December 6, 2021

I recently discussed how Alliance seals some great deals by acting quickly and decisively. As the old saying goes, the early bird gets the worm. But it’s not enough to be the earliest bird. You also need to distinguish between a juicy worm and piece of garbage. Knowing the difference, and knowing where to look, is what makes us great at what we do.

One strategy for finding underpriced quality assets is shopping for new properties directly from real estate developers. Shopping center developers know that the first few sales are the hardest to make. Once they land a prestigious anchor tenant, then filling spaces gets much easier. While developers are still anxious about making the early sale, Alliance has something special to offer — we can help them start their sales (and cash flow) momentum, and that’s worth a lot.

Buying early is a risky strategy, and I only recommend it for experienced investors. But when it works, it pays off big time. Regular life only makes me appreciate these early-adopter deals even more. Years ago, a friend of mine was among the first people to buy a Tesla. In his excitement, he put down a hefty deposit, years before delivery. My friend ignored the risk involved in buying a new and unproven device — he knew what he wanted and he paid a premium to get it. Imagine if, instead of paying full sticker price, my friend had purchased his pre-order luxury car at a 25% discount, just because Tesla needed to build some sales momentum. What a deal!

A car from a whole new company carries risks. The vehicle could suck. It could be late. Tesla could go bankrupt, leaving my friend unable to service his vehicle. They could even fail before delivering the car, leaving buyers high and dry. New real estate developments can fail to deliver too. Properties can have all kinds of problems, projects can finish behind schedule, and retail locations depend on high occupancy to bring in foot traffic that benefits all tenants, so any vacant space hurts everybody involved in the project.

The potential for failure is exactly why it’s hard for developers to make an early sale. It’s also why Alliance has an advantage. We’re the bird that finds the worm because of our deep understanding of the markets where we work. Our strong broker and developer relationships mean we have great information on properties. In-house research into the demographics, economics, local politics, zoning, tax law, etc of the local market gives us critical context. Finally, our single tenant net lease specialization means we know what types of businesses would do well in a given location, so we can develop a strong game plan for signing up tenants, before we ever close a deal. This early-buying strategy requires the confident analysis that only comes from experience and deep relationships.

A recent investment illustrates this well. One of our favorite brokers alerted us to a new project that was still under construction. Wanting to get that early sale, the developers shared schematics, layout, parking info, and more. On top of the regular public information like highway access and neighborhood growth, this info convinced us that the development would succeed. We wanted to get on board quickly, and to help make the deal work, we secured a 15 year lease from a high quality tenant in the healthcare industry, before even closing the sale.

Alliance encouraged the developers to offer us a great deal by making it worth their while. We pulled together all the necessary documentation for a sale in record time. Our investor network and bank relationships came through, as always, and we were able to lock in financing a full 120 days before the closing date. Add our willingness to pay the contract forward for 6 months and the developer was ready to offer us a great price to seal the deal. A few years later, our investors closed out with an IRR of 21% — the early bird strikes again!

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