Would you like to learn more?
© 2019 Apartment Realty Investors. All Rights Reserved.
This section outlines the schematics of the debt financing placed on the property acquired and what is required of the Member and other expectations.
Berkadia is YH principal lender and has the deal underwritten in a few days and presented to Agency Debt (Fannie Mae and Freddie Mac). It is YH intent to pursue Agency Debt for the follow reasons:
The other main type of debt is a conduit loan. These have more competitive LTV (i.e. less down payment and therefore more leverage) than Agency debt. YH is NOT actively pursuing high leverage acquisitions due to higher operational risks. Conduit assumptions can take 6-9 months, a handicap when selling the property. Legal and 3rd party reports routinely run over double what Agency debt costs on a $5 million loan- these enhanced costs are hard for a smaller property to amortize.
All Members must be accredited. This is a passive investment with all the key operational and management components set in place by directly overseen by YH. YH receives a 20% equity position in each property acquisition for this and securing/guaranteeing the property loan. We seek Members in the $250,000 to $500,000+ range. A Member is not required to provide financials to the lender unless they own greater than 20% interest in the venture.
YH prefers to work with fewer Members in each transaction for the prototype property pursued and by posting higher equity (down payment) this translates into the Member investment range requested. Management sends out periodic reports (monthly to at least quarterly) which includes:
These reports can vary depending on the management company; these are what Centra Asset Partners, LLC provides. Frequency and report content can change if YH elects to use a vetted management company in a distant submarket should that be a more efficient management solution than utilizing Centra.
© 2019 Apartment Realty Investors. All Rights Reserved.
Amazon has been decimating traditional retailing for some time now. Other online retailers have low to zero real estate rent and drastically lower payrolls than standard retailers with a physical location. Online concerns can offer the same goods at drastically lower pricing than the traditional retailer saddled with real estate rent + property taxes, insurance, and maintenance (aka NNN). Nothing new there-
Existing (not brand-new construction) neighborhood retail centers and grocery anchored shopping center deal structures usually have smaller cash outlays from the landlord perspective for build out construction and therefore shorter break evens BUT typically shift the brunt of the build out costs to the tenant. Most landlords offer some free rent to allow the tenant to recoup a small portion of the build out. It is very common for the local to regional credit (versus national) retailers to open operations in a precarious financial position with revised (i.e. usually unrealistic) projections requiring profitability from month 1 to succeed. The culprit here is the significant construction costs (and naturally cost overruns) the tenant must fund on the front end- write a check or put on a credit card. Scared yet? Defaults are a big problem in retail and the stats prove out that 50% of retail operations close up inside of 5 years. Why do you think landlords don’t fund build out directly? They are anticipating (even expecting) a tenant default… Not where you want to be as an investor.
Retail landlords will attempt to plug holes with non-traditional retailers; this is the beginning of the end of your retail investment. When the retail center rent roll starts listing churches, schools, day care/rehab tenancy, the retail owner is trying to cover basic operating expenses and will typically have a mass exodus when the traditional retailer leases come up for renewal.
Single-tenant retail (“ST”) is where a tenant occupies the entire property; sometimes a developer builds the property to tenant specifications (aka a build to suit) and funds 100% of the extensive cash outlay (buying the land, engineering, legal, construction costs and yes- brokerage fees). The ST signs a long term (12-20 year) lease in consideration for the property being custom built and contractually takes care of everything related to the property- janitorial, air conditioning repairs, parking lot/lawn maintenance, etc. These ST investments are pitched as no management headaches and just sit back collect/cash rent checks. Mike oversaw a large disposition portfolio of ST freestanding retail across Texas for many years for a publicly traded company. This company vacated the ST freestanding sites before lease expiration and kept paying rent looking to sublease the site (hence disposition property) to another tenant for the remainder of the lease term.
Here is the inside scoop on supposed “headache-free” ST/NNN investments-
These can be multi-tenant or single tenant properties. Mike represented office building landlords in this arena between 1988 and 2002 with over 600 office leases consummated. “Cash outlay” is the money the landlord has to pay on the front end like legal, broker commissions, build out (remodeling costs of the premises), and any other cash incentives to secure the office tenant. Build out costs for a standard 5-year lease can easily run $10-$15 per square foot and broker commissions are 4-6% of the gross rentals. We have seen “break evens” to the office landlord/investor run to 3-3.5 years and longer. That means that the 1st 3 years of a 5-year lease the landlord is trying to recoup the front-end cash outlay just to break even and hopes the tenant fulfills the lease to realize a profit.
We saw a 52,000 square foot, three (3) floor tenant (in a 10-story office building) relocate from out of state, sign a 10-year lease, and default on the last stage of move in (only moved into 2 of 3 full floors leased), and then bought out of the lease at the 5-year mark.
Changes in the office market to the detriment of the landlord/investor-
Overall take away for the office market- High cash outlays, long break evens (and risk of tenant failure during the breakeven), and technology with worker demand for flexible work environments tends to work against the office market. Remember YOU as an investor ARE a landlord and should share these downward trending concerns in the office market.