International office project analysis

[Vikram C.]

Guys, I have an investment opportunity outside the U.S. and would like to have the opinion of the more experinced RE investors on this site. Although the project is outside the country, I think the same principles of investment will apply to it, except that I may have to give you more background information. So here goes. . .

1. Macroeconomics. The project is in a large city in India, whose economy has been growing at about 9% annually for over a decade. Rents have been growing at double-digit rates for over a decade and the demand for office space continues to grow as multinational companies set up and expand their back-offices here. In short, the economic outlook is excellent with the city's "GDP" doubling in size every four years.

2. The project. The central business district (aka CBD or "downtown") has very little vacant land. One of my friends, who is a small developer, has identified an opportunity to build an office building in partnership with the owner of one of the few vacant lots in the CBD. Based on the local zoning rules, the building will have 280,000 sq ft of rentable space. The rent will be $1.50 per sq ft per month at current exchange rates, which works out to about $5 million per year. Three tenants have signed agreements to lease the offices once it is completed (which is a normal practice here as builders tend to build with leases prenegotiated). The tenants are all well-known multinational corporations. The leases are for 3-years renewable for two subsequent three-year leases, each renewal being at a 17% higher rent.

3. Project structure. This is where it gets a little complicated, at least for me. The land owner, in return for allowing my friend to build the office building on his land, gets to keep 25% of the rent. In addition, the duration of the deal is only 30 years, which means that after thirty years the entire building goes back to the landowner and my friend is out of the deal. The project will take 3 years to complete, which means the rents start coming in only after three years.

4. Financing. This is where my opportunity lies. The project is going to cost about $17 million of which bank financing is for $10 million at an interest rate of 13% per year. That means $7 million in equity is needed. My friend is willing to give me an 85% stake in his part of the deal (which is itself only 75% of rents for 30 years) in return for funding.

My questions are:

a. Have any of you worked on deals like this? If so, can you give me some insights from your learning from your experience?

b. The deal structure is actually quite normal here. But what are some of the things that I should be careful about even if this is a normal way to do things?

c. I do not like investing without the active partner having some skin in the game. But my friend, the small developer, cannot invest much. How much should I expect him to invest at a minimum?

d. He has asked for 15% of the equity in return for putting the deal together and managing the permits, construction, etc. That seems reasonable to me. But since he does not have much money, should I try to negotiate a higher percent of the deal?

e. Finally, in your overall opinion, should I even invest in this type of a deal? I understand this is a very broad question, but I am trying to get a sense of what your gut tells you about this deal.