Circumventing Challenges

This Saturday was class number 2 where the first hour was spent debriefing the past week. All three groups seem to be on the same page with one another: assets are overpriced (at least for our appetite) and lenders do not have much "appetite" for tenant properties. So the discussion led to ideas on circumventing the problems we face. The possibility of Joint Venturing (JV) with the owners was always in our back pocket; in fact, the broker for Park Place threw out a few scenarios of what we could do for seller financing. He is on my list of people to contact this week to get a better handle on what he was referring to and the details of said scenarios.

The other idea that Forgey threw out was essentially a rent differential return. The basic theory is this:

• Begin with a lower price per square foot master lease which you enter into with the owner. This lease is simply going to cover the cost of ownership (insurance, taxes, etc), so will be a sub-market lease. This will only work on properties that are not currently rented, and have very little activity.



• Next, pre-lease the property for the use you intend to market it as; for our case, it will be pre-leased as office and residential (or a much smaller retail space, but this is probably the least likely)



• With the pre-lease in hand, secure a TI loan. These are easier to get than outright purchase as the lender can use the pre-leased tenants as backing for the loan. Because the modifications needed on Park Place are minimal (HVAC, Plumbing, partition walls and kitchen/bath amenities), the TI loan should come in at a relatively low cost ($30/square foot)



• As long as what you (the master tenant) have pre-leased the property for is more than the cost of the master lease (your lease with the owner) and the TI payments (amortized over the lenght of the master lease), you can reposition the property for a profit.



• Obviously, the lower the master lease and TI loan, the higher your return.

The scenario fits well with this building, as it does not require a lot of "work" and will be relatively low maintenance fees on going throughout the master lease term. The owners "profit" in that they are no longer paying for an empty building and at the end of the master lease term, can sell the building at the NOI our lease was generating. By that time, the RE market should have turned, as well as the Southside of Fort Worth, leaving the owner with a substantial return.

Our task this week is to present our ideas for both JV and Rent Differential to the owners of the property.

The remainder of the day was spent searching comps (office, residential, retail), researching historic and planning parameters of the area, as well as beginning the presentation packet for the owners laying out the dual scenarios.