What would you do in this scenario for an acquisition? 25M

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So a quick background on myself: I am in college, but come from a real estate family so these numbers are not "out of reach" as far as this case goes.

I came across an offering for $25M deal in retail space. It is in a good part of town with well known retail tenants. NOI is a little over 2M.
Won't be able to bite at this offer though until our own house is in order, but its a good learning experience for how we would go about financing it. Ultimately these are the EXACT type of deals I want to be doing when I am older: acquiring income producing "trophy assets" sort of speak in my hometown, as well as in my state.

Currently have about 14M in equity and 6M in debt in current real estate business, any idea if community banks could cough up 20M if 5M is put down as equity. What rate this would be at? Or is that simply not plausible?

Capital structuring for this deal would be appreciated. Ideally staying way from mezz financing, but again, I am a newbie still so I could very well not know what I am talking about.

Any insight as what to people in the industry would do given this scenario would be appreciated.
We are not very leveraged at the moment which is why I believe there would be a way to finance this without using a significant amount of other money for fronting the equity in the deal.

Curious to hear from you guys!

Comments (18)

 
Dec 10, 2013 - 10:08pm

I think you will have a tough time finding a bank willing to do 80% LTV under most circumstances, unless you are dealing with a bank your family has a long-standing relationship with. You will likely have to pursue some mezz financing or a participating program.

 
Dec 10, 2013 - 10:52pm

You're going from 30% levered to 58% ($26M of $45M value) on the overall "Portfolio" so that's not too bad. A lender will look at the leases (term, sales %, etc.) along with your debt coverage. I doubt you could get 80% LTV on this deal by itself.

Fill the unforgiving minute with 60 seconds of run. - Kipling
 
Dec 11, 2013 - 11:58am

End goal would be to hold it and cashflow it, build equity in it, and when another investment opportunity comes up, tap into the equity to fund the next investment. That has been the strategy for the company for awhile. We have an in-house property management team that takes care of our properties so our NOI on this might be a little higher since we don't have to out source that aspect of it.

 
Dec 11, 2013 - 6:42am

are the tenants strong? How long are the leases?

Assuming you have good tenants and the leases are long.. I think 80% from a community bank is doable... Especially if its one your family has a history with

That's a debt yield of 10%... Which is good

Deal could be :

10 year term
25 year amortization
5.5% interest or so... Probably a floating rate

You and your family would have to sign on for full recourse

Typically how you'd want to finance this is from a cmbs lender or life insurance co... This deal may be slightly too small for most life insurance companies... Not sure. That way you'd get non-recourse and a fixed rate.. You'd only get 70% ltv though. If the deal is strong enough you could do cmbs + mezz to get to 85% ltv... You wouldn't be coverage constrained ... That's prob your best bet as its still a fixed rate and non recourse

I broker deals like this ... If you want help feel free to pm me

 
Dec 11, 2013 - 12:08pm

Tenants are strong, Chipotle, Bed Bath and Beyond, Barnes and Noble and other well known companies. The leases expire anywhere from 1 year to 8 years I believe.
I was not even aware that Life Cos dealt with CMBS (shows how much I know)
Thanks for the information guys, again, we can't bite at this deal, but looking forward I will keep all of this in mind.

 
Dec 11, 2013 - 1:47pm

The Borg:

Tenants are strong, Chipotle, Bed Bath and Beyond, Barnes and Noble and other well known companies. The leases expire anywhere from 1 year to 8 years I believe.

I was not even aware that Life Cos dealt with CMBS (shows how much I know)

Thanks for the information guys, again, we can't bite at this deal, but looking forward I will keep all of this in mind.


Life companies do not deal with CMBS, two very different animals.
 
Dec 11, 2013 - 11:35am

Definitely not too small for Life Co., there are a ton of Life Cos where this would be their sweet spot. Do you want to hold long term? If so, Life Co. is definitely the way to go since you would have the ability to fix a long term rate, and you could most likely get a non-reco depending on the property quality and strength of sponsor. And I must disagree with Scott Hartnell above, 75% LTV is certainly possible. As previously stated there would be quite a few variables that would factor in to determining the financing structure you would get.... Is it grocery anchored? Credit tenants? How are sales of major tenants? What do remaining lease terms look like? What condition is the center in? What does population/incomes look like in 1/3/5 mile radius? Highly trafficked area? What do historical operating statements/operating history look like? Whats the story on this center? - these barely break the surface on what lenders will look at

 
Dec 11, 2013 - 12:11pm

$25MM too small for life cos? Worked with several life cos that have no issues going as low as $5MM.

Pretty much echoing prior statements: 80% LTV is stretching it as far as life cos are concerned but it is possible. That's a lot of their absolute limits and that would require: trophy asset, gateway market, multiple credit tenants with low potential rollover within the loan term.

 
Dec 11, 2013 - 12:39pm

DK2345:

$25MM too small for life cos? Worked with several life cos that have no issues going as low as $5MM.

Pretty much echoing prior statements: 80% LTV is stretching it as far as life cos are concerned but it is possible. That's a lot of their absolute limits and that would require: trophy asset, gateway market, multiple credit tenants with low potential rollover within the loan term.


As a broker.. ive only called them on bigger deals.. looking back its probably cuz many have exculsive relationships with a certain broker in markets outside of ny for smaller deals...

Either way I clearly need to brush on my lifeco knowledge haha

 
Dec 11, 2013 - 1:45pm

scott hartnell:

DK2345:

$25MM too small for life cos? Worked with several life cos that have no issues going as low as $5MM.

Pretty much echoing prior statements: 80% LTV is stretching it as far as life cos are concerned but it is possible. That's a lot of their absolute limits and that would require: trophy asset, gateway market, multiple credit tenants with low potential rollover within the loan term.

As a broker.. ive only called them on bigger deals.. looking back its probably cuz many have exculsive relationships with a certain broker in markets outside of ny for smaller deals...

Either way I clearly need to brush on my lifeco knowledge haha

All good man. You're correct too. The firm I work for has some exclusive regional agreements with life cos, and that's where a lot of the smaller deals are sourced.

SHB, good call on that breakdown. Pretty accurate.

 
Dec 11, 2013 - 2:03pm

If you were interested in CMBS, lots of lenders would be all over your deal.

Barnes & Noble as an anchor could be an issue for securitization, but if you're in a relatively tight retail market, BB&B is reporting strong sales, and your 10% DY on NOI is legit, that's a workable conduit deal. Real money going into the deal for the acquisition helps too. Without a long-term lease on the anchor you'll probably top out at 75% in CMBS land, but things are getting pretty stupid these days, so who knows. We top out at 75% on the senior mortgage, and I doubt we'd do mezz on your asset given the description.

Assuming there's no hidden hair outside the quick blurb you've presented, and the 10-year treasury swap doesn't jump over the next couple months before you'd close the deal, it would be reasonable to expect a 10-year fixed-rate loan in the low-mid 5% range. Of course, those are gigantic assumptions.

We get beat by life cos on plenty of deals in the sub-$10 million range. There are definitely some who play in the smaller ponds. Others who've mentioned it are spot on in guessing that many have correspondent relationships with brokers in the regions where they lend, and typically only take deals from those brokers.

I can get into more detail if you want. Feel free to PM me if you want more info on CMBS.

 
Dec 11, 2013 - 4:39pm

Slothrop:

If you were interested in CMBS, lots of lenders would be all over your deal.

Barnes & Noble as an anchor could be an issue for securitization, but if you're in a relatively tight retail market, BB&B is reporting strong sales, and your 10% DY on NOI is legit, that's a workable conduit deal. Real money going into the deal for the acquisition helps too. Without a long-term lease on the anchor you'll probably top out at 75% in CMBS land, but things are getting pretty stupid these days, so who knows. We top out at 75% on the senior mortgage, and I doubt we'd do mezz on your asset given the description.

Assuming there's no hidden hair outside the quick blurb you've presented, and the 10-year treasury swap doesn't jump over the next couple months before you'd close the deal, it would be reasonable to expect a 10-year fixed-rate loan in the low-mid 5% range. Of course, those are gigantic assumptions.

We get beat by life cos on plenty of deals in the sub-$10 million range. There are definitely some who play in the smaller ponds. Others who've mentioned it are spot on in guessing that many have correspondent relationships with brokers in the regions where they lend, and typically only take deals from those brokers.

I can get into more detail if you want. Feel free to PM me if you want more info on CMBS.

Slothrop - My office doesn't do all that many CMBS deals (handful a year). Could I shoot you a PM in the future with some questions?

 
Dec 12, 2013 - 6:29pm

Currently there is no way to get to 80% LTV with CMBS. You need mezz to push the capital stack to that level. I did a deal 6 months ago 80% LTV (non-recourse) with a community bank, but it was much smaller around $4mm. No way with life companies at that leverage.

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