April 12, 2024

Buy low and sell high is such an obvious recipe for investing success, you would think anybody could do it. In reality, it takes real market insight and a clear picture of where things are heading.

Alliance’s investors appreciate our reliable 7-9% preferred returns. But with interest rates where they are today, nobody is getting overly excited about them either. The reason Alliance’s IRR has been 24% is because we exit our deals with major capital appreciation.

When we buy a property, we usually have a plan to lock in those big returns within 4 or 5 years. It all depends on understanding what the market wants.

As we do our diligence on a potential purchase, Alliance also develops a strategy for how we can add value and make that property more desirable for resale. One of our specialities is what I call lease renewal arbitrage.

For example: Lease renewal arbitrage.

When a commercial property has an expiring lease, tenants sometimes try to play hardball by threatening to leave. Vacancies are bad and extended vacancies can be a disaster for owners. So when those owners aren’t experienced professionals, they may want to offload that risk by selling the property.

With our decades of experience, Alliance knows how to assess the real risk of losing a tenant and our prospects for replacing them if they leave. Most often, we’re able to offer the tenant something of value, like a property upgrade, that will get them to stay. In return, we’ll get rental rate increases on a new long term lease that will make the property significantly more attractive to buyers.

We can structure those leases in a variety of ways. Our team knows what levers to pull, what investments to make, and how they will affect market value.

Another exit rout is sellsing entire portfolios of properties to a Real Estate Investment Trust (REIT) or some other investment vehicle looking for a diversified basket of real estate assets. Our strong track record means we can sell portfolios for good prices. In effect, we act as a kind of personal shopper for bigger real estate investors.

Another part of preparing an exit strategy is to stay on top of market conditions. Last year, Alliance sold more properties than we bought. We foresaw that rising interest rates would push prices down, and we got out before that happened.

This year, prices have been adjusting downward. We’re gearing up for a lot more buying, and we’re ready to pay cash. When interest rates fall, as we expect later this year, property prices will increase, but we will already have made good strategic buys. And when rates are lower, we can finance our new properties with cheaper debt than we could get right now.

It’s also important to match debt financing to the exit plan. We carefully negotiate our loan maturities, prepayment penalties, and options to extend or rollover debt to fit our plans. Financial engineering is a big part of creating excellent returns for our investors.

There are no great returns without a smart exit strategy. And with a good strategy, we operationalize the old maxim of buy low and sell high.

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