've already done and you have the choice right there to say, yeah, I'm in or yeah, I'm not, There's been a lot of people over the past few years that have partnered up with us on similar deals and they've gone, great, right. We're still waiting to exit some, some, we're gonna hold for a long period of time. We're paying out cash flow. What do we say last quarter between precision and greater. And it was $1 million dollars in distributions. And those went to people who signed up to our investor list.

Yeah. And I want to say people that are saying, Okay, this has some risk, this has some downside. Has some upside. The thing is people that are investing with us. Their money is typically in the market. Okay. And I would ask people, is there any downside risk in the market over the next six months? Have you done the last six months? You're down 20% down 30%. And the thing is, I don't I don't think that's gonna magically just rebound. I think we have some more risk. Uh and so then you have to say, Okay, what if I put it in the bank? I get zero, I get 1%. And so, yeah, we we may not hit 30% ir we may not hit 20% ir but even if we hit 10 or 12, I think it beats, uh, you know, 95% of investing alternatives uh, for our investors. So that's that's why they invest in these deals. Even with some downside risk, is because alternatives also have downside. So, great point anyway, That's exciting stuff new deal going on. And I guess we'll catch you next time on how to invest in commercial real estate. Make sure to like and subscribe. And we will catch you next week on how to invest in commercial real estate.

Thanks guys.

Episode #074 - What We LOVE About Our NEWEST RETAIL DEVELOPMENT!
Episode #074 - What We LOVE About Our NEWEST RETAIL DEVELOPMENT!
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