Today we are talking about a deal we recently raised for, mostly so you can understand some of the things that happen behind the scenes and why we decided to have this be our first syndication for 2025.
This opportunity is a small bay industrial building in Phoenix, AZ, it’s a 506b syndication, so this is not marketing the deal. I’m just sharing how it came to us, why we said yes, and what were the results so far. This is a deal came to one of my business partners through a sponsor that he had worked with in the past. They have together done four successful deals that have all exited. Out of the four, two were above projected IRR and two were slightly below projected IRR. So these partners are fantastic operators, and the deals all exited within the timeframe that was underwritten for. This is the very first thing that we look for, people that we know and trust and have great ethics. We also of course do a deep due diligence on the deal.
Why did it pass our test besides the fact that these partners have a great track record and having exited 4 deals with them?
1. Low vacancy. There is a shortage of small bay industrial in the Phoenix market, people have been building large bay industrial. For the small tenants that need a smaller space, the available inventory is very low.
2. Leases expiring and below market. A lot of the tenants had their lease expiring during our ownership, and the vast majority is below market, one of the largest tenants in the property with the biggest rent upside, already decided to not renew. We underwrote them not renewing a year from now, and they are significantly below market.
3. IG Leases. All of the tenants except one are on industrial gross (IG) leases. We are converting all of the tenants to NNN leases. This will also increase the bottom line for our investors.
4. Prohibited cost to build. Besides the market having very low vacancy, the vast majority of tenants being between 30 to 70% below market, and the leases expiring in the next 24 months, small bay industrial is cost prohibited to build. It costs more to build than the rents that you’re going to get. We are purchasing the property at a significant discount to replacement cost. Not only that, the property was built in 1999 and it looks really good.
5. Location. The property has freeway visibility and is right next to the freeway exit.
Deals like this are very hard to come by, deals that have true targeted 16 to 18% IRR because the interest rates are high and it’s hard to find a good value add deal in my personal opinion.
6. Market. Phoenix is a phenomenal market. It has a 16% population growth since 2010, a job growth of 45 to 50% since 2010. The personal income tax is very low at 2.5%. They’re simply exploding in terms of plants, campuses, and jobs being created in the area. There is a $65 billion chip plant being created next to the property. There is a $20 billion Intel expansion. These are all creating jobs, which is always a great sign of a phenomenal market to be in.
Part of the due diligence was to talk with every single tenant and understand if they were renewing their leases or not. And all of the tenants were interested in renewing their leases.
Mitigating Risks
When you present a deal like that to the investors, you also have to talk about potential risks that can come along. The risks that we could think of were very mininal.
Of course there are risks for any investment, and we have to disclose them. They were:
1. Specific tenant failure. And the way that we mitigate that is, the fact that not only have we interviewed every single tenant, but also there is a shrinking supply, and we have a very diverse list of tenants, so if a specific industry fails, we are not bound by that industry that could potentially take the whole center down. We have a very diverse roster of tenants.
2. Higher leasing costs than budgeted. So let’s say a tenant does not want to renew their lease because the market rent is cost prohibited and we need to do some TI (tenant improvement) for the next tenant, and that will cost more than what we budgeted for. The way that we answer and the way that we potentially solve this problem is to value engineer costs down. That means that you get with the architects or the designers or whatever it needs to be done in that particular unit, and you say, how can we make this item cheaper? How can we make that item cheaper?
So those were the main two risks that we foresaw could potentially happen and how we would potentially solve them.
Final Thoughts
The raise took a little bit longer than what we thought it was going to take. We did not finish the entire raise and still have a couple million to go, however, we did manage to close on the property and the couple million that we have to go is mainly for reserves, so that still needs to be finalized.
The lessons learned were do not ever raise in the month of August. Everybody is traveling.
Another feedback was that some people wanted more cash flow upfront. This deal has more cash flow towards the end when we exit it. And we are potentially exiting within two to three years, and that’s when the bulk of the return comes to fruition.
I think that these investors that wanted more upfront cash flow were a little bit older, so they prefer stable cash immediately versus having to wait.
The fact that we have done four other deals with them that were successful, and that exited within the proper timeframe, I think that also helped. Reputation is always incredibly important, and my partner and I are all about reputation.
Commercial Real Estate Tips Learned Recently:
- Turn expense into income: e.g., rent dumpster out.
- You can open a Senior Living home in any state if one tenant has a disability due to the ADA / Fair Housing Act.
- Always over-raise in case investors don’t send funds.
- If a deal blows up, attorney often refunds fees (to keep you as a client).
- When you refinance, you don’t pay taxes. This means you can cash out of a property, or get a line of credit, and buy another property without paying taxes on that down payment. Make sure you are comfortable with the LTV’s when you cash out.
- Interest rates are always negotiable, you can get ~0.25% interest rate break if you open a checking/savings with lender.
- When developing a property from the ground up, always assume that the piece of land has all of these: endangered species, wetlands, easements, utility issues, trees – until proven otherwise. This means you need to get all of these reports and surveys done (amongst many other things)) before purchasing a piece of land for development.
- Seller financing is becoming more popular nowadays since interest rates are high:
- Position as a “tax strategy” for the seller, since they won’t have to pay taxes on the money they lend you.
- Call brokers regularly so they keep you in mind. Tell them: “I want the stuff you may not want to bother with” and pay them a full commission.
- In offers: Add buyer background (e.g., “I’m Steffany Boldrini, I own X units of storage, X other properties, have done X number of syndications, part of Scott Meyers SS MM”) so they know you are a serious buyer that can close.
- On a $2M deal that only pencils at $1.3M, ask broker: is it worth an offer? If not, ask if the seller is open to creative financing.
Asset classes:
- Student Housing:
- 50% shortage.
- June 1 – May 31 lease, 2-year lease common.
- Master lease; 2-year waitlist.
- Rules: students introduce selves to neighbors, give neighbors their phone, handle own work orders.
- Manager hosts parent/student party.
- For luxury student housing in certain markets where a standard room is going for $800, you can get $2,000/student → fully furnished (students only bring their own pillow, sheets, towels).
- Multifamily:
- Some operators have 96% of their new leasing done without tours (with Matterport).
- Self Storage:
- Storage containers need ventilation, otherwise items inside can rotten or get moldy.