Creative Dealmaking Delivers Returns
Thank you to all the readers who wrote in last week after we published our story about the hospital investment that turned into a big win. Since we received such a warm response to the last case study, I want to share another story that further illustrates how Alliance’s skills convert challenging situations into great returns for investors.
Background
In 2013, our team found and closed on a 9,000 square foot, 2-story commercial building in the Southeast. The property had a great long term tenant in the healthcare industry and prospects for long term growth looked strong. A university campus expansion and several hotels were under construction in the area, and developers were remodeling the building next door. Our investment came on the cusp of a neighborhood renewal that promised to deliver great returns.
The Challenge
A bustling neighborhood is great for real estate values, but it can produce new challenges as well. In this case, our long term tenant felt increasingly constrained as local development made parking scarce. When the healthcare tenant informed us that they intended to leave, we kicked into high gear to prevent that from happening.
At Alliance, we emphasize stability and relationships because they unlock value. Given the growth in the neighborhood, we could have patiently searched for a new tenant with the expectation that we could raise the rent on the next guy. Instead, we preferred to keep our tenant happy and in place. Discussions revealed the tenant’s underlying concern — To keep them happy, we needed to solve their parking problem.
Solution
The answer came from an unexpected source. The builder who was redeveloping the property next door was concerned about protecting his views. He wanted commitments from neighbors not to renovate or expand their properties in any way that would impact his sightlines, and our building was a particular threat.
We usually avoid encumbering our properties with usage restrictions, but the neighbor was keen to make a deal, and we had a need of our own. The development nextdoor included parking, and we realized we could link the two issues to create a win-win-win situation. Our neighbor would get a promise that we wouldn’t expand vertically to obstruct his views, our tenant would get parking for his customers, and we wouldn’t have to find a new tenant.
Good deals require more than a concept, they need ink on paper. Three-way deals are tough because nobody wants to sign an agreement that gives up their rights without a promise of payment. If either leg fell through, the other would become undesirable, so closing required patient negotiation, persistence, and skillful relationship management. Fortunately, these are among Alliance’s biggest strengths.
Over the course of a year, we hammered out linked agreements that did not take effect until all pieces were in place. For a 50 year easement that prevented us from expanding, the developer next door offered 8 parking spots, available 24/7, plus an additional 8 spots during business hours. The promise of 16 parking spots was enough to sign our tenant to a new long term lease, including a 25% rise in rent. Problem solved.
Conclusion
With a booming neighborhood, a tenant doing brisk business, and a lease commitment of 8 years, our property was rapidly appreciating. 4.5 years after buying, Alliance sold for a gross return of 276% and an IRR of 29.3%.
What made this deal special was our ability to secure higher rent and a long term commitment from our tenant in exchange for a capital improvement that cost us nothing and left everybody better off. Once again, Alliance’s experience with tricky negotiations and careful relationship management produced a big win for investors.
