S.E.C. Real Estate Observer

• Tweet

• Tweet

2002 S.E.C. Most Creative Transaction

Never Quit:

Edgar Lopez, S.E.C. (Las Cruces, New Mexico)
and Ed Killian, S.E.C. (Reno, Nevada)

As a result of our commercial and retail brokerage experience, we were contacted by a retail developer of Texarkana, Texas to sell three stores that they built and leased to a national publicly traded company which rents and sells movies.

We accepted the listing. As time went on and we produced a lot of activity on these stores, the developers decided to place more stores in our hands for sale in increments of 2 to 3 stores. Although the stores were attractively priced at an 11 Cap Rate on a triple net leased basis, they were difficult to sell because they were located in very small towns. Our eventual transaction involved 15 stores in 3 different states, Oklahoma, New Mexico and Texas.

We knew of an investor who lived in Incline Village, Nevada who owned a parcel of land in Reno, Nevada zoned for multifamily that he had not been able to sell, even though it was a very desirable parcel. He had priced the property at the highest achievable price for apartments. Apparently, the apartment developers did not agree with the value that he had placed on the land. We analyzed the property and decided it was an exceptional condominium site, a use that had been overlooked by other builders. We also knew there was a pent up demand for condos in Reno. We first presented to the investor the video store package to see if he would be interested in owning the portfolio of stores. He said he was interested. We asked him if he would consider offering cash plus his Reno land as a down payment and finance the balance to acquire the portfolio. He agreed subject to
inspection of the properties and being able to secure favorable financing. An offer was prepared.

We presented the offer to the retail developer/owner of the movie rental stores. They were open to the offer, but the Reno land value presented a problem for them. We convinced them that they should consider building condos on the site or, if that was not feasible, then we could resell the property to a builder at that price within a short period of time, not as apartment land, but as condo land.. They agreed to accept the offer contingent upon inspection and approval of the land.

Up to this point we had not met the retail developer in person. All representations and negotiations had been completed by telephone. Knowing they may not be interested in developing the Reno land, we contacted a very reputable Reno builder who had been successful in condominium development in the past. We presented the property to him to see if he would be interested. After analyzing the property, he said he would be very interested, but only on a joint venture basis because he did not have the capacity to purchase the land for cash.

We met with the principals of the retail developer and their attorney at the ICSC conference in Las Vegas to discuss the contracts. The next day we all traveled to Reno to inspect the condo land and meet its owner.

After inspecting the property, they decided they were unwilling to take on the contraction project and were afraid the land would not sell. Although the property was an in-fill site with older condos already surrounding the property, being unfamiliar with the market, they were afraid to accept the proposal. They decided that the only way they could proceed was to get all cash for the movie stores. We came to realize that their need for cash to continue their building program was their primary motivation.

We convinced them that they should still meet the condo landowner and discuss a possible transaction. They agreed.

The parties then met and laid out to each other their concerns and we suggested that they both accept the offer contingent upon the sale of the Reno land. The condo landowner’s reluctance to that solution was that if he had the property sold and had all cash he probably would be a purchaser for property other than the movie stores. His primary motivation was to exchange the land. He had exchanged into it and had a low basis.

We asked if we could meet with condo landowner separately. We asked if he would consider exchanging the land and then loaning back capital from a different entity he owned to the retail developer. That would satisfy their need for cash. We suggested that he collect 8% interest on the loan and asked if he would subordinate that loan to a construction loan. We told him we had a reputable builder who was considering a joint venture on the project and those conditions would help make a joint venture appealing. He knew the condo builder and agreed to those conditions.

We then presented the new scenario to our retail developer. They agreed to the transaction provided we could present a joint venture agreement that made sense to them. The transaction was still contingent upon the inspection and approval of the 15 movie stores and satisfactory financing.

The condo landowner still had timing problems making the inspections so we found a New Mexico contractor to do a due diligence report on each facility. Several small construction problems surfaced and we convinced the movie storeowner to fix all problems. All of the parties assisted in securing very favorable financing on the 15 stores.

We then approached another major California construction company with a joint venture proposal. The proposal was for them to purchase the condo land. The terms of the joint venture provided that projected profits generated on the condo sales would be split among the parties based on their respective interests. Edgar and Ed agreed to represent the sale of the condos, thus remaining involved in the transaction to its conclusion.

The joint venture agreement was presented to both the condo landowner and the retail developer. All agreed and the transaction was closed on September 6, 2002.

The bottom line is the exchange transaction involved 16 properties in 4 states. Everyone’s needs and wishes were accomplished utilizing a 1031 Exchange and in the best tradition of the Society’s mission – Service, Experience and Counsel- a successful transaction was achieved.

Editor’s Note: The Society of Exchange Counselors each year presents an award for the most creative transaction to a member(s) who has closed a transaction during the year that best exemplifies the Society’s commitment to “Service, Experience and Counsel.” The award is named after Cliff Weaver, S.E.C., one of the most creative real estate brokers in the illustrious history of the Society. This year’s award winners are Edgar Lopez, S.E.C. of Las Cruces, New Mexico and Ed Killian, S.E.C. of Reno, Nevada. Here is their story.