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Commercial
Real Estate Sale-Leaseback
The prototypical commercial
real estate sale-leaseback financing package of the late '90s was the sole
providence of Real Estate Investment Trusts (REITs) where:
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The basic plan
was a commercial real estate development program that produced an ongoing
business operating income-producing assets; and
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The developer
receives a construction loan from the REIT; and
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Upon completion
of construction the REIT purchased the project for an amount equal to the
construction loan plus any agreed upon spread over the cost of developing
the income-producing real property assets; and
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The REIT would
execute a commercial real estate sale-leaseback agreement wherein the REIT
would be the Lessor and the developer would be the Lessee; and
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The REIT would
typically participate in the incremental equity gain produced by the
property over time under some agreed upon formula. In reality, most
REITs focused on keeping the entirety of the post-construction equity gain
for their own account.
Today we find
ourselves in another era that offers possibilities and opportunities the
substance of which cannot be adequately contemplated and the REIT-based
commercial real estate sale-leaseback financing approach has been supplanted by
the fractional tenants-in-common ownership plan syndication.
Why?
The key reasons are:
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The fractional
tenants-in-common approach provides the opportunity for the
developer/sponsor of the syndication to earn-out up to 90% of the real
estate ownership of the project. REIT financing does not typically
consider this issue. In point of fact, most sale-leasebacks require
the developer to pay full market value for the property - isn't that a
bitter pill?
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The fractional
tenants-in-common approach allows the developer/sponsor to take money off
the table as soon as the construction financing escrow closing. The
REIT financing approach does not allow the developer to take any money off
the table; and
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The fractional
tenants-in-common approach provides a greater level of control for investors
in terms of the timely receipt of reporting of the financial results of all
operating and non-operating events; and
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The fractional
tenants-in-common approach allows the developer/sponsor to
"double-down" and increase the development tempo because the
developer will have all of the developer/sponsor's capital off the table by
the time the project achieves fully stabilized operations; and
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The fractional
tenants-in-common approach provides the mechanism by which the
developer/sponsor can access non-recourse commercial real estate development
and construction loans. Most REIT transactions require joint and
several recourse at the personal and corporate level, thus ending the
developer/sponsor's ability to develop future projects because all of the
developer/sponsor's assets are tied up in a single transaction because the
REIT demands a riskless return plus a huge spread as their profit, thus
cutting the developer's assets out from under him/her; and
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The fractional
tenants-in-common approach can provide up to 100% equity funding, thus
eliminating the vast majority of subjective investment risks created by
priority non-operating disbursement obligations that are no longer part of
the transaction. REIT transactions do not have this level of built-in
transaction elasticity and flexibility. Once you sign, you are
obligated and the equity gains you create are not necessarily your own to
keep in the REIT transaction construct.
Want more?
Continued
on to page 2.
Please contact
us with your questions and project proposals.
Contact Information
- Telephone
- 832.659.5009
- FAX
- 206.600.5130
- Postal address
- 15519 Dawnbrook Drive, Houston, TX 77068
- Electronic mail
- General Information: info@realestateplays.com
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