The Deal Is in the Details

Doing the Deal Depends on the Circumstances, But There's Always Something to Learn from Unique Commercial Transactions.

You may not often have the chance to find a home for 1,000 greyhounds or convert a historic, 60-year-old grocery store. However, when the opportunity arises, it pays to be prepared.

What defines a unique deal? It all depends on where you are and what you usually do. Of course, there's not any one way to do a unique deal; they're unique, after all. Whether you're dealing with an unusual piece of property or assembling a successful financing package, creative transactions depend on a number of common threads-patience, perseverance, and the ability to weave an incredible number of loose ends into a solution that satisfies everybody.

Six commercial investment real estate professionals who have worked on transactions they consider unique cite a number of factors for their success. Though their circumstances and approaches varied, the six echoed several common themes: Build trust with your customer. Work the details. Above all, don't shy away from the out-of-the-ordinary-even if it's something you've never tackled before. Today's unique deal may become your next bread-and-butter transaction, as you look for opportunities to use your newfound knowledge and experience.

A Crowded Closing
The property was the least-unique aspect of Steven Pettit's deal. Instead, it was the complexity of the transaction. Pettit, CCIM, handles mostly commercial properties for RE/MAX Realty Marketing in Goshen, Indiana. In early 1995, not long after listing a Ziebart business and real estate, he got a call from a former client to whom he'd sold an industrial building. The man and his wife had renovated the building, filled it with restaurants and shops, and turned it into a local tourist attraction. It was right across the street from the 8,000-square-foot Ziebart property.

"He thought the Ziebart might tie in with his building," says Pettit. "While people were getting their cars done, they could go across the street, have lunch, and shop."

Though the buyer had some cash to invest in the project, he asked Pettit about other ways to structure the purchase. One bargaining chip was a commercial parcel northeast of town that the buyer owned free and clear that would incur a large capital gains tax if he sold it outright.

Because the buyer had both cash and land, Pettit combined a reverse exchange and an installment sale to close the deal. The buyer transferred the commercial parcel's title to a qualified intermediary; the tax-deferred proceeds from its sale would then pay down the loan on the Ziebart building.

In the interim, the buyer got an 80-percent bank loan for the real estate and an 85-percent loan for the business assets. The seller carried a 50-month note to make up the difference. In addition to the two property parcels being handled-and the business transfer-Pettit also had to negotiate with Ziebart to ensure proper transfer of the franchise, as well as with the holder of the land contract for the Ziebart real estate.

As a result, says Pettit, the closing was crowded: both buyer and seller and their attorneys, a representative from the bank making the loan to the buyer, the land contract holder's attorney, a Ziebart representative, the intermediary (via phone and fax from California), and Pettit himself.

Pettit credits his CCIM training for making the deal run more smoothly. "It was the most complicated transaction I've ever done-no question about it," he says. "I hadn't done a lot of tax-deferred work previously, and it gave me a chance to use a lot of things I'd learned in the classes. Had I not had CCIM classes, I might have had difficulty getting it all done.

"The other thing is that I felt like the buyer had a lot of confidence in me-he knew I knew what I was doing, and had he not, it would have been difficult to get done. They hammer on that in classes, too-you've got to have the relationship with the individual to get these kinds of things done."

Breaking Up a Baby Box
Tom Rohde, CCIM, faced a different set of problems when it came to finding a new use for a 21,000-square-foot grocery store. Fortunately, his experience will probably give him a leg up on the wave of the future-adaptive reuse of surplus small- and big-box properties.

In 1994, Rohde's wife's family, along with a group of investors, purchased the empty HEB grocery store in Olmos Park, a gentrified older neighborhood in San Antonio. The store, built in the 1930s, was one of the first 10 built for HEB, a regional chain of grocery stores.

Rohde, the retail specialist for Rohde Realty in San Antonio, operated as the developer and leasing agent for the project. He knew the store could be divided, but because of the space's characteristics, he would have to be careful about choosing tenants. So, he says, instead of using mass-mailing solicitation, he targeted tenants he thought could fit the space and he approached them directly.

The first tenant Rohde landed was Blockbuster Video, which took the 8,500-square-feet storefront area. That left the side of the store that faced a street and another side of the store that was a loading-dock area-a bit more challenging in terms of tenant fit.

"The biggest problem with these big-box uses is that they're so deep. They're really set up for one store," says Rohde. The spaces facing the side street could be businesses that could handle in-and-out parking, but it was imperative to find a unique user for the warehouse space. "The tenant mix and the dead-space user was critical," says Rohde. "Otherwise we'd end up with Blockbuster in front, and a warehouse in the back."

The warehouse space turned out to be a good fit for Tuesday Morning, a discount gift chain that operates warehouse-type stores. The developers eliminated the loading-dock appearance by adding stairs and modifying the entrance.

The smaller spaces facing the secondary street were leased to a regional cleaning company and a dry cleaners, and an 1,800 square-foot space is slated for a bagel-store lease. Work on the project began in November 1994; Blockbuster, which did its own finish-out, was open by Christmas of that year, and the other stores began to move in by February 1995. Total investment for the project was about $1.3 million; income stream, says Rohde, is somewhere around $220,000 a year, triple-net.

Using the HEB project as a prototype, Rohde says that he's looking to do more store rehabs. "The market is there. there's no way you can find land in these old areas," he says. "This is typical of a lot of old neighborhoods where the grocery stores are too small-they're moving out to the big boxes. What do you do with the old ones? They've got to be converted into other uses."

Rehabbed stores offer advantages, says Rohde. They've got parking, lots of space-and generally the price is right. "It's a surplus situation," he says.

Seven Properties-One Exchange
Michael Courtney, CCIM, undertook a whirlwind tax-deferred sale when he sold an RV resort and mobile home park on the central Oregon coast last year.

Courtney specializes in recreational properties-marinas, golf courses, mobile home parks, and resorts. Based in Merlin, Oregon, his sales area is the Pacific Northwest, which he covers in a 30-foot motor home-equipped with computer and cell phone-while prospecting for clients. "I just visit people and get to know them, and then when they're ready to do business, hopefully they'll call me," he says. "There's nothing like face-to-face contact."

Courtney got the RV park listing from a prospecting letter he had sent out. The property owner had been trying to sell for a year when Courtney contacted him. The property consisted of about 100 sites for mobile homes and recreational vehicles-with room for some expansion-as well as a condominium development plan for a stabilized sand dune. (The sand dune offered ocean views that lent itself to an upscale development.) The property had some deferred maintenance but the income stream and the development potential were there, says Courtney. The owner didn't have the money tofinish the development, so he decided to put the property on the market for $1.2 million.

Courtney presented the property to his CCIM chapter meeting in Portland and got an exchange offer on it three days later. "Those meetings work," he says.

The offer consisted of a small cash down payment to cover the costs and six Portland-area properties-four single-family homes and two duplexes-that the buyer was bringing in on a tax-deferred exchange.

"What made it unusual was that there was so much to be done to make the thing happen," says Courtney. His seller wanted to turn over properties quickly and get on to another project, so Courtney had to get right to work to verify that the properties were sound and marketable. "We had to investigate all these properties, we had to get appraisals, we had to get a broker who was willing to list them as soon as we acquired title so that we could sell them. We tried to get financing lined up ahead of time. There was a lot of structural work to be done and some deferred maintenance on the properties coming in. We wanted our buyer to take care of all that so that the houses were marketable-so that when we closed the escrow, we could put them right on the market. So we spent the first two weeks full-time just investigating the properties."

In the meantime, the buyer was investigating the coastal property to make sure that he could do what he wanted to do-upgrade the park and start work on a condo development.

"We had a lot of details to take care of in a short period of time," says Courtney, "But we did manage to get it accomplished. We had to set up a facilitator who would accept title to all these different properties, which was kind of difficult to do because they were leery about taking title-they had encumbrances. We only had six months to do this, so it was really risky. But we closed the escrow and put all the properties on the market."

The transaction closed in 23 days; the final price for the property was $1.1 million. "This one was particularly meaningful because of the exchange concept," says Courtney. "That was a real eye-opener on how to structure the transaction so that the facilitator would take these properties, particularly since they didn't know the property. You learn something every time you do a deal."

Dogged Determination
In contrast to Courtney's whirlwind deal, James Ford's most-unique deal took two years to complete. He knew from the start that it could take a while, though-after all, he says, "What kind of a neighborhood could we find that would permit 1,000 dogs?"

When the management of a jai alai facility in Bridgeport, Connecticut, decided to convert to a greyhound-racing track, Ford, a CCIM at George J. Smith & Son in Milford, Connecticut, began working with them to find kennel facilities for the racing hounds. Ford had done some kennel work before on a small scale, "so I'd already had a minor education in the designs required to satisfy kennels and not only keep dogs secure but keep the neighborhood secure from howling and noise," he says. "It turned out what I'd learned before was completely applicable to what the buyers were doing-just on a much larger scale."

The site had to be within a 20-minute drive of the track; more important, it had to be in an area where 1,000 dogs and their neighbors could peacefully coexist. In fact, they ran into trouble with the neighbors when they found their first suitable site, in Milford. The town had already approved some large dog-training facilities and kennels in the zone Ford was considering, but "nothing like 1,000 dogs," he says. The town regulators, however, seemed amenable to the issue, so Ford and his buyers began to move forward with the deal. But the property's neighbors objected strenuously and told Ford "they would expend every possible amount of effort to prevent it from happening," he says.

The buyers decided to continue to look. "The problem was the amount of land required-there wasn't any sufficiently large piece of land at that time available that we knew of," says Ford. The site's intended use proved a sticking point as well. "Everywhere we went in an industrial zone, we found we were going to have to go through the public hearing process in order to get specific and special approval in order to permit this kind of dog intensity," says Ford. "That always gave you some pause, because it depends on how the neighbors feel."

After looking at more than 30 locations over a two-year period, they decided to give a second thought to Bridgeport-which they originally rejected because the buyers "felt that the town would prefer to see just the facility there and not the dog kennels," says Ford. But a site was available, close to the track, and after getting clearance from city hall, the buyers decided to stay in the city.

However, they faced one more hurdle before they had a deal. The owner of the nine-acre site didn't want to sell the land. He had listed the land several years earlier, says Ford, as a build-to-suit situation. "They did not, however, want to be the investors to create a dog kennel," Ford says, "because there was no second user." So Ford set up a long-term land lease on the basis that should anything happen, the tenant would be responsible for removing the facilities and returning the land to its original status. The owner of the land decided to keep a couple of acres for his own use, "so we ended up with something on the order of seven acres," says Ford. "But we made it work."

While the particulars of this deal made it memorable, the work involved was familiar territory for Ford. "What I do a lot of is finding land for people who want to create something, in both Fairfield and New Haven counties," he says. "And both of those-particularly Fairfield-are almost fully built out." Trying to find land for new projects is hard, he says, because the sites available usually are problem sites. "They either have difficult owners or difficult restrictions on them or they have pricing that makes it difficult to make a transaction come together."

Ford says he's had transactions that have been in contract for as long as eight years, while various contingencies were satisfied. "To do this kind of work, you have to be very analytical," he says. "You've got to be willing to do an awful lot of ground work, an awful lot of background work in searching, a lot of code analysis, and a lot of meetings with the bureaucrats to try to find ways to make things work."

For Ford-and the greyhounds of the Shoreline Star Racing Facility-the work paid off. The deal closed in December 1994, the race track owners had kennels built to their requirements, and "as far as I can tell," says Ford, "the neighbors are not unhappy."

Sold on Syndication
Where Ford faces land shortages, Dennis Goodwin, CCIM, lives in an area where land is plentiful and reasonably priced. York, Pennsylvania, where Goodwin is president of Valcour, Incorporated, is home to a number of distribution-warehouse facilities both because of the amount of available land and its location-50 miles north of Baltimore, an hour and a half from Philadelphia, and two hours from Washington, D.C.

So it wasn't a difficult decision for Goodwin's company to start building warehouse distribution centers. But what sets Valcour apart is its approach. "We don't do any kind of general real estate brokerage at all," says Goodwin. "We do real estate syndication." The company has been doing so since 1984 and, he says, is one of the few small real estate syndicators that made it through the 1980s.

Valcour also builds the warehouses on spec. But, Goodwin says, "we know there is a market for the building we're going to build-a large distribution-warehouse type of building that can be divided down to 25,000 square feet."

The company forms a real estate syndication, raises cash from the investors (for its most recent project, $3 million), buys the land, gets the approvals, and builds the building. During construction it looks for tenants through industrial development authorities and other brokers. "Typically the building is leased before the construction is finished," Goodwin reports. "We've never done one where that has not happened."

Once the building is finished, Valcour then manages it as well. Its most recent building is 200,000 square feet and houses three tenants-one tenant with 150,000 square feet, and two with 25,000 square feet each.

The all-cash route puts Valcour in a better position to negotiate with tenants, "because there is no interest meter that keeps ticking every month," says Goodwin. "We can negotiate better terms on our mortgage and better terms with our tenants. It's a little more difficult to raise 100 percent cash sometimes, but after the building is built, we'll go out and look for financing. Once we get financing on the building-depending on the market and our tenants-we can return to the investor anywhere from 40 to 60 percent of the original investment. We have one transaction we did like this about five or six years ago, and so far the investors have gotten back about 85 percent of their investment to this point-and they still have some pretty substantial equity in the project."

Investor enthusiasm is essential to the projects, and Goodwin says Valcour works hard to raise it. "The investors that we have are investing in these projects because of us, because we've always put the investors' interest above our interest," he says. "We pay them first; we get what's left over. If we don't perform, we've worked for several years for nothing. We get some fees out of the deal to pay expenses and so forth, but our significant income comes from the back end of these transactions." The company gives investors a preferred return in a three-stage distribution.

"We really work the deal backwards," says Goodwin. "We look at it and say, 'If the investor is going to make a deal today, what are his options, and what kind of rate of return is he going to be able to get?' We've got to pay three or four points above that when we structure the deal, so then we structure that into those three splits and look at it over the holding period."

Goodwin recognizes that syndication is unique in today's commercial real estate market. "I think the reason why a lot of people don't do syndication is that they really got a bad name back in the 1980s," he says. "Brokerage houses were raising millions and millions of dollars, and a lot of investors got burnt on real estate syndications."

Nonetheless, he adds, "I've told a lot of CCIMs that many are missing the boat in not doing syndications. It's a way for you to have a captive group of investors-you can build relationships with them and build your own net worth by owning a piece of the property. I would say that this isn't for everybody, because it is different. It's not like doing general real estate brokerage; it takes a different discipline and a different mindset to do it. Maybe the attitude is 'I don't want to have to get over that hurdle.' But in the long term you can build some nice net worth by doing it."

History Pays the Way
Cathy Alba, CCIM, had never worked on a hotel deal before she took on the listing for the Maison Blanche building. Alba, a principal in SRSA Commercial Real Estate in Metairie, Louisiana, does mostly investment sales and leases in the metropolitan New Orleans area. But the Maison Blanche was an opportunity she couldn't pass up; the historic 13-story building, constructed in 1906, is the last large property available for conversion in New Orleans' French Quarter. (There is currently a moratorium on hotel construction or conversion in the Quarter, but because the building fronts Canal Street-technically one block outside the Quarter-it was exempt from the ban.)

The building housed the Maison Blanche department store on three floors and office space on the other 10. Given its location and the city's $3 billion tourist industry-buoyed by the recent arrival of casino gambling-a hotel conversion offered plenty of potential.

Visually stunning, the 529,000-square-foot building's glazed white terra cotta facade features ornate cornices carved in a French Renaissance style; it was nominated for landmark designation by the Central Business District Historic District Landmark Commission.

But when Alba took the listing in July 1994, she faced a few obstacles. For starters, the building was already under contract. The owner had found a buyer offering his asking price and had signed an $7.5-million option agreement. The potential buyer wanted to convert the building to time-shares, but the city council wouldn't allow the conversion. The option expired, the buyer threw it into lis pendens, and the deal got tied up in court. "That," Alba says understatedly, "made it difficult to market." She persuaded the owner to let her take on the listing, realizing, she says, that it would take "a creative buyer who wasn't afraid of it."

Besides the building's desirability as a conversion, it also carried another distinct marketing advantage: historic tax credits. In this case, says Alba, they equaled 20 percent of the total renovation costs, which could pay for the building's initial purchase price.

Once she took the listing, Alba showed the building constantly. Some would-be buyers, she admits, were scared off by the legal entanglements, and some were nervous because the location was "pushing the end of the high-traffic area of Canal Street." She talked to interested developers and hotel chains-encouraging, but fruitless if neither side had the money. "One of the more interesting things I learned," she says, "was that where you might assume the flags do their own deals, there are actually multiple pieces-often you need the flag, the debt and equity, and the developer."

In the end, Alba had two 11th-hour offers-one for $6 million and carried interest, the other for more cash but no carried interest. The sellers opted for the carried-interest offer, and once they agreed to do it, Alba says, "we almost went straight to closing"-which took place last December.

Alba's buyer turned out to be a Baton Rouge apartment developer who had done a lot of work with low-income housing tax credits and understood how they worked. The buyer also had connections to a California insurance company that was willing to bank the deal-"they'd worked with him before and trusted his numbers and knew what he was doing," says Alba. The company arranged to buy the tax credits in exchange for fronting the buyer the money to close on the building.

Construction on the building is scheduled to begin in September. The upper 10 floors-about 340,000 square feet-will be turned into a 500-room hotel; the Maison Blanche department store will continue to occupy the bottom three floors. As for Alba, she's ready to try another such deal. "It was interesting to learn and understand the different level," she says. "It's another tier that eliminates a lot of the local guys who are used to doing deals, but not of this scope and size. As a result, I have a file drawer full of the players and the pieces-so I'd really love to find another project that would need the same conversion."

Sarah Hoban

Sarah Hoban is a business writer based in Chicago.