Perseverance Pays Off in Industrial Portfolio Sale
A well-occupied industrial portfolio consisting of class A buildings located in the thriving Rio Grande Valley on the U.S./Mexico border is an easy sell, correct? Unfortunately, as Michael A. McMahon, CCIM, SIOR, learned, properties that look good on paper don't necessarily guarantee quick sales.
“This was not an undesirable property, but one that was very unique and very difficult to sell,” he explains. Although the sale was arduous, it wasn't without its rewards. Last October, McMahon received the San Antonio/South Texas CCIM Chapter's Big Dog Award for closing the largest commercial transaction of the year and its Tough Dog Award for “the deal that took the most persistence and perseverance to close.” He also received the 2002 William E. Fleming Commercial Realtor Distinguished Service Award from the San Antonio Board of Realtors' Commercial Industrial Division.
Selling the Rio Grande Valley
McMahon entered the commercial real estate industry via a circuitous route. After receiving a business degree from Southwest Texas State University and completing active duty in the Marine Corps, he worked for seven years in hospitality management, marketing, and sales with Westin and Marriott hotels. “Liking sales, but not management,” he left the hospitality industry and attempted to start a “western ranch concept catering to conventions,” but the project lacked capital, he says.
Unsure of his next career move, McMahon joined a friend's industrial real estate company as a commercial/industrial agent. After working in the industry for several years, he started McMahon Properties, specializing in the sale, leasing, and site selection of industrial properties in southern Texas.
McMahon decided to take CCIM courses “after seeing several of my peers who were CCIMs utilize their knowledge and expertise in marketing and selling industrial properties.” He received the designation in 1993.
Although his primary market is San Antonio, he “started working along the border by accident in the early 1990s” when a national transportation company asked him to find an industrial site in Laredo, which is 150 miles south of San Antonio, he explains. After discovering the area's potential, he began investigating other border cities. While exploring McAllen, a city 9 miles from the Mexico border that contains a foreign-trade zone, McMahon began a relationship with a local industrial developer and eventually sold the developer's 10-building portfolio to First Industrial Realty Trust. This transaction sparked his interest in selling other industrial portfolios.
“Now that national developers and investors were discovering the opportunities in Mexico and along the border, I continued looking for investment opportunities,” he says. While shopping around, he learned that another real estate investment trust, Security Capital (now ProLogis), was considering selling its 14-building, nearly 1 million-square-foot portfolio in Brownsville, the southernmost Texas city adjacent to Matamoros, Mexico.
McMahon jumped at the opportunity, as the portfolio appeared to be a sure thing. “The main portion of the portfolio was located at the Brownsville airport, was well occupied, and consisted of class A bulk industrial buildings,” he describes. Some of the buildings were located in Harlingen and Edinburg, also in the Rio Grande Valley. His efforts to find a qualified buyer for this portfolio began in early 2000.
However, the portfolio's problems quickly became apparent. Although the area had potential, it had yet to appear on investors' radars. “Several of the investors I spoke to had no knowledge whatsoever of these Texas cities,” McMahon says. “They were not even considered third-tier investment cities,” and some of the investors refused to make the journey to look at the portfolio.
McMahon began an extensive marketing process, including compiling industrial data that was not previously available and taking prospective buyers on numerous property tours. Many investors “saw the [area's] opportunities, but a market that was totally different and greatly dependent on the maquiladora program,” he explains, referring to the practice of U.S. companies operating manufacturing and assembly facilities in Mexico while performing service operations and warehousing in the United States.
Luckily, McMahon learned that the Sealy Cos., a full-service commercial and investment real estate company in Dallas, wanted to expand its portfolio, so he pitched the sale to them. “They had investigated industrial opportunities in Mexico, were familiar with the Texas border cities, and felt there was a lot of upside by acquiring the portfolio,” McMahon says. Also, by purchasing the portfolio the company would become the largest industrial landlord in the area, and “through its development experience, Sealy could grow the portfolio throughout the border region,” he says.
In May 2000, Sealy signed a letter of intent, and three months later both parties executed the purchase agreement. Unfortunately, another setback emerged during the phase 1 site assessment. An inspector found environmental contamination at two of the properties, and Sealy submitted a termination letter in December because its lender would not allow environmental problems.
Determined to complete the sale, the buyer hired an environmental consultant who found that the contamination came from adjoining properties. Remediation efforts began, and in May 2001, Sealy agreed to reinstate the purchase agreement with a four-page amendment. The amendment outlined a time frame to correct the environmental problem and a new financing contingency from the lender.
But the crisis was not over. This time around the lender was concerned that the remediation was taking longer than anticipated and withdrew its commitment, forcing Sealy to submit a second termination letter in June. At that time, the portfolio's largest building suffered a severe vacancy and was dropped from the acquisition, further weakening the deal.
Sealing the Deal
McMahon refused to allow the setbacks to derail the deal. “The pro forma showed that this was a good deal — the returns and the upside were there,” he says.
Although “every party had their doubts it would ever close,” he worked around the clock to convince everyone involved that the transaction was worth the trouble. After studying the market and its demographics, he accompanied the buyer in taking potential lenders on tours of the cities and properties. “You really have to know the market and the product and be prepared to answer the penetrating questions” from lenders that have money at risk in a market they are unfamiliar with, he says. McMahon stayed in constant contact with Sealy, reiterating the portfolio's upside, the area's potential, and business opportunities made possible by the North American Free Trade Agreement. He also frequently reassured the seller that the deal actually would happen.
Finally, the parties reinstated the purchase agreement in October. The original contract contained a second amendment, which extended the feasibility period, and a third amendment that set out a new and final closing date. The transaction closed in December 2001.
McMahon believes you should never give up on a transaction if a possibility of it closing remains. In addition to a buyer with tremendous patience, “persistence really did pay off on this transaction,” McMahon says. He learned that “you have to stay involved — large deals don't just happen.”