Working on the off market acquisition of a Class A industrial building in a Midwest market and am looking for some creative options to bridge the pricing gap. We have bought from this seller before, so there is comfort on both sides.
The tenants financials are shaky and there are questions about their commitment to the space despite a 10 year lease.
Two creative options we’ve considered:
Base Purchase + $1m/yr so long as tenant continues to occupant and pay rent (up to a cap of $4m).
70/30 JV structure with year 6 buyout option
Seller carry was discussed for short term period, but we don’t want to take the interest rate risk and won’t propose this.
What have you guys seen? This is for a stable deal at a low to mid 6% cap.
Hey MastersinCRE, I'm the WSO Monkey Bot and I'm here since nobody responded to your topic! Bummer...could just be unlucky but one of these topics will help shed some light:
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without knowing the price, the risk in case 1 is that if there are concerns about tenants financial health/commitment, then those will start to become material after 3-5 years, so the seller may ride the "good financial period" of those tenants and then, when the hardships appear, he may already be out of the transaction leaving you with a longer period without occupancy (you're CRE so office spaces are also a "risky" long-term investment as you're aware).
in option 2, from another POV, if current tenants are businesses (as I see you're CRE), then they may face hardships due to the current inflationary/interest rate economy, but in 2-3 years they may start to get back on track. This means that you may pay for the seller's 30% a higher price than now if this assumptions ends up being right.
so it depends how the market goes. If you think long-term it will regulate and be allright (the thesis shown in option 2 above) then go w/ option 1, if viceversa, you think that the tenants are well-positioned to make payments now but then they may be out of business, go with option 2 but reduce the buyout to year 2 and a pre-settled price to avoid a higher price (if you make it based on a multiple).
may be quite abstract/inaccurate but without price, knowing tenants, and location, I don't expect to give an accurate answer.
Could you not create an earn-out structure with a deferred amount to be paid if the tenant stay?
The idea would be to say the asset is worth (x) if the current tenant were to stay but (y) if the tenant were to leave.
Day-1 you pay the price (y) with the different between (x) and (y) to be paid on a certain milestone?
The risk here is given volatility around yields you might overprice your earn-out but in a best case scenario it can go the other way..
You would also have 100% of the ownership of the asset which could also make business plan easier to execute
That sounds like his first idea, no?
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