Infrastructure Improvements and the Investment Opportunity They Create

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The commute from my home to Arlington used to be a little more than 30 minutes.  Now with the high volume of construction projects underway it takes an hour..…on a good day.  Just like everyone else I do get frustrated with lane closures and detours along my route, but cursing the ongoing projects might be a little short-sighted, much like a farmer cursing the rain.  These infrastructure projects are a sign of growth that municipalities see as significant enough to spend millions sustaining.  However, just like anything else in life, there are highlights and pitfalls.

The prospect of increased traffic counts increasing visibility seems promising for a property’s marketability from a speculative aspect.  On the downside, I have seen many promising retailers along my route struggle due to the lack of accessibility.

There is an opportunity here for maverick investors to help the local economy and get assets that are naturally increasing in value at a discount.  That opportunity comes in the form of sale/leasebacks to owner/operator retailers that have lost business due to the strain the construction projects have presented.

Yes, I know that pursuing a sale/leaseback with a struggling tenant seems idiotic and I am already getting the flashback of my real estate professor at UTA telling me “the best way to get small fortune is to hastily invest a large one.”  However, with a few constraints involved to underwrite the risk this could end as a win for the investor (and the operator).  If I were to pursue this opportunity here are some of the requirements I would start with:

First, given the inherent risk involved I would need to be higher than a 10% cap rate when my sale/leaseback is completed.  It will probably have to be a shorter term lease in order for the tenant to feel comfortable, probably 5-7 years, and the guarantee of a failing retailer isn’t worth the paper it is written on.  An investor should be compensated for all of the risk that they take on.

Second, I would need to be able to purchase the property below replacement cost and in decent physical condition.  Sometimes that is significantly below appraisal value, but one could argue that if the building were vacant no other owner/user would want to purchase it after another retailer went dark.  Owner/user retail buildings are hard to sell even with no construction blocking ingress/egress (trust me, I have had one for 2 ½ years that I can’t get rid of) so appraisals on these things are a little arbitrary to begin with.

Third, I would need to do some very thorough research on the tenant.  I would start by looking at financials before the construction began.  If they had a steady history of proven sales, then I would feel more comfortable with the investment.  Then I would study the submarket and see what other obstacles lie in the way of the tenant’s success.   This part of the process is about identifying the construction projects as the only hurdle that stand between the tenant’s current situation and continued success.  If that conclusion is reached then you would think that their sales numbers will be back on track once the projects are complete.

Finally, the building itself would have to be conducive to a couple of different options if the tenant were to vacate.  The most common of these options is dividing the building in to a two tenant property.  Almost every Blockbuster that has gone dark has been converted this way.  In order for this to work there are certain considerations that need to be made (building dimensions, parking, lot layout, etc.).  If that is not possible then it needs to fit into a very standard single tenant model.  In other words, any kind of special use, zoning, or unique physical

I-20, I-30, and I-45 are the source of much frustration for residents deep in theheart of Texas. The 12 counties that make up the Dallas-Fort Worth-Arlingtonmetropolitan area have a total population of around 6.3-million. It is alsothe fastest growing metro area in the country.

aspects of the building would be a problem for me, and I would probably pass.  It is also important to note that the value of the asset will naturally   increase when the construction project is complete (a building on a 4 lane road is a lot more marketable then one on a 2 lane road).  This is the most important facet of the due diligence process.  The best way to underwrite this deal is with the assumption that the tenant won’t make it, and if you can still make the building a profitable investment after your tenant vacates, then it could be a solid investment.

To some this may sound like I am enticing a bunch of sharks to chase down mom and pop businesses and kick them out of the property they built from the ground up.  I can assure that this is not the case.  This is a way for owner/users to recoup their equity in their properties to sustain themselves until they can be profitable again.  If the investor doesn’t step in there is a good chance the following scenario would play out: The retailer would continue to struggle, profit margins would get so tight that they couldn’t afford the bank payments, the bank gets the property leaving the retailer with nothing, then the bank does absolutely nothing to add value to the property and it sits on the market for 2 years bringing down the property values of other surrounding commercial properties.  If I were the investor I would certainly hope that the tenant makes it and possibly buys me out at the end of their lease.  Then I wouldn’t have to worry about finding a new tenant and all of the headaches associated with that process.  I just think that most investors would need to look at this and feel comfortable with the asset if the tenant goes dark.

In conclusion, no one wants to see anybody else go through hard times, but I truly believe that this could be a win-win for retailers and investors alike.  It is going to take a little patience and a lot of research to pull something like this off, but I am all for finding new opportunities like this and exploring them to their fullest extent.  If you have any thoughts on this I would love to hear them.

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