Posted by ray@lcorn on January 20, 2010 at 08:06:37:
In Reply to: Ray, do these really work ? posted by Ron on January 19, 2010 at 10:36:06:
Ron,
As deal strategies, yes, both the MLO (Master Lease Option) and the JV (Joint Venture) structure are valid (more on "JVF" below). However as Mark (SDCA) alluded to in the CTI thread below, they are useful in only a small percentage of cases.
The MLO has been around as long as I can remember. It is best suited for a turnaround situation where the property needs capital improvements and/or better management to improve performance and increase value, and then qualify for traditional financing with the exercise of the option.
You’re looking for a property with the following circumstances:
--problems the Owner can’t or won’t cure, and who doesn’t need cash right away (often mutually exclusive elements);
--has sufficient income to service existing debt and fund the needed improvements;
--enough room in the deal to make a spread between the existing rents and potential rent;
--and for which you can agree to pay more than the present value in the future as an incentive for the owner to play.That’s a small slice of the deals out there, but they do exist.
There is an inherent problem with title issues in a MLO, but that’s another topic. As a buyer I prefer structures that offer 100% control of the property, the debt and the exit timing, without over-paying for the property. I think it's enough incentive to the seller to solve his problem.
The JV strategy works great for new development projects in a growing economy, with lots of cheap money, lots of tenant demand and a seller’s market.Hmmm, that sounds like 2007, eh? (smile)
In a weak economy, tight credit (as in the tightest I’ve seen since 1981), low tenant demand (for all property types), and a glut of supply creating the best buyer’s market in a generation… well, not so much.
The dominant strategy for merchant development employs straight options, using debt or equity capital to exercise the option once all entitlements are approved and the desired lease commitments are in place. However, with no debt capital available for development the JV structure is a valid alternative if the land has very little or no debt and the owner can put it in the deal as equity.
As for the JVF (Joint Venture Facilitation), I hesitate to call it a strategy. More like a business model that is an extension of the concept of bird-dogging. As I understand the CTI pitch, the JVF is a middle man between an owner and a developer, and gets a cut of the deal either as a percentage of the net profit (the pie), or an ownership interest in the finished project (the stack).As a developer I get calls weekly from brokers, owners and lenders who have sites for sale and some offer to pay me to develop them. So I’m not likely to do deals that give 10%-20% of the profit to a “JVF” unless they brought something to the table, such as funding the A&E expense for approvals or perhaps a tenant relationship. If I'm expected to supply all the funding and sell the deal, then I'd more likely settle on a finder's fee to be paid at closing, more along the lines of $5T-$10T.
In summary, I’d never say never to any (legal) deal strategy or structure. All are useful in certain circumstances. But usually before I start looking outside the box I make sure I've tried everything inside the box. There is a reason that tried and true methods stay around. They work more often than not, rather than vice versa.
ray
- Re: Ray, do these really work ? Ron 14:57:04 01/20/10 (0)