So you can’t find any good commercial real estate investments in Missoula… now what?
If you’ve spent any time looking recently for a commercial real estate investment in Missoula or Kalispell, you’ve no doubt realized that the pickings are paltry. Whether you’re after apartments, warehouses, office, self-storage, cap rates on properties are generally low and the “upside” is tight. Most listings on the market labeled as “investment deals” are not financeable at list price without an outsized down payment.
What’s an investor to do? Here are three ideas…
Depending upon the level of involvement you’d like to have in the day-to-day operations, your cash availability and tolerance for risk, here are 3 ideas to get you a better overall return:
Value Add/Opportunistic Deals
Value Add deals are what they sound like — taking an under-utilized property and adding value to it in order to improve its investment performance. The process of adding value can come in the form of renovating some or all of the space, making management improvements to the property, rezoning or re-purposing the building for a different use, increasing density, or changing the tenant mix. Or, these could be properties where some or all of the tenants in the building are on short term leases and thus the reliability of the income stream is severely diminished. In most of these cases, this provides an angle for an investor to acquire the property at prices well below market.
Example: We helped an investor find a 45,000sf office building in Missoula for sale that was at about 60% occupancy. Through our underwriting process, we helped him assess the potential value to be added through targeted renovations, replacing the management company and leasing the remaining space. Armed with market intel on in demand office space in Missoula, expected rental ranges and amenities desired by Missoula corporate tenants, he was able to close on the property significantly below the market rate for comparable properties. We then helped him lease the building to 100% occupancy (with a waiting list for spaces). A year later, the property appraised for almost double its acquisition price.
An investment strategy, accurate and timely market intel and correct underwriting assumptions are crucial in making these work. It is especially important to have accurate assumptions on the likely type of tenant or users for the space and a marketing plan to get the space filled.
Sponsored Equity Investor Deals
Real estate investment sponsors (sometimes referred to as syndicators) put together properties, tenants and financing into a package. The sponsor will identify an investment property, develop a strategy to acquire and manage the property (which may include some of value add items from above), then prepare an offering memorandum for investors who might be interested in such a project. He or she will then get commitments from investors in equity “blocks” (typically ranging from $25,000 – $250,000 per block, depending on the investment scale and type) to invest in the deal. With the equity raised, the sponsor secures finalizes the financing (usually without any guarantees required by the equity investor) then closes on the deal and begins the asset management process to deliver on the projected returns.
For an investor looking for a more passive role in commercial real estate investments in Missoula or Kalispell, this can be a great solution. We’ve seen everyone from school teachers to engineers, and doctors to ranch owners, that desired the increased returns a sponsored CRE deal can provide but didn’t want to become a CRE property manager or investment guru. Depending on the type of asset and strategy, we have seen investment deals offered that deliver a 15-20% internal rate of return over the hold period. Sponsored projects in a qualified Opportunity Zones, which have an added layer of tax incentives, are also in very high demand. Kalispell, Missoula, Bozeman and Great Falls all have qualified Opportunity Zones.
Like all investments, there are trade-offs however. In a sponsored deal, the equity investor will typically give up some control in exchange for the higher return and lack of obligation to manage the project. Sponsored deals, with some limited exception in a tenants in common arrangement, often preclude the ability to do a 1031 exchange into or out of the investment. It’s also important to consider that anytime there are partners in a deal, the paperwork level at the outset and the possibility of complications along the way tend to increase. An experienced sponsor will do everything they can to mitigate these concerns in their offering. But, some of these items can be unavoidable.
Depending upon the offering, there can be restrictions on who can participate in these deals that come from the SEC. Be sure to consult with your tax and legal professional to make sure these are right for you.
Last but not least: Engage a Commercial Real Estate Advisor to present you with opportunities
When working with a professional who focuses exclusively on commercial and investment property, you will be provided with significantly more opportunities than you would find from a “jack-of-all-trades” real estate agent that spends most of their time selling houses. A CRE advisor will have a list of off-market opportunities and can help you find a deal before it ever hits the open market. This is delivered through a disciplined process on the part of the CRE advisor of finding willing property owners and understanding their goals and motivations. You are then matched with those properties based on your investment goals. It’s not uncommon that a CRE advisors will have a tenant in tow that needs space at the property you close on. In so doing, you convert an otherwise under-utilized or vacant property into a cash-flow producing machine.
Sterling CRE Advisors helps businesses, investors and developers to buy, sell and lease commercial and investment real estate in Missoula, Kalispell and Western Montana. Contact one of our advisors today for help creating a customized investment strategy that fits your goals.