written by
Rocco Cortese

A Detailed look into general partner investing and navigating a deal through a pandemic

Throughout my years raising capital for our real estate investments, I have encountered a few investors who ask how they can be the General Partner instead of the Limited Partner in a deal. The first thing that would come to mind when I heard those questions is: Invest thousands of hours in learning a complex industry, and hundreds of thousands of dollars into people and technology, and you will be just getting started. Putting together a successful commercial real estate deal is not for the faint at heart or the inexperienced. It takes years of hard-work, talented people and you have to actually find the right deal in a very competitive market. That said, Ingenuity, Collaboration, and Stewardship are core values of our firm so we always tried to find a way to give our investors a taste of the General Partner “like” returns by targeting value add properties with higher return scenarios.

 

During the Pandemic, we were raising our second Fund and in March of this year (2020) we purchased an office property. Bad timing? Not really. We still love the deal and our basis, and in fact, feel very bullish about the long-term opportunity to generate a strong return for our investors. The structure in that deal, however, was a little different. We had a joint venture partner in that property, and our Fund was acting as the General Partner. All of the returns from the Joint Venture, including carried interests that we would be able to earn in excess of the property level returns, were set up to inure to the Fund. This structure effectively put all of the Fund investors in the role of General Partner. Normally, this scenario is structured a little differently with investors only earning a percentage of the carried interest. However, because we were using Fund equity as the General Partner capital, we felt that sending 100% of the carried interest to investors was the right thing to do. Considering the risk that the Pandemic has thrown into the market, we’re happy to have that structure in place and are optimistic that the returns will ultimately play out in a significantly positive way for our Fund.

As we approached the structure of our last deal, we started to consider the concept in a more meaningful way for future deals. Our research returned that the GP Co-Investment structure seemed very appealing for us as we continued to build our investment practice. We had just built out a new strategy for acquiring logistics based industrial in markets west of Denver and realized that we could lever our personal capital more effectively if we brought in GP-Co Investors in multiple deals. They would have the opportunity to earn a 10% piece of our carried interest effectively allowing the individual investor to earn greater returns than our institutional limited partners when measured against project-level returns.

Sometimes unexpected situations create opportunity. Not only did we develop a new and exciting investment strategy, but we were also able to create an investment structure that helped us address the requests of those who wanted to be General Partner in some of our deals. The thousands of hours, and hundreds of thousands of dollars invested in people and technology, along with a little entrepreneurship, helped us put our private investors one step ahead. We’ll still do all of the heavy lifting of course and continue to focus on enriching the lives of those we serve (whether they be GP’s or LP’s)!

Autumn Valencia is the Marketing Coordinator at Intersection, providing strategic marketing expertise to support business objectives across company divisions. For general and marketing inquiries, please contact Autumn at avalencia@intersectioncre.com 

written by
Dan Leon & Anton Myskiw

Research shows a significant pipeline of industrial demand, can we THINK™ like supply chain managers to predict where it will go?

 

Our team hopes everybody is staying safe and healthy during these unprecedented times. 5 months ago, California and our office went into a state of lockdown. Businesses temporarily shut their doors, some fully closing in consequence. The state of the economy and real estate sector shifted overnight. The industry collectively held their breath in anticipation of what was to come.

Friday, March 18th, we were both new to the functionality of working-from-home. We sat on a Zoom call that morning discussing the market implications, whether it was derived from Peter Linneman’s Webinar or general market sentiment. The bottom-line from our discussion was that our firm needed to take a proactive approach to recent events and that a refresh in our investment strategy was necessary. Through significant macro & microeconomic research over the course of the next two weeks, we arrived at a high-level strategic concept of pursuing logistics-based industrial assets. Once we had a foundation, we needed to piece together support around this idea.

Two primary drivers reinforced our reflections: the rebirth of domestic production (offshoring to onshoring manufacturing) and the surge of e-commerce.

Over the past 2 years, retail e-commerce sales, as a percentage of total retail sales, have increased by 500 bps. The volume of those purchasing staple and discretionary items at the touch of a button has only increased from the onset of the virus, with many market experts believing in an irreversible shift from traditional brick-and-mortar sale. The previous, intertwined with the growing argument for domestic manufacturing, invokes the need for logistics-based assets in the near future. The fact that the opportunity cost margin of offshoring production of final goods is shrinking, due to on-going trade discussions/uncertainty & increasing labor costs overseas, supports the prior. Our vision encapsulates these market shifts, in our pursuit of suburban distribution centers (best utilized for same-day delivery), city-center distribution centers (1-2-day delivery), and manufacturing facilities.

As a result of this accelerated e-commerce adoption, the increased inventory levels required by retailers could generate square footage demand for logistics-based industrial equivalent to the total supply of industrial assets in the Inland Empire. Now that we have our rationale behind the investment, where does the demand go, and how do we intend to capture it? That’s where the proprietary THINK™  process came into play. Our team developed a quantitative site selection formula that incorporates the use of multivariable regression analysis to find markets that are best positioned to serve future logistics operations.

In effect, we had to understand what drives the logistics industry, where supply chains would thrive, and ultimately, we had to THINK™ like a supply chain manager.

If you have any interest in learning more about the acquisition & financial criterion within our 3rd offering, please reach out to the experts at Intersection.

written by
Emily Bane

Intersection Completes 1031 Exchange for Long-Term NNN Lease

Intersection represented South Lind Square, LLC in the 1031 exchange which resulted in the purchase of the Safeway at La Toscana Village in Tucson, Arizona for $10,750,000. Intersection Managing Director Mark Hoekstra and Senior Director Rob Kerr represented the buyer, Greg Cortese of The Royston Group represented the seller. 

The 46,798 square-foot retail property is located at 7110 N. Oracle Road, Tucson, AZ 85704. The retail center is situated in a densely populated, affluent and developing area of Tucson. The Safeway building is one of 14 that comprise La Toscana Village, which is anchored by national retail tenants, and located at a heavily trafficked intersection at N. Oracle Road and W. Ina Road. 

Originally built in 1992 and renovated in 2014, 7110 N. Oracle Road is 100% occupied by Safeway in a 20-year NNN lease with options and regular base rent increases.

The property was part of the buyer’s upleg for their 1031 exchange, acquired at a 5.2% cap rate. The lease was corporately guaranteed by Albertsons Companies. Financing for the transaction was provided by 40/86 Mortgage Capital with the assistance of Charlie Robinson of NorthMarq.

Intersection was approached by the buyer to identify 1031 exchange opportunities that would provide both a high-quality and safe investment for the family that met their long-term goals, requirements, and criteria. 

“The process involved the thorough evaluation of numerous properties of all types across a diverse range of desired geographic locations nationwide,” said Kerr. “In the end we were able to identify a number of great options that met requirements, and the client settled on this excellent Safeway investment in Tucson.”

Emily Bane is the Marketing Coordinator at Intersection, providing strategic marketing expertise to support business objectives across company divisions. Contact Emily at 619-819-8725 or ebane@intersectioncre.com

written by
Emily Bane

Intersection Completes 1031 Exchange to Reduce Clients Stress and Increase Cash Flow

Intersection commercial real estate represented Elizabeth H. Riggs Trust in the 1031 exchange which resulted in the purchase of Barons Market for $4,650,000 at the Menifee Lakes Plaza in Menifee, Calif. Intersection Senior Director, Kyle Clark, represented the buyer, CBRE’s Newport Beach office represented the seller Menifee Lakes Plaza, LLC.

The 17,854 square-foot retail space is located at 29787 Antelope Road, Menifee, CA 92584. The building is one of 13 that comprise the new, 138,000 square-foot Menifee Lakes Plaza, located at the intersection of Newport Road and Interstate 215.

The property served to complete the 1031 exchange for the buyer, who was selling their apartment building for a less management-intensive asset to provide stable cash flow and preserve her monthly income in the years to follow. 

Clark was approached by the buyer’s son to identify a single-tenant property under a long term NNN lease while avoiding high risk tenant types such as restaurant chains or traditional retailers. After searching nationwide for suitable properties, tying up two other prospects that failed during the due diligence review, Clark identified the Barons Market property.

“It was close to home, yet provided an attractive cap rate and return similar to other out of state alternatives,” said Clark. “Since closing on the low maintenance property, our client is thrilled with her increased cash flow without all the management headaches.”

Emily Bane is the Marketing Coordinator at Intersection, providing strategic marketing expertise to support business objectives across company divisions. Contact Emily at 619-819-8725 or ebane@intersectioncre.com

written by
Dan Leon

The Second Acquisition in a Portfolio Delivering Strong Cash Flow for Investors

CARLSBAD, Calif. – San Diego based commercial real estate management and investment advisory firm Intersection announced the closing of escrow on La Place Court in Carlsbad on Feb. 12, 2020.  The office property is the second procured by the company for the Intersection Diversified Value Fund (IDVF), which provides investors with a portfolio of properties that have in-place cash flow and high potential for appreciation.

La Place Court offers 81,965 square feet of office space on a 4.58-acre campus with two office buildings.  Historically, the property has maintained a high occupancy, and as of closing, 90% of the property is leased.

Intersection acquired La Place Court from Swift Real Estate Partners, represented by Louay Alsadek, for approximately $15.8 million.  Financing was completed by CBRE Capital Markets team Bill Chiles and Scott Peterson.

La Place Court is the second property in the IDVF, which is targeted to acquire $60 million in properties with approximately $25 million in equity according to Intersection Director of Acquisitions Dan Leon.  The fund’s other property is Oberlin Court in Sorrento Mesa, which was acquired in May 2019.

“We feel that the risk adjusted returns for this product type are solid, especially given the continued strength of the Carlsbad submarket as indicated by increasing tenant demand from the technology sector, improving workforce talent, and strong demographics,” Leon said.

With this acquisition, Intersection officially plants their flag in Carlsbad, with plans to be a tenant of La Place Court providing on site brokerage and management services.

“Having ownership on site enhances the value of the property for investors,” said Intersection Senior Director Henry Zahner, who represented Intersection in the sale.

“By having a presence at La Place Court, we’ll be in a unique position to familiarize ourselves with both the property and its tenants,” said Zahner.  “Furthermore, we will gain valuable insights in leasing remaining space.”

Leon added, “Being on site is all about the delivery of best-in-class service.  It means being there for our tenants.” 

Quality of service is a hallmark for Intersection, which is led by Rocco Cortese and Mark Hoekstra.  With more than 60 years of experience in the real estate industry, Cortese and Hoekstra have built a customer-focused team that is providing investment, brokerage, and management Concierge services in the commercial real estate industry.

With this focus in mind, Intersection plans to modernize the property by integrating a seamless connectivity between indoor and outdoor working environments.  Leon says this will create an innovative atmosphere at La Place Court, attracting a cohesive tenant mix that lays the groundwork for collaborative opportunities among tenants.

La Place Court promises to be a truly unique work setting that already offers tenants convenience and high-end amenities.  Located in the prestigious Carlsbad Research Center, the facility boasts exceptional access to Interstate 5 and Highway 78.  With the McClellan-Palomar Airport less than one mile away and being centrally located between San Diego and Orange County, the property provides an ideal hub for doing business in Southern California.

“By acquiring a high-end asset at below replacement cost, we’re providing investors with a portfolio that enhances short and long-term appreciation,” Leon said.

Opportunities to invest with Intersection will remain through 2020 as the team continues to secure properties and raise capital for the IDVF. Inquiries about the fund or investing can be sent via email to investors@intersectioncre.com.

Dan Leon is the Director of Acquisitions, managing the performance of the funds and investments sponsored by Intersection. Contact Dan at 619-541-6070 or dleon@intersectioncre.com

written by
Rob Kerr
Sale-Leaseback Overview

In commercial real estate sale-leaseback transactions, a property owner sells real estate used in their business to an unrelated private/institutional investor or other third party.  At the time of the sale, the property is leased back to the seller for a mutually agreed upon time period. It is generally structured as a 10 to 30-year triple net lease and often includes renewal options.  If executed successfully, a sale-leaseback will be mutually beneficial to both the seller/lessee and buyer/lessor.  All parties must give careful consideration to the business, tax advantages and disadvantages associated with this type of arrangement.

 
Seller Advantages
  • Improves bottom line —company can focus on their core operational business resulting in potential increased returns, productivity and efficiencies.
  • Seller receives 100% of property value (subject to possible capital gains tax) versus conventional financing or re-financing options with likely more favorable terms and without the associated fees and possible covenants.
  • Reallocation of capital/reinvestment of sale proceeds.
    • Funds available for dividends, re-purchase of stock, debt payments or financing of mergers and acquisitions.
    • Conversion of non-earning assets into investment capital provides flexibility and often results in potential higher return on capital/profitability.
  • Improves balance sheet and credit standing – eliminates asset book value and liability and replaces with cash resulting in improved financial ratios.
  • Position the company to take advantage of beneficial tax treatments.
    • Lease payments versus depreciation/interest deductions which may have inherent limitations, especially over time.
    • Timing of gain and loss recognition including the ability to offset expiring net operating losses.
  • Typically, a higher sales price is achieved in this type of transaction unlocking the property’s appreciated value while owner/user maintains occupancy.
  • Can act as a deterrent to corporate takeovers.
 
Seller Disadvantages
  • Loss of residual property value.
  • Possible relocation at the end of the lease term.
  • Potential for some loss of flexibility.
  • High rental payments if market softens.
 
Final Thoughts

Sale-leaseback may be an excellent way for a company to continue uninterrupted use of the property while retaining certain control over the real estate that is important to its operations for the foreseeable future. It also enables the company to free up debt and equity capital to achieve some of the various advantages listed above. Generally, the possible seller advantages outweigh the potential disadvantages. While there are certain marketing and legal restraints, with the right advisers the transaction can be carried out, the value is maximized, and the company’s operational interest are adequately protected during the term of the lease.

Rob Kerr is a Senior Director at Intersection, offering expertise in both property acquisition and disposition as well as investment sales, including NNN, retail, industrial, and multi-family. Contact Rob at 619-369-2400 or rkerr@intersectioncre.com

Read More Insights

Insights

Intersection. A Company Driven By Integrity.

Read Article

Insights

Crowd Funding-2.0 Is the JOBS Act starting to take hold?

Read Article