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How do you go about creating value out of nothing in real estate? How to look for stranded assets? How to narrow your focus? How do you pick which opportunities to work on? We are continuing our conversation with Victor Menasce, host of The Real Estate Espresso Podcast, author of Magnetic Capital, and experienced investor and developer. Victor will also review how you can dissect a property and find stranded assets.

How about the real estate? Do you have any thoughts there? Because there will be a ton of vacant restaurants.
Those will probably fall in the category of distress first. And I think we need to wait a little longer, probably another 12, 18 months before we see where the floor of this market is ultimately going to be. If you were to buy that now you’re going to pay too much. So I would wait. Now the restaurants that survive, the ones that flourish, because the industry is going to shrink. The ones who survive are going to be busier than you can ever imagine once this is all over.

Exactly, I’ve been telling people that it will be an incredible time to open a restaurant if you have a good good food.
If you have good food, if you have the guts to do it, but what’s going to happen is of course, the pandemic is accelerating trends that were already underway. Whether it’s with any of the delivery services like Uber Eats or Grubhub or any of the countless others. They’re starting to do well. But it’s the restaurant themselves that if you really want to gear the kitchen towards solving that problem, in fact, Travis Kalanick, who was the founder of Uber has a new business, he just took in a very large venture capital investment from Saudi Arabia to do ghost kitchens. Most of that money is to purchase these kitchens. Now, I don’t think you need to go out and spend money on a brand new kitchen, there’s going to be a gazillion of them available for pennies on the dollar in the fire sale market. So I think that’s the opportunity, to take these things, put them together and get back into business with a new opportunity for a very small amount of money. And in many cases, you might be able to strike a deal. And this is the thing that’s different about a stranded asset and very distinct from a distressed asset. When you have a distressed asset, the only option usually, is to purchase the distressed asset. With a stranded asset, it’s stranded, it’s stuck. Maybe you can borrow it, maybe you can strike a deal. So you can often take advantage of stranded assets with much more negotiating leverage, than you can with a distressed asset.

When you look at a property, what’s your thought process of figuring out how can I add value to this, and create something out of nothing?
Whenever I look at a property, I’m always thinking in terms of highest and best use. I’m looking to see what are all of the assets. I’m looking at zoning, I’m looking at what zoning has been approved around it or across the street around the corner to see if there’s any precedent for changing the zoning on that particular property. The zoning is always what is the property right now. It’s not what it could be in the future. So if it was a corner store, it’s zoned commercial for corner stores. But across the street, there’s a 20 story building, chances are good that you might get rezoned for a 20 story building. So you have to look to see what else has been done in the area.

And then you have to look at what other assets are there. One of my favorites is something called conservation easements. There is a tax regulation called IRC 170(h) that allows you to donate a piece of land to conservation in perpetuity. And in exchange for that you get a tax deduction. Not what you paid for it, but for its value according to its highest and best use. Now, remember, this property has to have real wilderness conservation value, you’re not going to take a parking lot in Pittsburgh and return it to wilderness ever. It has to be something that has real legitimate conservation value. But imagine it has minerals underneath it, maybe it has oil. What if you could get a tax deduction, you could say, It has a nice lake on it, I’m going to donate this to conservation. It has to be donated to a 501c3 land trust. And then you get a tax deduction for the oil that you never pump.

Is this valid for the entire United States? 
Yes, the rules varies by jurisdiction, but what I’m describing here are US regulations. And there are consulting firms that specialize in conservation easements on how to get that charitable donation deduction. And then you can sell that deduction as a separate asset. So you might have 200 acres you might sell 100 of them to conservation, and get the tax deduction for the conservation easement. Now, you have an entity that has monetary value, that tax deduction is monetary value that’s worth something to somebody, it might not be worth something to you, but you might be able to sell that at a discount. There are all kinds of different ways of looking at things.

Think about a corporation, imagine there’s a corporation that had a tax loss in its history. The company is not bankrupt, it’s just dormant. That carry forward tax deduction from that prior loss is a stranded asset. Now, I’m not an accountant, you have to seek your own tax advice. But imagine you could buy that company for its value as a tax loss. That’s a stranded asset.

They’re literally everywhere.

You’re going to like this one. Hertz Rent a Car is in bankruptcy right now. They have about 700,000 vehicles. The way those vehicles are financed is, they set up subsidiary companies that lease the vehicles to Hertz and those subsidiary companies, do bond offerings and they sell those bonds as securitized loans into pension funds and all kinds of different things like that. Now, the reason they’re in bankruptcy is because they didn’t come to terms with the bondholders. Their business is down 95%, much like the airline industry. And so they are they’re in bankruptcy.

Now, if you want to get cars from Hertz, that’s going to be a distressed asset, because you’re going to be dealing with a bankruptcy judge. And the only pathway there is to purchase the vehicles. But you have a whole bunch of other rental car companies that are not in bankruptcy. You could go to Avis, or Budget, or National. Those vehicles are sitting on the lot depreciating, and they’re stranded assets. They’re not distressed yet because those companies are not in bankruptcy. What if you went to Avis and said, You know what, I’m going to take all of your white vehicles off of your hands for the next six months. I’m going to wrap vinyl on the door and I’m going to run a delivery service for supermarkets, my minimum commitment to you is to lease those cars for six months. It’s a stranded asset. It’s a deal that you could never strike in any other environment.

When you are so aware of all of these possibilities, some people may get paralysis analysis, like “Oh my gosh, I can do anything and everything”. How do you pick which ones to take on? And also maybe how do you even organize your day? Because I’m sure you could literally spend your entire day looking at possibilities.
I really view the world as an all you can eat buffet of opportunity. There’s way more than you could possibly ever digest. And if you’ve ever been to an all you can eat buffet, you know that you can get indigestion in a hurry. You have to be selective. You say, You know what I’m going to pass on dessert. So it’s a matter of choosing what’s right for you. For example, I’m looking at an opportunity right now, in our market there’s a shortage of industrial land. And there’s an acute need for contractors, and builders to store building materials. A place where they can put down a half dozen C Can containers and they can store lumber. If they can get a deal on building materials, whether it’s siding, or lumber, anything that it’s going to be in short supply that they need over the next 8, 10, 12 months, because we’re definitely in a supply chain constrained environment. They need that space.

I’m in the middle of striking a deal right now with a landowner who has some land, they don’t know what to do with it. I’m probably not even going to buy the land, I’ll probably end up just leasing it. And then put security fence around it, put down some C Can containers, provide secure access and lease out these spots to different builders as an outdoor storage facility. It doesn’t have to be climate controlled, they can drive in with their trucks and trailers and load up. And I’m solving a business problem for a very low startup cost. We already have business partners that are in a very similar space. So the leap for me to run that business is a very small thing for me to take that on. I’m not really starting a new business. It fits with something that we already have. So you have to ask yourself, Is it in your wheelhouse? Do you have the team that can run it because you don’t want to run it yourself? That’s called a job. We’re investors, we’re business owners, we’re business leaders. So you have to be able to put these businesses together so that they run sustainably by themselves with the right team, and so that’s the key because all these businesses are active businesses, and who’s ultimately going to run it? That’s the key question. If you can’t find the talent, the expertise to run it, then you don’t really have an opportunity because it doesn’t matter how good the deal is. If you have the wrong people in it, they’re going to screw it up.

Do you have a process of how you go about your day? Let’s say, Mondays you look at deals, Tuesdays you determine which ones you might want to call and find out more how, how does that work for you?
I wish it was that structured. These things come in when they come in and you look at them and try and give a quick no if you can. I don’t spend too much time looking at things. If there’s too many moving parts, if there’s too much risk of it coming together, then we’ll pass on it and pass on it very quickly. We will look at it, but we will pass on it very quickly.

As far as the other ones, we’ll get with the team and we’ll see how would we put this together. They literally come in every day of the week. So we have to dispatch them fairly quickly. And some of them have a gestation period. They take a little while to put together, sometimes they come together quickly in a matter of weeks. Sometimes they take months to come together. So you have multiple of these running in parallel, and some of them will die, some of them will get consummated ,and all of these projects have a lifecycle anywhere from six months to a couple of years. Because of that, you often end up juggling multiple things simultaneously. One week, you may focus almost full time on a single project. And then while you’re waiting for an approval, nothing might have happened on it for two months. So it’s pretty fluid. It’s pretty dynamic. The key is to have people in your team that you can draw upon to get things done when they need to get done. And that really is the key. Otherwise, you’re going to be multitasking, you’re going to make a few millimeters of progress on 10 things every day, which means you’ll get nothing done. So you have to have folks in your team that you can give primary responsibility to a particular project and have them running it to completion. And that is their number one.

Is there anything else that you think is important for our audience to know?
You want to look at the environment and just see these things everywhere. Now the beauty about stranded assets is that because there’s so few people looking for them, you’re not competing, there’s no auction for stranded assets. So you get to create and synthesize these opportunities, simply by being observant, by being curious, and it often means putting together sometimes two or three stranded assets that are maybe in separate areas. And when you do then you can put something together, it’s it’s just a different way of looking at the world.

Victor Menasce
victor@victorjm.com
http://victorjm.com/

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