Commercial real estate investing isn’t hard to understand. Find a property; pay an agreeable price; manage it competently. But to beat the market, it takes something more. See the unmet potential in a property. Take some risk to realize that potential. Lock in long term value.
Nothing illustrates this approach better than Alliance’s 2013 investment in a midwestern medical facility. The property was older construction. It was a little run down and in need of some capital improvements.
While other real estate investors saw the risks in this aging facility, we saw the potential. Demographic trends in the area indicated the need for multiple medical facilities, and there were not a lot of locations with the right zoning. Despite its flaws, this property was positioned to benefit from favorable supply and demand dynamics. So we went for it and bought the property at a great price.
Stable long term tenancy is one of the keys to success in our real estate niche. So, when a couple years later, our existing tenant notified us they would be leaving for a larger property in another neighborhood, we might have worried. But our team believed in the investment thesis: This property was undervalued due to visible but fixable problems, and the danger of losing our tenant was offset by the opportunity to unlock the property’s real value.
As soon as we understood we could not persuade our original tenant to stay, we reached out to our network of real estate agents, brokers, and attorneys. We had decided that instead of allowing the old tenant to sublease until their lease expired, we would instead let them move out and then quickly find an even better long-term tenant.
Great rewards require taking risks. Confident in our market analysis, we invested our own capital in facility upgrades that would help us land a great tenant. New lighting and wall panels delivered a significant look and feel upgrade. Additional work on the building’s plumbing and electrical system helped modernize an aging structure.
Our investments paid off big time. A friendly broker connected us with a major university health system that was looking for a new facility — a perfect fit. To close the deal, we forged a great relationship with the university administrators. We offered competitive rent, renovations to address all their concerns about the facility, and always made sure they were comfortable with the process. Since long term tenants are more important than a rent check, we gladly tolerated a brief vacancy period while they transitioned from their old facility to ours.
When our tenant said they were leaving, we could have easily allowed them to sublease while we collected checks for a few years. But that’s not how Alliance beats the market. We saw that departure as the opportunity to revamp the property and sign an even better long term tenant.
The end result was even better than we expected. A truly marquee tenant signed a 15 year deal. With smart capital improvements and a brand name tenant, this ugly duckling property increased dramatically in value. Not long after, we received a buyout offer that was too good to refuse. This is the story of an Alliance investment. See the potential, take some risk, and lock in long term value.