Shopping Center Real Estate Investment Opportunities - Continued...

Shopping center real estate investment opportunities continued...

This shopping center is anchored by Big Corporate Grocer Credit Tenant, Inc.  The cost of construction is $77.50 per square foot (hard cost) while the soft costs and land come out to another $28.00 per square foot.  Costs of financing add $11.45 per square foot., so we're all in at $116.95 per square foot for a grand total of $14,618,750 for the project.  Since it is a credit-anchored center, it can get a non-recourse construction loan equal to 70% of the hard and soft cost of development (70% of $105.50 per square foot) or the sum of $73.85 per square foot; the sum of $9,231,250.  This means the developer has to raise $5,387,500.  The developer spent about $150,000 to get to this point in the road with the due diligence.  We know what the hard cost, soft cost and land worked out to be around $13,187,500.  This means the final month of the construction phase will cost about 8% of that total amount; or $1,055,000.  The condominium sales plan is contrived so that the net sales proceeds will equal $1,055,000 - or an amount equal to the last month's capital expense.  A portion of the project is apportioned off into a condominium plan.

This is not your parents' condominium plan.  This is the allocation of a portion of the project space for the sake of structuring development financing for a commercial income-producing property; this can be any type of commercial property as the plan buyers are going to never set foot in them unless they happen to go shopping in one of the stores.  The condominium plan is organized as an equity financing tool that provides leveraged financing.  There are two (2) things you have to remember about condominium plans:

In the meantime, we have established the validity of the condominium plan model.  Why does it always work, you ask?  It works because it puts the value accretion together with the investment income split to create the opportunity.  As the value in the center grows, this works for all parties.

This leads us to a discussion of the use of the fractional tenants-in-common commercial real estate plan (or "TIC Plan") syndication.  We used 5,000 s.f. out of 125,000 s.f. for the condominium investment plan.  We have 120,000 s.f. left to put into a fractional TIC Plan syndication sale.  The developer had to raise $5,387,500, of which the condo plan provided $1,055,000, so that still leaves $4,332,500 still to be raised and we will use the TIC plan to do it.  

Let's dig into the numbers just a bit further.

The rent in the center averages $16.50 per square foot.  The center operating expenses are covered in the CAM charge.  Center operating costs and contributions to reserves work out to be $4.50.  The net cash flow is $12.00 per square feet; or the sum of $1,500,000 in current dollars.  That works out to a 10.26% capitalization rate and  the market for the cash flows is 8.50%.  So the income-capitalized value of the center is $17,647,058 - that's a total initial equity gain of $3,028,308 if the center is sold.  If we assume the shopping center is pre-leased and in the first six (6) months the property is sold to another syndicate - the "take-out financing" syndicate (that's an opportunity too!).  That means the $3,028,300 is realized within the projected 12 month construction and stabilization period projected by the developer.  This $3,028,300 plus six (6) months of income (a total of $750,000) goes into the pot, providing a total of $3,778,300.  The typical arrangement works out to be 20% going to the developer and the remaining 80% would go to the construction risk pool that put up the $4,332,500, plus the return of capital, for a total of $7,798,500.  $7,798,500 divided by $4,332,500 divided by 1 year equals 180% on the nose.  If you had been in the construction risk pool, you would have realized a 180% return for being in the deal for a year.  That should make the TIC plan opportunity sufficiently profitable enough to attract sales sufficient to generate a net of $4,332,500 to the developer.

There's another way to play this and that's the long-term investment.  The long-term investment gets you roughly the same return over the course of a 7 to 10 year holding period.  The annualized cash-on-cash return drops considerably, but the long-term syndicate wasn't going to be exposed to construction risks or market risks as the long-term syndicate would only close once the property has completed construction and reached full capacity operations.