Blue Dirt
Blue Dirt: Commercial Property Investing delivers expert insights and strategies for building and managing a successful commercial real estate portfolio. Whether you're a seasoned investor or just starting out, this podcast uncovers market trends, financing tips, and key investment principles to help you thrive in the industry.
Blue Dirt
Smart Exits: Planning Your Commercial Real Estate Endgame
Your exit strategy might be the most critical decision you'll make in commercial real estate investing—even before you purchase the property. As we explore in this episode, the most successful investors begin with the end in mind, shaping every decision around maximizing future value and creating flexible exit options.
The foundation of smart exit planning starts with a conservative discounted cash flow analysis that projects realistic timelines for lease-up, renovation costs, and eventual sale value. We dive deep into how converting traditional leases to triple-net structures shifts risk away from landlords while dramatically increasing property value for future buyers. Through real-world examples like our Berryhill project, we demonstrate how thoughtful programming of tenant spaces and strategic lease restructuring can double a property's value in just three years.
We also explore what we call the "property death spiral"—the dangerous downward cycle that begins when deferred maintenance drives quality tenants away, forcing landlords to accept lower rents and increasingly problematic tenants. This insight explains why distressed properties represent both opportunity for buyers and cautionary tales for owners who neglect maintenance. By maintaining properties to high standards and treating lenders as partners through transparent reporting and regular property tours, smart investors position themselves for success regardless of market conditions.
Beyond traditional sales, we examine creative exit strategies like condominium conversion, where multi-tenant buildings are divided into individually saleable units—significantly increasing overall value while creating opportunities for tenants to become owners. Whether selling to institutional investors, individual buyers, existing tenants, or partners, the key is maintaining flexibility while building long-term value.
Ready to transform how you think about commercial real estate investing? Subscribe now and learn how planning your exit from day one creates exponential returns when opportunity knocks.
Learn more about Blue Commercial Properties on our website.
Welcome to Blue Dirt, the podcast that digs deep into the foundation of commercial real estate investing. Unlike most real estate shows that focus on dealmaking and market trends, Blue Dirt gets into the nuts and bolts of what truly builds long-term value the building itself. We break down how to spot deferred maintenance before it costs you, why a solid preventative maintenance program is a game changer and how triple net leases can maximize your investment returns. We'll also explore the importance of strong landlord-tenant relationships and how they drive stability and growth in your portfolio. Whether you're a seasoned investor or just getting started, Blue Dirt gives you the practical knowledge to make smarter, more profitable decisions in commercial real estate. It's time to get your hands dirty and build value from the ground up. Let's dig in.
Speaker 1:Welcome to the Blue Dirt podcast, where even idiots can make a killing in commercial real estate. Today we're going to talk about your exit strategy. If you don't know how you're getting out, you probably shouldn't get in. So with that, we want to kind of just roll through various things as it relates to when you're buying a property, how you're forecasting the exit. So the two questions we want to answer today is how did the most successful commercial real estate investors plan their exit before they even close on a deal, and then what exit strategies create the most flexibility and value throughout the life of a commercial real estate investment. So that's going to be our focus today. You know, Don and I are not the biggest investors. We've got a lot of properties for us. There's people that have a lot less, but there's people that have a lot more. So, Don, what do you think about exit and when we buy a property, what are your thoughts on? Before I get into more of the semantics, but just logistically, what are your thoughts about the exit plan?
Speaker 2:It kind of goes against what we're normally doing when you step into the investment right, where we always want to hold for the long-term. But when we first started, or when I first started, I thought that was probably one of the most interesting things that you had shared with me, whether it was I remember you had just recently closed out a large private equity deal, but it was always, as you're preparing and getting into these things, just set it up today as if you are about to sell. You always have to just be. Every decision you're making from organizing documents, planning on build outs for the property, leases, everything needs to be geared with the long-term in mind for our stuff, but you ultimately have to have it in a nice package that you can deliver over and sell Right.
Speaker 1:I mean. So that was always amazing, One of the things let's talk about. When we started Blue Commercial Properties, right, the property management arm. So that's kind of one of Don and my first conversations about how to set up this company. And I like to start off with okay, every decision we make, how would a new buyer of our business look at that decision? And I'm talking about from, maybe, the name, which is why you don't see Don and Mike's big adventure. You know what I mean. I don't care about my name, right, I, I, I, I. What is a name? That it doesn't matter who buys it, you know. So that's why you don't see my name on any of our businesses, right, it might be on an individual LLC, but it's not on a business, right?
Speaker 2:It's not branded.
Speaker 1:So then, what systems and processes are in place that are easily replicatable and scalable? Right, and so each one of these decisions is meant to make the business more efficient, run better run as lean and efficient as possible, better run as lean and efficient as possible. So it's not terribly different from an asset as we're going through, because each of our assets is its own little business, and when I use the term asset, I'm talking about a property. So if we have a retail building, you know, are we making the right decisions that an investor would like? Hey, I really like what they've done with that asset. It, it, it's divided out in a way that makes sense. It has the type of thought in the um, the programming of the various tenants, you know, and we can probably talk a little bit about Berry Hill on how that one kind of evolved and um, and so those are some of the things that we think about right, long-term leases right, like you said, um having well the types of leases right.
Speaker 1:We we always want long-term leases, but more importantly to me is what triple net, triple net, lease right?
Speaker 2:good financials. Right, because if you have a clean, audited pack of package of financials, you can hear boom, it's a, it's a click, send it over and someone can review it, and but it goes back to the process.
Speaker 1:Do you have a process that is clean? You know, a lot of times when we go to buy a property that now again, as you've heard don and I talk about before, we buy a lot of problem. So a lot of the things we are buying may not have been professionally managed, and so we have to recast the financials in such a way that are easy for us to understand but, more importantly, that our lender can understand, because the lender is not going to, you know, you can't hand them a shoebox and say give me some money. You know, and it has a bunch of receipts. So we recast you know it may be years of P&Ls and and, and we redo a lot of leases to make them more user friendly and and so. So we'll dive from a from a from a exit strategy.
Speaker 1:We go into every property using and you'll hear me say it, unfortunately, at countless times cause it's I'm a one trick pony I do a discounted cashflow analysis on every property. That means we buy it at whatever the purchase price is. I add into that whatever Don tells me that he needs to renovate the property, some closing costs and some operating capital while we have vacancy. So I bundle that up and then I predict right, don we have to go through and predict, that's right. We have to predict over the course of the next five years If we have a hundred percent vacant building, that let's just say it's. It's five units, all right, I predict I'm going to lease up and I'm. I'm really, really conservative when I run this model. There's no reason to put yourself into a box and over-promise. If you miss, you miss, but you're not going to miss because you over-exaggerated. So, um, go ahead.
Speaker 2:No, that that is, I say, very important. Obviously it's it's just being very conservative and it's it's. It always feels a lot better when you're able to just get it back filled that much faster. It doesn't feel good, the opposite. And fortunately, when we do the models it's a very conservative rate, so it always feels like we're kind of hitting them, so it tends to feel hot.
Speaker 1:Well, so let's say we have a five unit retail building in an okay area Not great, not horrible, but an okay area. I might say, all right, great, not horrible, but an okay area. I might say, all right, I'm going to predict that we lease our first unit of five in six months, so we have a hundred percent vacancy for six months. And then I might say, well, the second one will lease a little bit faster, it might be in four more months. So so between month six and month 10, we have one lease, but in month 10, now we have a second one, and so I kind of go through. It might take, I might model it out that we will not fill up all five spaces for two years. So then that's part of my vacancy factor.
Speaker 1:Well, during the vacancy we have holding costs, right. We still have our mortgage payment, insurance, property taxes, upkeep, maybe utility bills, electricity, water, you know, landscaping. We still have all of these expenses that we have to model up. Well, obviously, sometime in the middle of year two we probably got to positive cash flow, right. Okay, that's the goal. Now it's not cash flow that we're going to put into our pockets. We have to build a reserve right to our pockets. We have to build a reserve right and so, and then, as we fill up these spaces, we might have if, depending on the quality of the space, we likely have to put in maybe new flooring, paint the walls, just do some, do some improvements to the space, which is where we need this extra renovation budget. And then, let's say, going into year three, we're a hundred percent full, and I model it that way, but I always model 10% vacancy. So, even though we may be a hundred percent full, I'm only modeling 10%, I'm only going to model 90% occupancy.
Speaker 2:Even if it's two tenants, that's right. Even if it's, it makes no sense, logically right, that I'm going to going to have 10 percent vacant of two tenant building where they're occupying 100 percent Don.
Speaker 1:why would we do that?
Speaker 2:Well, because there may be a brief period where, to say, the tenant is moving out Right and another one's back.
Speaker 1:Exactly so. There's going to be, there's going to be vacancy at some point, right, and so, yeah, we may be full a lot of the time, but there's a transition period between a tenant moving out and another one moving in. So, and then I'm also modeling a 3% annual increase in the lease rates. I'm not worried about the pass-through expenses because they are what they are. I do not do leases in 90% of our buildings that are not triple net. There are a couple of buildings that lend themselves to a full service rate. You typically see a high rise. If I'm in downtown Manhattan, you're not going to be dividing out the utilities between this hundred story building between each tenant. You know what I mean. So those are the types of leases. Doesn't have to be that grand, but those are the types of leases that would have full service, meaning what number that is on their lease. That includes all the triple net and utilities.
Speaker 2:And for ours it's usually executive.
Speaker 1:Right, our executive offices right, where somebody comes in and rents one office. You think about coworking. We call it pro working because we don't have shared space in the sense of a collaborative area. Our shared spaces are what?
Speaker 2:Just conference rooms, kitchens right, Bathrooms Right, they still get the same access, but it's not that kind of open work environment where people are taking phone calls hot desks Sometimes we refer to it yeah, these are a bit more premium individual spaces, more for the professional pro work, right Right.
Speaker 1:A professional work environment. Yeah, and so then, at the end of the DCF analysis, we plan on selling according to the model at the end of year five, day one of year six is is the is the holding period. So we always have that plan in our exit. So the exit strategy starts before we buy it. But that's also helps us with the decision-making of whether or not to buy the property. So, yeah, we're looking at it for a couple of different reasons. What do we think the exit is on this asset? But also it tells us a different story.
Speaker 1:The reason why I do it up in the beginning is I wanna know what the beginning is. I want to know what the anticipated ROI, the return on investment, is. And so, based on the level of risk that we are taking on an asset, I need to, most of the time, get a target of 20% or more. And it's not because I'm greedy, it's because we are taking a great deal of risk and having all of this predictive analysis and it's easy to miss. Now, fortunately, because we are so conservative our modeling we typically don't miss. But if we were buying a fully leased building, we don't need a 20% return because it's been de-risked. Now let's talk. Let's go ahead and talk a little bit about Berryhill as an example, because that, to me, is is has turned out to be a really fantastic asset. Right, talk about some of the leases that we uh, uh. If you recall that space, you remember.
Speaker 2:Yeah, yeah, yeah. So we have 12 units right Retail. I think all of them have been converted right To to triple net.
Speaker 1:But the day we bought it, when we were under contract, what did we have? We were, we were full, but what was? What was? Oh, yeah, yeah.
Speaker 2:We had the gym. That was a mass exodus, right, Right.
Speaker 1:So we had we had six spaces. We had six spaces that had already planned on exiting before we closed. We knew in advance which was fine, because they weren't the type of leases we would want anyway, but that went into our modeling. Oh yeah, right.
Speaker 2:That takes a lot of money, especially when all these units have been basically turned into one right. So you have reconstruction. Reconstruction if need be, because we're going to offer it.
Speaker 1:Well, talk about the benefit of what you know. That's the negative, but they were built out. How, though?
Speaker 2:Oh, the positive with that type of a center is they're all individually built for those one units and they just happened to expand into each one.
Speaker 1:So they just opened a doorway between each, so it was no big deal from our standpoint.
Speaker 2:they each had a front door, back door, restroom hvac, metered electrical metered water, which is a huge expense. If you need to break it up, that's exactly right so this was, this was fantastic for us.
Speaker 1:Now we had to overcome a lot of challenges up front. And then we also also had that, that little shipping company I can't remember their name, but they um great people but they occupied two units and they were also looking to vacate.
Speaker 1:So there was a lot of people looking to, looking to exit as we stopped there and so we had a fitness, a kind of a shipping type company, private shipping, though. Then we had a salon that had two units Two units at the time. We had another barbershop that had one unit. Yeah, we had a yoga studio, a yoga, a chiropractic and, I think, a missing one, but whatever. So that's kind of what we had. So it was a mishmash of people. But then what happened is we started releasing the available spaces, kind of to health and wellness.
Speaker 2:Yeah, we really targeted because there is a larger hospital across the street ish, and then in that kind of corridor there is a lot of of dental, there's a pediatric, there's a lot of just regular, you know, a home doctor type.
Speaker 1:Yeah, and then the first lease we did was actually the chiropractic center.
Speaker 2:Okay.
Speaker 1:So the end unit, so first lease. And, by the way, we did this first lease while we were under contract. I wrote it in the contract that they will not sign any new contracts because, quite honestly, those leases would not work for us. We were paying a certain, we were paying a fair price, but not with those leases. So if the lease, if the building was empty, it would have almost been better for us, not really, because we were able to work with the existing tenants and, um, you know, when their leases expired, we got them, we gave them a discount on the rent, but we switched each of the leases to a triple net lease, switched each of the leases to a triple net lease. So within short order, I mean, we went from 50% vacancy and to backfilling all six of those spaces with closer to market rent plus triple net. The other tenants that remained, we gave them discounted lease rates plus triple net.
Speaker 1:So, while they went up a little bit, more importantly, the risk associated with property taxes, insurance and maintenance was now shifted from the landlord back to the tenant, where it should be in a commercial property. In residential, that risk remains with the landlord, which is why we're not fans of residential. That's a primary reason. Whereas in commercial our tenants take care of their plumbing issues, their mechanical issues, electrical, we typically take care of the roof and the envelope of the building. So that's kind of our methodology for a triple net lease. What do you want to add to that?
Speaker 2:It's kind of interesting because we did. I was with you the other day and someone did already reach out we don't have the property for sale but someone, I can't remember who, but they had reached out to you saying hey, there's this retail center over there and I think maybe your sign was out there for a lease purpose. But he had seen it, had known you and uh and asked if it was for sale. So you know, that's the the preparing for the exit. You know it. We're not looking to sell, but it it ultimately made it happen.
Speaker 1:We get a lot of calls on this because it's a really Don did a great job at cleaning it up. This was one of our better buildings that we bought in I'm saying better condition. So we did a very minor facelift. We've done some interior facelifts to individual spaces. That has really helped out, but exterior wise it was in pretty good shape, so it looked good. But I would say say, you know, we paid about a million, nine, nine, about nine something, maybe not 975, yeah, and it's it's probably worth double that today. You know, maybe a little more than double. Um, so, and what do we have? Three years?
Speaker 2:yeah, we're coming up on three years.
Speaker 1:And, by the way, when I say double, it's because of the leases we now have in place, so the investment value of the property has really worked. So if we wanted to sell, we would have one hell of an exit. Because if you think about the, let's just use easy math. Let's say we paid $1 million for it. We had to put $250,000 down as an example you know we've been riding it through the last three years and let's just say, theoretically we could sell it today for $2 million. Well, we didn't double our money. How much money did I just say we put down, Don?
Speaker 2:Oh boy.
Speaker 1:Oh my God, $250,000. So if we put we put 250 000 out of our pocket and we sold it for 2 million, we would get our 250 back, plus another 100 000. Of course there's a lot of other factors, you know. There's principal pay down, there's other things, but so we really closing, got a million, 250. So we we got five times our money. You, you know, a million dollars. We got $250,000 investment and then we made four, uh, four times that a million dollars on that investment Plus we got our original investment back. So so that's how you look at things is cash on cash return. So if we exited right now, you know, minus closing costs, we would have slayed that dragon. That's an exit.
Speaker 2:And now that's one of the things, that is that kind of event that you just need to be planning for, right, if in an earlier exit, what are some of the other ones that that you've seen, that maybe not even ours, but some of the other ones that have kind of forced people's hands, whether it's a positive or a negative, um, for people having to exit early where maybe they didn't originally want to.
Speaker 1:Well, most exit early. Most exits, I see, early. I'm. I'm working on coining a phrase Um, I call it the property death spiral or something like that.
Speaker 1:Right, and what happens is you have a. You have a landlord who is not taking care of the property for whatever reason, whether they either don't understand it, don't have the time or don't have the money, but it's some. It may be a combination of all that or, or worse yet, they may think they're doing a great job and they're just not Very common. So let's say they have a property and they have. Let's just use the same example. It's a five-unit property and they have five good tenants, but now the roof is leaking and they're really not taking care of it. Yeah, they might make a call, but they're really just not diligent about taking care of it.
Speaker 1:Well, ultimately, let's say, two tenants get really upset and say you know, we can't be in a space where stuff is leaking all over our stuff and this landlord's not taking care of it.
Speaker 1:So they leave and let's say the landlord refills it, but the people who are going into it now they're seeing that the property is not as well maintained, so they're they're like he's likely going to charge a lower rate. Okay, this is very common, which is more common than you even realize. Right, even though the market might be higher, the market's only as good as is the tenants that are willing to be in there, and if the property is being neglected, it's lowering the value. Well, eventually, the other three tenants who might be quality tenants, they're like you know, this isn't working for me, and so they leave, and then other tenants come in. So there's this equilibrium the worse the property gets, the lower the lease rate that the landlord can charge Typically, the lower the quality of the tenant, because they can't afford a good space, so they'll still go into a bad space. And so then there's this symbiotic relationship.
Speaker 2:You gotta they may miss a few payments and run they may. So it's, it's always. It just becomes a struggle.
Speaker 1:It's quick it's a death, it's the property death spiral. It's going to go down, it's going to keep going down and then eventually you've've got tenants that aren't paying their rent. The property is just hemorrhaging cash. It needs more money than it did ever. Because these problems don't go away. You can sweep them under the rug, but it's actually creating other issues that you don't see under the rug, but it's actually creating other issues that you don't see, and so now the property is dead, and that's where we come in Dancing on the grave.
Speaker 2:That's what I thought of. That's the grave dancer, sam Zell the grave dancer, so.
Speaker 1:But that's where we come in and it's like hey, listen, we get, listen, we get it. You know, and you know many times we can, we can bail out a seller who's just you know.
Speaker 2:Um, I'm thinking about midtown, you know what I mean, and the and the one that I always think of when you talk about is right over here at gregory. I mean that one. A lot of roof leaks. You know, the tents are super nice, but they were just in there kind of making it.
Speaker 1:Oh, oh, the property that we own, yeah, right over here, yeah, yeah, yeah, oh, my gosh. So that's a perfect example, don. It had already, you know, anyways, a lot of roof leaks. You know a lot of issues, you know. But the other property that we have is I think that was losing about $100,000 a year. But, more importantly, it's about a 40,000 square foot office building. A tenant that was occupying almost 50% of the building had given their notice to vacate and they were paying over $100,000 a year. So now this landlord is like, of course, I actually don't know what he was doing, but if it was me I'd be like this is really bad, and so as soon as they leave now I'm going to be losing $250,000 a year. I'm tapping out, yeah.
Speaker 2:You know cause he was already really doing. It seemed like everything he could to make repairs on his own and by the way really good guy worked his tail off, yeah. It wasn't for a lack of effort. Smart guy I mean, I think he was a professor, I don't know but he was a brilliant guy.
Speaker 1:But the reality of it is is, sometimes it's not for a lack of effort, but it still wasn't working. And so when I looked at all these leases the some leases the lease rate was he was losing money. If his triple net was six dollars a square foot, he might have been charging three dollars a square foot for the whole space. So he's leasing stuff out that he's losing money on it. So anyways, so those are the types of properties we go in now.
Speaker 1:Listen, we got it, got it for a great price per square foot, knowing so I think we paid forty dollars a square foot, but I knew we had to put another twenty dollars, twenty five dollars. We put about a million dollars back into the building, and now that building looks beautiful. We've refilled it. We actually got it to 100% occupancy. After that, one tenant moved. Now we have a couple more tenants that have moved out. So now you know it's just it ebbs and flows, but that property is probably more than doubled in value over all the total investment, not our investment. Our investment is exponential. We're probably 10Xing on our investment, but we paid 1.6 for it probably put another million dollars. Half of that came out of cashflow though, so we probably have 2.1 million into it, and I think it's worth four and a half today if we were to sell it. Now, again, we don't plan on selling it, but again, this is how you continue to build value. But you can't go in and not have a plan and not have the money, and so that helps your exit as well, and again, we get calls on that one too.
Speaker 1:Yeah. Yeah, if you don't go in with all the right tools in place the leases, the financing, everything that you're prepared with a plan to shift the direction of this, this, this asset, the ship then you're just, you're really inviting the same thing, and I would say that you know your lender uh, I, my lenders are, are my partners, and everything I bring them in, I bring them into the inner circle. I tell, I show them all the challenges with the property. I'm not hiding anything from them, because I want them Number one. I want them to, and I invite them back annually to walk the property. I want them to see it, because I'm really excited about these things. I get really, this is my happy place.
Speaker 1:I mean, I get jacked up about watching a property continue to improve, and so we invite our bankers in on an annual basis. We take them to lunch and then we take them to the various properties that they have given loans on. We share the financials with them. They need it anyways, don't get me wrong, but I really appreciate it. And we I've got one banker that flies in from out of town and we really make a day of it because you know, we've got a lot of money that they've loaned us and and and guess what? They're always first to the table to give us more because they appreciate that type of relationship. So they're kind of our front end partners, but they're our partners throughout the whole thing. And so, and you know, I actually am pretty proud of what we get to accomplish because we are relentless with our quality and Don, you know, can test to that.
Speaker 2:Yeah, it's not easy, right, but it's rewarding. You get to see that things start to take shape. You know, it's like your ball of clay, right. You're kind of massaging it, doing some things, and we make a lot of mistakes, right. I mean, especially in the design world, all those colors look good. It's like, okay, not maybe not so much, but we're getting better at least. Right, our color palette is, uh, is refining, but it is very rewarding, right. There's that, that great level of gratification, getting better tenants in there, having a space for them to be able to, to use for their business, because you know they're entrepreneurs just like us. They they're just in a different sector, they're going after it, just like we are. We're getting ready to improve this home of theirs now, and it really is nice, especially when you can work with the partners the lenders work with the partners, the tenants work with the vendors, work with everybody in a very professional and symbiotic way and evolve that asset.
Speaker 1:Okay. So now you've done all of these improvements to the space, you've gotten some good leases in place. Who, then, are logical buyers of your property? Well, so, if you have, if you have good quality tenants with tenancy, you have an institutional investor. You know, if you have a high, high enough quality uh lease and property and institutional or real estate investment trust, they might be a buyer. Okay, now, we don't have a lot of those types of properties, um, that were really institutional worthy. We don't have a lot of those types of properties that were really institutional worthy.
Speaker 2:We don't do those kinds of single tenant right. We're not, we're not real big into those ones or some of these other. I'll say medical, re or or retail style. We have a lot of downtown properties which don't they. They get the really cool businesses. They just don't demand those national credit tenant that the groups that are more conservative, they want to de-risk.
Speaker 1:They just want to by the way, everybody wants the national credit tenants but there is a lot of competition and a bit more. You also have to be typically willing to travel further and we're kind of tight knit over here. We're not looking to go to St Louis or California or all these other places to build the suits. So those are great companies and that's where maybe the institutional buyers Don mentioned medical, so like medical office buildings are a fantastic asset class that REITs might really enjoy in their portfolio, right, amazon distribution centers or big distribution centers the whole sector of warehousing is big, so that's a class, but we don't deal a lot with that type of buyer.
Speaker 1:And then you have normal investors. Maybe somebody who is an individual has a good retirement account, they've built a really good nest egg and they might want to buy some passive income. So what we see the most common thing for them is maybe a single tenant, absolute triple net investment. And when I say absolute meaning the tenant is responsible for everything, including the roof and structure, and so then that's kind of that true mailbox money. What might be a property. It may be one of those Walgreens, right? Maybe it's a McDonald's or a Starbucks. So a lot of those are absolute triple net leases. All right, then you have something that's still passive, but it's a multi-tenant building, and the reason why multi-tenant buildings are not as passive is because they're not typically absolute triple net leases. They're a triple net lease where the landlord still has the responsibility for the roof and structure, and so and has usually a bit of a role in managing the common area right?
Speaker 2:You know, a large retail center needs the parking lot swept. It needs to make sure that the parking lot lights are coming on when they should.
Speaker 1:Just maintaining that kind of comment and when he says, uh, part of that role, most landlords still hire a property manager to do that. So, but, but it's not pure mailbox money where they never have to talk to the tenant. When you have multiple tenants in buildings, you typically have a property manager who does all the management, but there is some decision-making throughout the year. So, again, not truly passive, but pretty darn close. Okay. And then, um, and then you have another logical buyer uh, are your existing tenants right? I mean we, we've seen that on several of our properties.
Speaker 1:Um, you know I had a had a warehouse on Fowler. You know we had three warehouses. Well, one of the tenants wanted to buy it, buy the one that he was in. And I was like, fantastic, I went and created what's called a condo dock. Everybody has heard of a condo, but we tend to think about those on the beach or residential, but anything can be a condo. In this case, I created a warehouse condo. So each individual building was its own property, and then the parking lot area and the retention pond, all of that was common area. It was still its own parcel, but it was individually and collectively owned by each of the building owners. So your tenants are the most logical buyer of your asset. And then another potential exit is what are we planning at Midtown?
Speaker 2:So that one. It's kind of interesting. I'm still not fully understanding the process, but essentially carving out pieces of the building and selling them off as condos.
Speaker 1:Right. So in the same way that we did this with our warehouse three individual warehouse buildings, this is more, and I'm testing this out for the first time. There's no reason why it shouldn't work. I'm testing this out for the first time. There's no reason why it shouldn't work. But this same 40,000 square foot building we have. It is unlike. They're not separate buildings like the warehouses. So there might be five doors in a row, but each door is its own separate office suite. And so what I'm planning to do I'm in the process of doing it is each one of those individual suites is going to be carved out with its own property ID number.
Speaker 1:And then, when it's all said and done, then we will go have the condo documents made and they're being made here locally by Moorhead Law. They do a phenomenal job and so they will create these condominium documents. And then I've got Pittman Glaze surveyors. They actually went in and measured each individual space, all the common area very complex scenario and then eventually, in the next month or two, it'll all get melded together and then I will have the opportunity to sell each individual condo.
Speaker 1:Now there's 26 of them, so we're going to start off, we're going to still own all 26. And then if we sell one, well then we'll own 25, right? But now the person who bought the 26 will have a seat at the table, right, because it's theirs. They are an actual owner, and so over time, you know, we might sell 50% of them, right? So even if we're an owner of 13 forever, it doesn't matter. You know, and we're going to. Now I'm kind of excited about this because we're also going to offer seller financing. Kind of excited about this because we're also going to uh offer seller financing for those that want it. So we're going to give more people the opportunity to own their own space and and so we'll get to play a little bit of banker and maybe earn some, um, uh money based on the interest.
Speaker 2:So so that's another uh opportunity for an exit yeah, and the one that's opportunity for an exit, yeah, and the one that's maybe not necessarily specific, talking about a buyer, but it's driven a lot of people to the table and force them to buy, is the 1031 exchange that I always think of that as just. I think that's why that, and I could be wrong, but I thought that was why the individual called us on the Berryhill property. I thought it was hey, I have this money, I have to place it. So they kind of get into this. They're a little bit hungrier.
Speaker 1:They need some Now. Why are they hungry, don? It's usually the window of time.
Speaker 2:That's right. You have to identify the property. You have to close on these properties.
Speaker 1:So they have this time frame and if they haven't identified anything, then they lose that tax deferred status. That's, quite honestly, what we did with Berryhill, just to use that same example. So, honestly, I was a little bit ignorant on this type of product class and so in my normal modeling I would not have done this deal because it was a little bit outside of what I was used to doing, quite honestly. But we had this money. I was like, well, that's a little bit more than I would be comfortable paying, but we bought it anyways and I'm so glad we did.
Speaker 1:I was wrong because I missed all of the conversion opportunities that we had, the conversion of each of the leases to a triple, that I missed the fact that the market was a little bit better than I had expected. I missed a lot of these things because it was in an area that I don't typically work in. Yeah, so a little bit outside, right. Right, it wasn't a bad area, it's just it was a. It was unknown to me as to the supply and demand of that, of that neighborhood, and it's turned out to be fantastic. So very, very pleased with it.
Speaker 2:I could get someone in just to talk about 1031s in general. I think that's a great idea.
Speaker 1:Another exit could be you just sell to one of your partners. You know, I buy a lot of properties with my team and you know, let's say one of them wanted to get out, I'm always willing to buy them out, um, or let's say I wanted to get out and then they, they wanted to stay in and they bought me out. I mean, so there's, that's another possible exit strategy. In fact, that's what happened down the road. I, I had an asset, uh, about four blocks down from here. Uh, what a phenomenal exit that was. Um, so I think we paid a million eight for the property and, uh, about six years, maybe seven years, and we just did a the print. The primary owner when I say primary, he occupied and owned the majority of the building. He bought my shares out for a market value of about $5 million, so the return on investment for my capital was 10X. So 10X in about six or seven years. So I was pretty pleased with that and, more importantly, he was thrilled about it. So whenever you can create a win-win scenario and everybody feels like they got something that they wanted, wonderful, and then we're using that money to buy other properties, another exit is not an exit, you know. You just your five-year term came up.
Speaker 1:Most loans are commercial loans, are 20-year amortization with a a five year term, meaning you have to go back to the bank every five years and renew that loan. Well, maybe your exit is is the renew, but over that past five years you did have some principal pay down. You probably had some appreciation, so your net worth likely increased, worth likely increased. And that's something that I now in my annual reports to my partners is I, I, that's one of my factors. We talk about what our current balance is, what it was last year, what it is today, and the principal value of of our principal pay down is real net worth. We also talk about what's the value of the property last year, this time versus today, you know, and typically that where there's an increase, and then hey, by the way, how much cash was distributed. So these are all factors that we focus on in in in our annual, annual, annual investor meetings.
Speaker 2:So what else Don I mean, that's you know. I think you kind of touch on each one. Of course, we can probably expand and we will as we continue talking about these properties. But it's really just important, as you are stepping into these investments, just properly planning, really being organized, having all these things prepared for the lenders, for everybody, a potential buyer just being prepared to sell so you really want to be able to seize it, and especially if you have someone who maybe has that 1031 money they show up hey, I need to place this. I need to place it now. They're going to need to make a decision quickly.
Speaker 1:Yeah, and call me a scaredy cat, to use a technical term. I'm always not always, but I'm afraid to sell.
Speaker 2:I like the properties that we buy, but Don, why do you think I would be afraid to sell? Because you have to buy? What am I going to do with that money?
Speaker 1:Right. Yeah, I mean, you got more money so you got a return on your investment, but you have to replace the return. I want cash flow. So if I'm getting $3,000 a month on a property and I get a chunk of money, that's great. I got this chunk of money, but I want that $3,000 a month. So do I have enough with this money that I just sold to go back out and get $3,000 or more? If I'm getting the same $3,000, is it worth it?
Speaker 1:Now, it can be I'm going to talk above my pay grade. It can be when you factor in depreciation and tax benefits, because you might have gone through a lot of your depreciation on your current asset, so that might be a reason. Gone through a lot of your depreciation on your current asset, so that might be a reason. You know, if you play the 1031 game, maybe you tax deferred the new acquisition. But for me it's about replacing the positive cash flow from that asset and it's all about cash flow.
Speaker 1:I don't want a chunk of money in my pocket because in all likelihood it's going to get spent on something that is worthless and now you've lost your forever money of $3,000 a month. So be careful just to sell for the profit unless you have a plan for those funds. So now sometimes we get offered stupid money and I will take it without thinking Um, and fortunately you know. Uh, with our when our one warehouse sale we bought Berry Hill in the downtown restaurant and then on our other sale, on our other warehouse sale we bought four, 15 and retail building and Maxwell, and then uh, right Were those the two.
Speaker 2:No, no, maxwell bought cash.
Speaker 1:No, I know, but that wasn't from the 1031. No, no.
Speaker 2:And then that other funds went into the event space.
Speaker 1:Oh, that's right, You're right. Yeah, absolutely so. So the key is so, be careful. Uh, when you sell it's, it's a fun day when you get that big check, but if it's not working for you and you don't have a plan to put it back into production, you might spend it and it's now worthless. Um, my wife commonly thinks that, um, I buy properties is equal to her buying clothes, and she, I I know she's smarter than this, but she doesn't understand that the properties is what pays for the clothes. But somehow, I don't know, don, she knows, she knows, you think so.
Speaker 2:She knows.
Speaker 1:So is she conning me?
Speaker 2:Oh, absolutely For so many years now. I'm so dumb.
Speaker 1:Just setting it, so maybe she's the smart one.
Speaker 2:Much, much smarter. She'd be great too. Oh goodness gracious.
Speaker 1:So the last thing I would just want to touch on again in the beginning is, when you are deciding on an asset and you have partners, make sure the partners in that asset and you are in alignment with what your expectations and goals are, not just on a return on investment, but the length of hold. If you plan on holding it for three years and flipping it based on some modeling, let them know, because if they were me, I might be thinking well, because everything I think about typically well 80% of what I think about is 20 years, even though my modeling is that five-year model. I'm thinking 20 years, so I'm not a flipper. But there are some properties that come across our desk and I make sure, because everybody knows I'm a long-term hold, I make sure I let people know hey, this property, there is a chance I might sell it in a year, just be aware. So, making sure that your exit strategy is in alignment with the people that you invite into your deals.
Speaker 2:Yeah, sympathetic.
Speaker 1:That's right. Well, what else am I missing?
Speaker 2:I think nothing else for today.
Speaker 1:Nothing else for today.
Speaker 1:Well, that wraps up another episode of the Blue Dirt Podcast, where even idiots like Don and I can make a killing in commercial real estate. That's a wrap for this episode of Blue Dirt. We're here to help you build smarter, invest wiser and create long-term value in commercial real estate one solid foundation at a time. If you found today's insights useful, be sure to subscribe so you never miss an episode. And if you know somebody who could benefit from these discussions, share Blue Dirt with them. Got questions or topics you'd like us to cover? Reach out. We'd love to hear from you. Until next time, keep digging deep, stay sharp and remember real value is built from the ground up. See you on the next episode.
