What are some ideas of how to think outside the box and negotiate real estate deals during these times? We asked Victor Menasce, host of The Real Estate Espresso Podcast, author of Magnetic Capital, and experienced investor and developer. Victor will also talk about what is a stranded asset and he will give us some examples of potential deals that you can start thinking about for your own investments.
Tell us a little bit about you.
I started out my ca reer as a microprocessor designer and, like yourself, I started out my career in tech. And if you’ve ever watched a movie on a seat back display on an Airbus aircraft, that’s my microprocessor, and most of those displays, Canon printers, Hewlett Packard storage networks and pachinko pachislot machines in Japan with Sammy Sega, Nvidia, and all kinds of different crazy applications all over the world. That was some of the most fun I’ve had in my life, and in about 2009 when I was working on a cellular network in Japan, traveling back and forth to Tokyo every couple of weeks, it was burning me out physically, and emotionally. I decided to make a bit of a left turn in my career and move into the world of real estate investment and development on a full time basis. So it was a hard left turn. And I discovered that some of the skills that I had developed in the tech industry. are very portable, whether it’s project management leadership, raising capital, all those things carried over pretty much directly into the world of real estate investing.
So I entered the market at what was a moment in history that looked like the opportunity of a lifetime. Little did I know that a decade later, here we are, but maybe even a larger opportunity than the financial crisis that happened a decade ago. So that’s how I got here.
You gave a wonderful presentation a few weeks ago on how to go about thinking about deals during these times, or any time, actually. For starters, what is a stranded asset? And then we can jump into some examples of stranded assets.
I’d like to make a distinction in defining the stranded asset. Most of the time, especially in an environment like today, people are thinking about distressed assets. Now, in a lot of cases, those distressed assets haven’t appeared on the market yet, or if they are, it’s really just the very beginning. We’re in the midst of a moratorium on evictions, a moratorium on foreclosures. But we know there’s a backlog at this stage of millions of distressed properties. I read a report last week that showed that 4.5 million homes in the United States are in either in default or in forbearance. And that happened literally in a very short time period. Now, if you think about the entire financial crisis that took five, six years to play out, a total of 10 million distressed properties, we have gotten half of that in just a few months. So the speed with which this market is gone into distress is unprecedented. A lot of money’s sitting on the sidelines today just waiting for those distressed assets, whether it’s single family homes, hotels, office buildings, retail, there’s going to be a ton of distressed assets on the market and all the money will be chasing those distressed assets.
What I don’t like about that is that when there are a lot of buyers and a finite number of sellers is that it’s what I call the auction. If there’s just a single bid on a property, you can often get a good price. But if there’s 10, 15, 20 bids, then you’re almost guaranteed that you’re going to end up paying too much for it. And that’s, I think, the environment that we find ourselves in today. When people are looking for a marquee hotel coming on the market at 30 cents on the dollar or 50 cents on the dollar, there’s going to be a bidding war, it’s going to be an auction. And I just don’t like the auction environment because you’re almost guaranteed to pay too much. So we’ll make the distinction between a regular normal performing asset which is what some people like to buy, and then there are the distressed assets, whether they’re physically distressed, financially distressed; some kind of turnaround, some kind of value add play can bring those assets back to their former glory, or to some new potential, to some higher and best use. And that’s what people are traditionally conditioned to look for in terms of a deal.
But there’s this third category of asset. That is, it’s below the radar, people can’t see it, it’s not readily visible. And that’s what’s called a stranded asset. Now the stranded asset is an asset that is a perfectly good asset. What makes it stranded is you can’t get to it from here. One of the examples that I give is the following, there’s a there’s a lighthouse in Prince Edward Island called the Baywatch lighthouse. And you can actually book this lighthouse on Airbnb, and you can stay in it on for the weekend. It’s in all the tourism brochures and that would be a wonderful income producing asset. Now, if you take that same lighthouse and you put it out in the middle of the Atlantic, and it’s a little bit stormy, and it’s not very safe to get to, it might be another very good asset from the perspective that it would be great to spend the weekend, that would be a unique experience, but it’s stranded because you can’t get to it from here, where it’s difficult to get to it, it’s inaccessible in some way. And that’s what distinguishes a stranded asset.
It’s like if you were to try and find a Rembrandt painting at a garage sale, there’s nothing wrong with the painting, in fact, it’s a wonderful painting, you just don’t expect to find it at a garage sale. It’s in the wrong place. It’s out of position. And it’s that quality that makes it stranded, not because there’s anything wrong with it, it’s just out of position. It’s in an unusual place.
I’ll give you an example of something that was somewhat a distressed asset, but for the most part, a stranded asset. And this is actually an example from my book, Magnetic Capital. I wrote a book on how to raise all the money you need for any worthy venture. And this is a project that I worked on a bunch of years ago, where my partner and I came across a baseball stadium, a minor league baseball stadium, about an hour outside of New York City. What distinguished this particular stadium, it’s called Skylands Park, it’s about 100 yards in the New Jersey State Fair, it’s 28 acres of land, 46,000 square feet of buildings, 4,200 seats, 18 luxury boxes, parking for a few thousand cars, a couple of commercial kitchens. This particular stadium was built in 1993 for $11.5 million dollars. And about a year later went into bankruptcy with $26 million in debt. Don’t ask me how they did that, there had to have been some funny business. And the folks who bought it were a husband and wife team that took that over 1994 and ran it up until the time that we purchased it.
It was the home of the New Jersey Cardinals. It was the home of the Sussex Skyhawks, they used to set minor league attendance records, it was a great stadium. Now, the husband died, the wife knew nothing about baseball. And here was this asset, literally bleeding cash. And she just wanted to sell it, and move to Florida to be close to her kids. So she handed it over to a real estate broker who threw it up on the MLS, folded his arms and waited. That is not how you market a baseball stadium. Two years into the process, they had an offer for $1.5 million in cash, which they had rejected. They had a financed offer for $1.8 million. The financing fell through. Two years in and they’re starting to get desperate. So we offered them $950,000 cash, which they accepted.
Now, this particular stadium has an asset on it called a cell tower. What’s a cell tower? It’s an easement. It’s a right to hang a cellular antenna on a pole. And you can charge rent to the cellular carriers in exchange for that. And that asset typically trades in the open market at about a 7% cap rate. So this cell tower had revenue from Verizon, Sprint and T Mobile at about $50,000 a year in revenue, in rent coming in. So if you do the math on that, take $50,000 and divide that by .07, you get a number. It’s a little over $700,000. So the cell tower alone was worth over $700,000. If we were to sell the cell tower independently, we could get our cost basis on the stadium down to $250,000. You take $950,000, subtract $700,000, and you’re down to $250,000.
So we could buy the stadium for less than the cost of a one bedroom condo in most communities. And that’s exactly what we did. But even before we closed, we went in search for someone who would actually want to own a baseball stadium, we started talking to former major league players. Do you want to run a training camp? We had all kinds of crazy ideas. Do you want to do a drive in movie theater because there’s parking for a couple thousand cars, all kinds of different things we look at. And before we even took possession of the stadium, we found a guy who maybe would want to buy the stadium. He said, Look, I’m trying to restart a new minor league. I need eight stadiums as a minimum. So you’re 1/8 of my problem. If I can get the rest of the stadiums together, I’ll buy it. We said, Okay, how about we give you a right of first refusal? So he said, Okay, what would you like for the right of first refusal? We said, How about 250,000? He said, Okay, no problem, but I want interest on that $250,000.
So we said, Okay. How much interest will you like? He said, 8%. We said, Done. So for the cost of 8% of $250,000. We bought a minor league baseball stadium. We sold the cell tower as a stranded asset on closing day and got our cost basis down to $250,000. There was another stranded asset, there was a liquor license, it was valued at $130,000. So you can see these are things that are attached. There’s nothing wrong with a liquor license, but you don’t expect to find a sellable liquor license in a derelict baseball stadium in Central New Jersey. That’s what makes it stranded. And these types of things are all over the place, you’ve got to know where to look. And so today’s discussion is about altering your thinking, altering the way that you look at the world. So that you start to see these stranded assets, because they’re everywhere. They’re all over the place.
I love this story. And I want to understand how you go about thinking about deals like this. There are deals everywhere, right? And then how do you process each property that comes to you? How do you go about thinking and seeing what the possible outcomes and the possible upsides are?
Let me give you a couple more examples just so we can solidify the idea. So we know right now that in the pandemic environment, not a lot of people are eating in restaurants, but you have to ask the question, why would you eat out in a restaurant to begin with? In my view, there are three principal reasons why people eat out in a restaurant. Number one, it might be to celebrate an event, maybe a birthday, maybe an anniversary, it might be for some social purpose, may be to go out on a date with your significant other. And then the third, which is increasingly common, and my wife and I sometimes on a Wednesday night, in the middle of the week at seven o’clock, we’ve been working up until that hour. We look at each other and we say, you know what, we’re both too tired to cook. So we would go to a restaurant, not for any particular reason, we’re just too tired to cook. And today in a pandemic environment, that is satisfied by takeout traffic. Some people will order takeout to celebrate an anniversary, but that’s not quite the same experience. But an increasing amount of the restaurant business is satisfying that third need, a significant chunk of it.
Now, we know that there are a lot of restaurants out there that are shutting down, because they’ve gone through several months now with no revenue, or insufficient revenue. In some cases, the owners are simply tired. I’ve come across several restaurants just in my own home community, where there’s no reason for them to shut down other than the owner is 75 years old, and he doesn’t want to go through the energy of restarting again. Tired owner syndrome is real.
So now you’ve a kitchen, there are going to be a lot of commercial kitchens for sale, those are maybe distressed assets. Maybe they just shut down because they decided that they’re getting out of the business. Those aren’t distressed assets. They’re just stranded assets. But there’s an even more important stranded asset, and that is the relationship between the customer and the menu. So if their favorite item is, let’s say the lamb bolognese sauce. And only that restaurant has a lamb bolognese sauce, and that restaurant is closing down. Where are you going to get that meal? So the stranded asset is that menu item. There’s one restaurant that I know about that on their website, you click on the button, they say, Sorry, we’re closed, they put their cookbook for sale, you can buy the cookbook for $30. That’s not a great legacy for that restaurant to buy the cookbook for $30.
What if you could set up a commercial kitchen in an industrial location instead of at $45/sf NNN in a retail location? What if you could put that in an industrial location with good freeway access at $8 a square foot and now you consolidate the menus of 6, 8, 10 restaurants that have gone out of business out of that one commercial kitchen, and you run a delivery service. You can pick up the kitchen for pennies on the dollar because there are lots of them for sale right now. And the stranded asset is that relationship between the customer and the menu. And maybe you get the guy who owned the restaurant with a lamb bolognese sauce, you give him a little bit of a royalty, so every time someone orders that menu item he makes a few nickels. These opportunities to create business to generate business are all over the place. If you choose to look.
And when you say you can pick up the kitchen, you mean the equipment and put in the industrial building?
Part 2 of this interview can be found here: https://montecarlorei.com/opportunities-in-real-estate-how-do-you-pick-which-ones-to-work-on-where-do-you-look-for-stranded-assets/