Alliance focuses on investing in properties with strong fundamentals and then adding value to the properties we manage. But it’s impossible to eliminate all risks or surprises in an investment. Sometimes acts of God or unexpected behavior from counterparties threaten an investment. On a few occasions over the years, Alliance has faced major, unpleasant obstacles. When faced with adversity, Alliance has a demonstrated track record of making lemonade when life throws a lemon.
One recent example exemplifies how Alliance deals with these kinds of surprises.
Several years ago, we found an attractive deal on a net lease commercial property. The location was great, and the area was sufficiently developed to give the tenant limited options to move in the future — just the kind of supply-and-demand dynamics we love best. The lease had a slightly unusual structure, but it was nothing we hadn’t dealt with before. Crucially, the tenant’s lease was up for renewal soon, and the seller’s insecurity on their ability to renew the tenant’s lease helped Alliance secure a below market price.
In the first years after the deal, everything was great. At the time, we were unaware of the landmine we were about to face…. there was a state law (not generally used in a commercial real estate) that allows the lessor to takeover the lease if the lessee fails to pay an invoice within 30 days.
In a questionable move by the firm that owned the shopping mall, they attempted to trump up the payments Alliance owed to the shopping mall in an effort to boot Alliance from its stake.
Faced with these surprise charges, we did everything we could to find a negotiated solution. No dice. Our counterparty was a significantly larger real estate firm, and they calculated that Alliance could not afford a legal battle and that we would give in and accept our losses. They were wrong.
Confident in our position and our legal analysis, we went to court. The whole point was to defend our investors’ rights, so we never asked for a dime of additional investor capital to defray our legal expenses. It took almost a year, plus a lot of effort, but the court vindicated our position.
The litigation process is never pleasant, but sometimes it’s necessary. There can never be any question that we will defend our investors’ interests with everything we’ve got. In the end, this difficult deal had a silver lining. The final judgement in our favor clarified the vague portions of our lease, significantly enhancing the value of our asset.
When we finally sold the asset, we’d sold it at nearly twice what we bought it for, bringing a nice preferred return to Alliance’s investors. Despite the hurdles along the way, it was a solid win for team Alliance.