All Forum Posts by: Andrew Tripp

Overall, I liked it.  Robert steps up to the plates and takes big cuts, and I'll always respect someone who does that even if they do swing and miss sometimes.  And I don't think anyone has ever done as well as explaining the investor mindset as he (and his co-author) did in Rich Dad Poor Dad.

Anyone else catch the shade Sharon threw at RK on the BiggerPockets show a few weeks back?  I knew they had a falling out, but I thought that was kind of funny.

RK is one of the more influential financial authors of LAST century.  And real estate never goes out of style, so alot of what he and Sharon said back then is still applicable today.  Their work has helped millions.  But he does seem to believe his own press clippings (Sharon kind of does too if you ask me, but that's a different issue).  However, the most annoying thing about RDPD is nothing to do with RK.  It is that some acolytes have taken what was penned as a basic financial literacy project and turned it into a complete religion.  It's not meant to be treated as some holy text.  It is one method (a good one) to properly organize one area (financial affairs) of your life. And he's no prophet.  But I feel like people, especially younger people, get confused sometimes.  

To me, funds offer two primary advantages over say an individual syndication.  For investors, the deal/strategy diversification already covered above.  For sponsors, a fund enables them to offer speed/certainty in execution to sellers in what is an extremely competitive investment environment for most asset types.  And that will likely get a decent-size fund into position as a preferred buyer on the broker's list when good opportunities come up, either on or off market.  So funds should (in theory) generate the best looks at the highest value/potential deals.  Yeah, there might be some operational efficiencies as well for both the sponsor and the investor.  But those are secondary I think.  Funds cost a decent amount of front-end money to get up and running and require some minimum scale to operate, so you aren't forming one just because it will reduce the number of K-1s.  

The downside of funds is that there is a TON of pressure for the sponsor to spend the committed capital because the sponsor always has its eye on that IRR hurdle it has to meet so it can get its promote. At least with a typical waterfall structure. And maybe some fee income as well. You do see some funds doing some fairly questionable deals (either from a size and/or quality perspective) that are kind of headscratchers. If you are going to invest, make sure your sponsor has access to a very healthy deal flow so that the deals that make it through the funnel are of good quality.

Yes, we are local to Chicago.  Four assets in select submarkets here.  O'Hare/I-90 corridor, and branching out into northern Kane/McHenry/Lake counties.

I like your website.  And nice portfolio coming together as well!
  

@Kim Hopkins, remind me again what the name of your firm is (if you don't mind sharing)?  Sounds like you guys are doing some interesting things.

Also, a couple of people here started a mastermind/networking group for commercial investors (non-multifamily division) where we spending some time doing this kind deal dive on what we are working on. A few industrial-focused investors in there.  If you're interested, DM me and I can put you in touch with the organizers.  Also a FB group to go along with it.  
  

That's looks really skinny for a 2% CoC. If we are taking recourse on the loan, we usually won't dip below 5% for a stabilized asset with the in-place income looking pretty solid for the first few years while we digest the asset. The possible rent bumps aren't adding much (although I would guess markets rents are going to keep going up as inflation sets in). And those improvements will be expensive. Are you comfortable underwriting overall market rent growth to carry the returns upward 3-4 years out? Rising tides lifts all boats type of theory? I go back and forth on that myself. But if the market is that tight on vacancy, users might look past the clear heights and pay the going rate anyway.

If you are going to ask for a credit, I would position it like "hey, you've got issues on the roof, and the opex is a little higher than we originally thought.  We're big kids, and we'll deal with all that.  But the clear height is a problem on the leasing side.  And it will be for any buyer.  We need $X off the purchase price to account for the greater vacancy risk.  If we can get to an agreement on this issue, we're otherwise ready to go hard on our earnest money."  Again, this assumes you are comfortable with the roof as-is and completely ready to go otherwise.

If they balk, I'd move on and then keep in touch.  Our first deal was a stretch from a return perspective in a good market just like this one, and its never made any material amount of cash flow for us despite attempts to raise rents pretty aggressively.  It has helped us build equity that we have used elsewhere though and its pretty low-maintenance, so not a total dud.  But I wouldn't do it over again.
  

@Cole Bigbee, great stuff as usual.  Diagram is super helpful!

@Kim Hopkins that's tight for CoC. Any big value-add possibilities that can justify that going-in price with all the issues or is it all downside risk? Some vacancy to be backfilled, which presents opportunity (and some costs). In this market, I would be prepared to look past the opex discrepancies, and maybe the roof too depending on the scope of the repairs. But I'd at least try to hammer out some reduction based on the clear height, because that will come back on them if they go back to market. Outsider looking in, but lots to like about Phoenix overall as an industrial market. Maybe a long-term growth play if the back end looks promising? Not sure what your hold period will be.

Tough call though.  If you have a strategic need to be in Phoenix, might make sense and just overpay a bit.  If you are looking for a place just to park money, can probably find a better deal elsewhere.  Just my two cents.

 Yeah, a discount is the starting point.  If they balk, then decide whether to terminate (and then negotiate a discount).  This is a problem that isn't going away for them.  But if they had backup offers, then you are out there battling again.  But you are probably going to have to stick to your guns because this will come again on exit.  

How to quantify the discount is a bit difficult.  James Storey has the the right approach I think.  Should be some lease comps out there that can help you build a base case/downside sensitivity analysis.  But another wrinkle is what is the specific leasing strategy for this asset if you have to backfill vacancy down the line?  Is this an airport-based use?  Logistics/freight forwarding use is going to be challenging with a 11'7" clear height (and the other physical dimensions), no matter what the broker/CoStar reports say.  Machine shop/light assembly isn't going to care as much about clear heights.  R&D/flex can probably deal with that kind clear height just fine as well.  Construction-type uses may be tougher as they might not be able to get equipment over a certain size in there.  Retail-ish consumer facing uses might be OK as long as they don't have to rack too much product. 

We had this come up on a deal in the past (that we didn't wind up getting for other reasons) where the building had 12.5 foot clear when market was 15-18 clear.  To be very conservative, we discounted $2 psf off market rents (modified gross) in our projections.  And put in a longer lease-up period. It was a great submarket with very solid underlying demand and supply drivers for small bay space, similar to what it sounds like you have here.  

Hopefully this helps.

A few things come to mind here:

- First off, thank you for volunteering to serve our country.  The SAs are a major commitment, and I applaud you for going that route.  Stay safe and God bless.

- Just get comfortable with the fact that there is going to be a "correction" (however you are defining that term) and it's almost impossible to time.  That's business cycle of capitalism.  What a downturn looks like and when it occurs are very much open questions to which no one (and I mean no one) has concrete answers.  The question investors are always asking themselves is, well, what does this deal look like if things really go sideways, both macro and micro.  And am I prepared for it (to a reasonable extent)?  Personally, I don't have a crystal ball, but I think the economy is going to roar here for the next 2 or 3 years.  People are coming out of the COVID caves.  You can see it and feel when you talk to people face-to-face.  Consumers of all stripes are flush with cash and there is going to be confidence to spend.  HNW folks have made big money over the last 12 months on a variety of investments.  Middle class folks have brimming 401ks, a bunch of equity in the primary residence (and growing) and maybe some wage growth ahead as labor markets continue to tighten.  And with an activist federal government pumping money directly into the economy, even the lower classes have some breathing room.  Now, there are some things to watch.  Tax changes might be a drag on growth to some extent.  If one house of Congress changes hands, there may be some gridlock (although that might not be a bad thing).  Inflation is here to some degree, so there is some interest rate risk.  But the growth might be so strong that rates increases just get passed through in higher rents.  And inflations constrains supply to some extent as well.  

- You sound like you are in the classic spot of moving from the scarcity mindset to abundance mindset.  I'm in the middle of that journey myself.  Classically trained to see all the risks and downside in every deal so that's my default.  What are all of the things that could go wrong?  Why I shouldn't do something?  I can't pull this off.  I wish I could say I'm farther along this, but that would be a lie.  Takes time and experience and the absolute comfort with the fact that I don't know everything, I am going to make mistakes (but jumping in anyway) and so I have to keep remaining teachable.  And watching/hearing others get through those barriers as well.