News from JGRE

Volume 7, March 2016

Investors Corner:  Challenge Plus Creativity Can Equal Success, continued

JGRE’s answer: Instead of walking away, from a good opportunity let’s get creative! Perhaps there are ways to make this type of deal work for all parties.  Instead of purchasing the building, what about leasing it - all of it – with an option to purchase?  Turns out that was a part of the solution to controlling a well located property in Midtown at West Peachtree & 16th Streets. By getting into the deal a very low cost, the investors would be left with enough money to improve the building systems and lease to numerous new tenants, thereby generating a reasonable cash flow while waiting out the wavering market and the troubled bank.

So in June of 2013, JGRE took over the leasing and management of 1280 West Peachtree Street through a net master lease of the property for a 5 year period.  The rent payments to the bank were small (but enough to keep the bank regulators happy), and the option to purchase was secure enough and long enough to give JGRE’s investors the confidence to move ahead with the deal.  The transaction structure made it possible to spend much needed money on the building, to start leasing it up and to generate enough cash flow to pay off the initial capital investment and make a decent ROI. 

The market was, of course, a factor to consider. If the market improved then the option would become more valuable, but what if the market didn’t improve? The other factor was the troubled bank itself. If the bank got stronger as was expected at the time, then it would be capable of taking the write down in the future if the market didn’t catch up within the option period.  But JGRE’s investors reasoned that even if the bank failed, they’d be in the cat bird seat with their purchase option and a very motivated seller in the FDIC.  The biggest risk in this type of transaction was if both the market and the bank stayed stagnant.  But JGRE and its investors bet on the one known constant: change.

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Commercial Real Estate Services, Atlanta, GA