Ongoing interest rate increases will undoubtedly affect cap rates and real estate values, according to Case Real Estate Capital, LLC (Case). A decline in asset values may spur difficulty in underwriting loan payoffs, and could prompt lenders to constrain their activity. But investors who focus on fundamentals and have the vision to realize the potential of strategically important assets — even if they are currently underperforming — will still be able to find opportunities.
Digging deep to uncover value
Case is a commercial real estate investment firm that has surpassed the $150 million mark in investments. It is active as a high-yield private lender; a financier of transitional properties; a purchaser of performing, sub- and non-performing debt; and a mezzanine and equity investor. The company’s methodical, innovative approach to real estate investing was dramatically illustrated when Case acquired nine triple net leased commercial properties for $20.5 million — eight CVS properties and one FedEx warehouse — located in New Jersey, New York, Connecticut and Massachusetts. The transaction featured a defaulted note purchase plus a simultaneous deed-in-lieu-of foreclosure purchase (DIL) of the ownership interests in the properties.
“We later financed the portfolio with M&T Bank, cleaned up lingering property management needs, and resolved unknowns with respect to ground lease covenants on certain assets,” explained Jon Leifer, who serves as Case’s director-acquisitions. “We also conducted blend-and-extend actions that lengthened short-term tenant leases on four of the properties, including the FedEx asset where we added considerable value through lease renegotiations to improve liquidity prior to listing the assets for sale. Six of the properties have been sold, and the final three CVS properties are currently in contract or are being marketed for sale.”
“While the exit scenario was not completely obvious at closing of our purchase, we determined that between the credit component and cash flow, we would successfully be able to conquer the complexities,” said Sanford Herrick, founder and managing principal of Case.
Before committing itself to the initial purchase, Case conducted a detailed program of due diligence that included site visits, market research, title / environmental investigation reviews, and internal strategic backfill valuations of the portfolio in the event of tenant lease terminations at any of the CVS stores and the FedEx facility. An in-depth review of tenant leases and ground leases — including likely landlord exposure to certain operating costs and capital investment requirements — was also conducted, along with investigations into the borrower’s background, pending litigation, judgements and liens, and financial solvency.
Structuring sensible financing
When the initial investigation yielded satisfactory conclusions, the company’s principals turned their attention to structuring the finance package. Simultaneously purchasing the notes and DIL gave Case ownership of the real estate portfolio. This enabled the firm to consider financing or selling individual assets to reduce exposure while optimizing the value of the individual assets through the ‘blend and extend’ negotiations.
This strategy maximized the break-up value of the properties by allowing for liquidation of individual assets to either local real estate firms or national 1031 exchange buyers interested in underlying credit tenant cash flow streams. Case was attracted to the triple-net leased CVS assets because five were on strategically located ‘hard corners’ and three others were highly visible locations on busy thoroughfares.
“Each situation is unique and must be examined on its own characteristics and merits,” said Leifer. “In this transaction, our analyses indicated that the optimal liquidation strategy would involve gaining control and optimizing the CVS tenant leases before selling up-managed assets with renewed and/or extended lease terms. With regard to the FedEx facility, we had already received two expressions of interest from potential buyers prior to our acquisition and later sold the asset after renegotiating the FedEx tenant lease.”
Since its establishment, Case has concentrated on deals in the $2.5 million to $40 million range for transitional properties in the New York metro area, Northeast and Mid-Atlantic regions, and south Florida. Its funds can be deployed as note purchases, bridge and acquisition loans or rescue and restructure capital.
The investment and origination expertise of Case’s principals adds further value to the company’s investments and loans for all asset types, including industrial, multi-family, residential for-sale, land, retail and office. Case helps local entrepreneurs take advantage of near-term profit opportunities.