Creative Currency
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Financing Focus.
Creative Currency.
Unlock your property’s potential with Equity.
In today’s real estate climate, making your property more marketable requires creativity and an open mind. Owners need to expand the benefits their properties offer. Along with physical aspects and pricing, the structure of the transaction, and your capabilities and expertise all figure into the formula. The key to completed transactions is determining which benefits appeal to a particular buyer and still provide the same or better benefits for you, the seller.
In the late 1970s I discovered that incorporating value other than cash is what helps to close transactions. That other value is equity — in the form of real estate, paper or notes, or even a particular skill. These additional forms of equity are a property’s hidden currency.
Transaction Structures
A willingness to look at different transaction structures can be a very positive step toward broadening the market for your property. Below are a few examples of transaction structures I have used to help property owners increase their properties’ marketability.
If the seller’s objective is to raise capital for a business, a sale-leaseback of the property provides a way to acquire the needed capital and create an investment for a potential purchaser that offers an appealing return. Many triple-net-leased retail, office, and industrial property transactions are sale-leasebacks. Small property owners may do this as well. It is an excellent way to fund a business expansion or other projects.
Owner financing also can help a buyer acquire a property. In this time of tight credit, it may be the only way to bring the parties together. Later the owner can sell or exchange the note for cash or other real estate. A note is generally more liquid than real estate and therefore many investors are willing to look at taking the created note as part of another property’s purchase price. There also is a large market of note buyers who will consider paying cash for the note at some value.
If a seller needs to extinguish debt on a property, another option is selling at a discounted price with the option to buy back the property in the future. This approach also offers the buyer an excellent return on his investment during his interim holding period (compared to what he could get for his cash in a money market account or CD).
For example, I was involved in a transaction a few years ago where a developer had acquired a land parcel to develop into retail/restaurant pads along with two hotel sites and an apartment site. The market changed and he asked me if I could help him get his debt paid (about 20 percent to 25 percent of the property’s value when fully developed) and give him the opportunity to develop the property when the market returned. Through a marketing session, we found an investment partnership that was willing to acquire the property for a little more than the debt and give the developer an option to repurchase the property within two years for a reasonable return on their capital. The new buyers were comfortable with their security in the real estate and the return they were going to receive on the repurchase. The developer freed up his credit line, took a liability off his balance sheet, and still had the opportunity to move forward with his development at a future date.
Exchange techniques also increase the marketability of your property. Early in my career I owned a small apartment building near a university. The university was interested in acquiring it, but after a couple of months, we were still far apart on the value, and it looked like we might not be able to come together. I asked if the school had any surplus property, since universities often receive property donations that are not in locations where the school can make use of them. The university had a tract of land it couldn’t use and offered to include it in our transaction. The value of that land brought us to a figure we were both comfortable with and we completed the transaction. I sold the land after a few years and realized a nice profit out of that part of the transaction.
These and other formulas are used every month in national and local marketing sessions and individually by well-counseled real estate investors and knowledgeable brokers schooled in formulas and techniques.
There are numerous combinations that can help a transaction come together if you keep an open mind. Using your own skills, expertise, and experience to dispose of property and acquire new opportunities will help you to profit from your real estate ownership in any phase of the real estate cycle.
Bill Richert, CCIM, SEC, is president of Richert Properties in Tulsa, Okla. Contact him at brichert@sbcglobal.net .
Reprinted with permission from Commercial Investment Real Estate, The Magazine of the CCIM Institute, Jul/Aug 2011, Vol. XXX, No. 4.
