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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