Monday, May 01, 2006

"Major Issues"
I generally discuss the key points of my investment research under the heading Major Issues. This will include economic opportunity, risks and some boiler plate disclosure. Peeling back a deal will reveal one or two prime opportunities risks that need to be exploited or overcome for a deal to be successful. When I talk about deal here, I am discussing TIC transactions. Here are some examples of "Issues" that have recently been seen.

  • Long-Term lease to WalMart (great). The lease never increases nor has revenue participation (bad). The deal has become a pure cap rate play with cap rates near historic lows.
  • Majority of tenant leases due in the year the deal is supposed to be sold and when the debt is due. Becomes almost pure lease bet and whether the sponsor can get that property leased at a level that will make it attractive to a buyer at a favorable price or at least get the debt refinanced.
  • Majority of leases below market. A deal had a majority of the leases up to $4 per sq. ft. under market. Again, a lease play, which if the sponsor successfully implements will be great for investors.
  • Negative leverage on an apartment deal. Discussed before. Need outsized rent increases to turn to positive leverage and to justify the low cap rate paid for the property.
Most deals, in my opinion, can be narrowed down to several main risks/opportunities that the sponsor will need to properly manage for investors to have a chance at success. I don't feel this is bad, but investors need to be compensated for additional risk. Investors were not compensated for the WalMart deal, in my opinion, but where (at least on paper) for the second example.

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