Triple net lease portfolio- how to split with partner?

Question

I have been in a partnership with my father-in-law for about 15 years wherein we bought land on a major interstate frontage road and developed & built commercial office warehouse buildings (we still have 10 of these buildings after selling off several over the last 4 years). All the leases are triple net. We then bought a property that had two 10,000 sf storefront office space buildings which are separately metered for electricity but share water/sewer. However, i then designed & built a bank building on the front of this property at a major intersection in town, with a 10 year lease with two 5 year options (I have is also triple net lease)

Now of course the partnership is strained because my father-in-law & I have been at odds for a few years. He taught me the commercial masonry business over 25 years ago (which I  own separately). He then taught me the development & commercial real estate business. However, he was pretty much self taught & we never really ever discussed cap rates, NOI, etc. which I am learning about here on BP! We mostly talked about the buildings & their values as "cost per square foot" & does it cash flow.

Now we are starting the process of dividing the partnership or selling off the buildings & I want to price them right. Because he has many other sources of revenue besides our partnership he just wants to be rid of the properties not caring about the financial impact on me. These buildings gross over $1,250,000/year NOI=$960,000/year. We have always managed the buildings ourselves. Because they have been in the heart of the oil boom country we have had no vacancies since 2008/2009. But therein lies the new wrinkle, we all know where oil is right now...in a down cycle. The cap rate in the area for these types of buildings is 10%-11%,

Finally! the question(s):

Is it best to try to ignore any discussions of psf prices when dealing with an old school "partner"?

What other analysis should be done to truly value the cash flow from these industrial buildings?

How do I quantify the impact the slowdown in the oil economy has on the value of the cash flow (other than increasing my calculation for vacancies which I am sure will increase if oil does not rebound soon)?

Are there other analysis or discussion points I need to be considering?

I haven't really posted much but I sure read a lot on these forums as well as listening to the podcasts! It has been such a tremendous resource I became a pro member! Thanks in advance for reading my too lengthy post!

Percy N. · Answer

@Jason Moore, I was going to suggest a 3rd party appraisal as well and then you can decide if you want to buy him out or bring in a new partner. Sounds like there may be sufficient value here to attract some small hedge funds or family offices?

Regardless of the appraisal value, the assets are only worth what someone is willing to pay at that point in time (ideally as a package).

Since you say he has other financial sources and is not that concerned about this one, perhaps you want to have your wife ask him whether he would like to gift it or sell at a reasonable price to his "princess"?  ;-)

Howard Abell · Answer

Why not get a third party appraisal on current valuation so you can take that issue off the table? Both of you must agree on the outcome, of course.

Jason Moore · Answer

Thats a great point @Joel Owens! Y'all have been very helpful!

Joel Owens · Answer

When you sell you look for "highest and best use" and time frame to sell.

One avenue might get you 300,000 more but the process takes 6 months instead of 3 etc. and has multiple ways the deal could fall apart.

So you have to ask yourself how fast you want to be out of this partnership and what it is worth to you?

Joel Owens · Answer

Jason look into a commercial BPO. Similar to an appraisal but not as technical and cost usually under 1k.

It depends on how many properties are being analyzed. Commercial brokers and also appraisers do them. If an appraiser expect turn around time to probably be awhile. They will work on the fat full order appraisals first and get around to the BPO's when they can.

You can contact an appraiser directly for a BPO or try to order through a BPO mill. You will have to find a mill that does one off orders though as some only take bulk requests of hundreds of orders at a time or higher.

Calling the local commercial appraiser familiar with your asset class directly makes sense.

Joel Owens · Answer

Do you have operating agreements in place or just did the handshake thing because you were ( family ).

The operating agreements should spell out how each partner will be allowed to exit etc. Also before forming these partnerships you should have started with the end in mind. Hopefully you set this up where you can keep a 1031 to defer depreciation recapture and long term capital gains taxes.

That will eat into your returns upon sale very heavily whereas a 1031 with a QI Intermediary is a few k typically at most.

Triple net lease portfolio- how to split with partner?

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