Throughout my career, I have read many blogs, articles, and various periodicals wherein a commercial real estate person described a win or a victory on a deal they were working on. It seems like most professionals like to share the highlights and gloss over the downtrodden emotional time periods of their commercial real estate ownership.
This story covers from low to high on the emotional spectrum for myself and my investment partners.
January 2016: I form a partnership with 3 other parties, and we buy a 10,316 square-foot building in Nampa, ID next to a Walmart Super Center all cash. The building is 53.37% occupied at the time of purchase. The property is available on all the normal commercial listing services. This business plan is a page right out of "Strip Mall Guy's" playbook. No glorious tenants, no anchors, just making money in the trenches slugging it out 1,000 - 2,000 square feet at a time.
March 2016: In our various dialogues with our listing agent and multiple local leasing agents our building is continually described as the one you can kind of see from the road “through all of the trees.” This happens often. We take over a building and the common problem is that there is a very high traffic road located adjacent to the new property, but you cannot see the building because of overgrown brush or trees. We hire a great landscaper, and we go to work on trimming the trees and then clear out most of the overgrown brush and reset the property with a new “fresh” landscaping look.
December 2017: We have now executed 3 new leases which bring the building to 100% occupancy and $1,360,000 of debt is put in place as a new loan. The plan is to paint, new membrane roof, new parking lot, demise the vacant spaces, and some tenant improvement work. The remainder loan proceeds are distributed to the partnership.
October 2019: JUST SOLD! We sell the Nampa multi-tenant property for $2,650,000. After paying off debt there is $1,450,000 in 1031 proceeds + cash on hand.
November 2019: We use ½ of our equity to buy a former Chase Bank building in Layton, UT. We lease the property to Little Caesar’s & Beans & Brew. We start a renovation on the building and then end up placing perm debt on at the completion of construction and tenant openings. We use ¼ of our equity to buy a 1/3 interest in a former Asian Market building in SLC. The plan is to fix up the building and rent it out to a long-term tenant.
December 2019: Saturday morning, I'm getting the kids out of bed and ready to go for the morning gymnastics, dance, and basketball. I breeze through emails and see a new listing alert from Crexi for a Red Lobster coming to market in Pocatello, ID. It is a 5.5% cap, but the total price is $836,363. The rent is literally as cheap as it could possibly be. I jump on it and dive in. I called the agent, John Andreini that Saturday morning. He is also hustling kids at his household. I request for him to not call anyone else back, and I will buy this listing at full price, just get me under contract. John barely knew me at this point, but he obliged me. We are fully executed by Monday and working toward closing.
I feel I should share a big rule of retail at this point: Flattery is mostly worthless with investment brokers. What matters most is when they take a chance and get you under contract in a competitive environment then do your job and close.
February 2020: We close on the Red Lobster. We have ¼ of our equity remaining which we commit to this long-term net lease deal and borrow the remainder of the purchase price. This now completes our 1031 and our original 1 tired old strip mall has turned into an ownership position in 3 properties.
March 2020: No rent out of Red Lobster.
April 2020: No rent out of Red Lobster. Sometimes it takes national tenants a minute to get rent payments in the correct spot, so this is slightly expected. We call and call and call to try and sort out the issue. As a reminder, this is the start of COVID which also could be a factor.
May 2020: No rent out of Red Lobster. I want to point out this was the low point emotionally for me. It was depressing to feel so helpless against a big corporation that was not paying attention to us or the legal obligations they had with us. I felt like I had “egg on my face” with my partners and it was frustrating that we were not getting anywhere with our tenant. We finally find a human at Red Lobster. It is their in-house counsel. They remind us that COVID is happening and why would we expect to receive rent. My response is simple: The regulatory body in this city, county, state has not closed restaurants due to COVID. To make matters worse in my multiple dialogues to the manager of the store they are relaying to us that sales are 240% up in 2020 from 2019. So pay the DAMN rent, please. They respond they are not going to.
June 2020: I retain counsel and begin the legal process to evict the tenant. Due to covid the courts are backlogged, and everything is slower than normal. Red Lobster corporate continues to throw bogus paperwork at us to distract us from our legal course, but we persist. This whole time they are still not paying rent or property taxes. Remember there are no passive income properties in CRE. Even net lease has its ups and downs.
February 2022: Our Idaho judge rules in our favor and decrees Red Lobster to pay all of the back rent, 90% of our attorney fees and vacate the premises within a 30-day time period. I hired Joe Mills & Tanner Olson at Legend Partners to find us a new tenant that will pay market rent for this great location. At that point, we had been keeping them apprised of our tenancy situation and their team had already been working on warming up Olive Garden and a couple of other national tenants to the opportunity.
April 2022: We sign a ground lease with Olive Garden. They make the decision to scrape the existing 18-year-old building and construct a brand-new prototype in its place. Of course, ownership is thrilled with the new tenant. Our leasing brokers get us a rent increase of 271% over what Red Lobster was supposed to be paying for the property.
January 2023: Olive Garden opens for business and commences rent on the ground lease. We go out to the debt markets and lock in a $1,250,000 loan and plan on putting those loan proceeds into one of our apartment deals that is set to start construction Fall 2023.
The local community is thrilled with the new Olive Garden location, and it has one of the strongest openings they have ever seen in the western states. Read about the opening of the restaurant from a local paper here.
At this point, our original investment into one tired old strip mall has now led our ownership into:
A 20-year ground lease Olive Garden
2 tenant building with 10-year leases for Beans & Brew & Little Caesars
Cash from the sale of the Asian Market building that we flipped 1 year after we purchased it.
An investment into a 195-door apartment complex that we are starting construction in Fall 2023
This project felt like the perfect example of how intense a rollercoaster of emotions real estate ownership can be.
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