Real estate never has a problem.
TIME TESTED CREATIVE FORMULAS
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Warren Buffet once said: “I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in business. I read and think. So, I do more reading and thinking, and make fewer impulse decisions than most people in business.” Oh, how I wish those words and actions were undertaken in an earlier life when the onward daily addiction of deal making was the first and foremost consideration! Going forward, it will be my pleasure to share, on occasion, real estate investment and development books, articles etc., from authors I know and have dealt with, and/or have alternative respect for and trust in. The first shared offering is a manual authored by mentor Virgil Opfer and Dan Harrison, entitled “ 100 EQUITY MARKETING FORMULAS ”, which is always kept by my desk. Each formula has a one-page explanation that further opens up my mind to solution-based ideas using non cash equities to create Cash and Cash Flow, Partnerships, Down Payments, Financing, Leasing, Options, using created Mortgages/Notes to acquire, sell, structure, etc. etc.
One of the true rewards of business travel outside our local geographical markets to attend meetings, marketing sessions, and symposiums is that we get a chance to reach out, meet and build relationships with like minded entrepreneurs ready to share their ideas, life experiences, and values. One extraordinary mentor to many of us is a long-time associate, Virgil Opfer. He has been a catalyst in sharing concepts and ideas that we all have readily been able to use back in our individual home markets. In upcoming articles, Virgil has graciously allowed me to share his knowledge on topics such as extended land development ideas, as well as a wonderful book he wrote outlining 100 Equity Marketing Formulas. Last month our article ventured into “Partnerships”. This month, Virgil has agreed to allow me to extend the Partnership dialogue by offering an article he wrote regarding a partnership structure that will surely activate creative minds and bring together complimentary skill sets. It is presented below, as written by Virgil, except for some very minor tweaking. I trust this article will be a benefit to the reader.
I remember a teaching moment during the 2008 recession that will forever be remembered. It involved a partnership discussion regarding a slow-moving large land development I had brought money to. My friend and long-term Managing Partner was Bill Stonaker who was apologizing for the slow movement in selling off pad sites, creating build-to-suits etc. that entailed this particular business plan. The Investor Partner quickly intervened with the following wisdom. Before investing, they independently reviewed project research and analysis presented including normal “Blue Sky”, “Most Likely”, and “Worst Case” profit scenarios; Even with best laid plans, due diligence, underwriting etc., history shows unknown future speed bumps occur that are ultimately viewed from the rear-view mirror instead of future proforma spread sheets; Saying that, the Investor Partner noted the number one reason for initially investing was because of Bill’s personal integrity, which was just as important as his well-known amortized development knowledge. Cash call assistance was then quickly offered out for any current or future perceived shortfalls needed at that particular point in time. No further questions asked! And, the project has ultimately proven to be an absolute "HOME RUN" for all investor partners.
Over the last many months, we have stressed the power of creative formulas to move corporations and individuals forward in a thought process of increased benefits. This time we have decided to bring some fun into these equations. Below are incorporated different simultaneous fictional transactions, where increased benefit intention is emphasized. To this we also note the formulas used to accomplish these transactions. Many thanks to my long-time associate, mentor and friend, Steve Barker, whose consistent “Out of Box” creativity (some times with simplified pictorials) has helped many think through and finalize win-win beneficial “value added” transactions for all. Here we go.
A while ago, I had the privilege to work with DBM Realty Limited comprising of Brian Mortell and his son Colin through a very interesting and creative land assembly. That journey is as follows.
Recently, I had the opportunity to visit with Gary Vandenberg, a long time 30+ year friend and business associate, also in the same creative real estate business. We again reminisced on some past transactions, successes, war stories etc. One transaction Gary remembers intrigued me again. It involved a 14-acre property in a beautiful recreation area. No services. Zoned ½ residential and ½ agriculture. On this site, he eventually completed a 37 semi-detached condominium project and a 4 single family lot residential project. The journey to that end was interesting.
It is not hard noticing the abundance of land parcels scattered around the landscapes of Canada and the U.S. Many of these locations may consist of farm and/or ranch land, forgotten or current non-economically viable development properties, remnant parcels, large hinterland acreage parcels, forests, old quarries, parcels with economically tired and nonfunctional buildings that haven’t sold for years etc. It is interesting that many times, busy corporations or individuals will mention these mentally discarded lands only when they remember ownership of same, when the yearly tax bill arrives. They also may be distinguished by old, rusted “For Sale” signs, barely hanging on their supports. A sure sign of “listing fatigue”. No takers. Just helping hold the world together.
A few years ago, a partner and I owned a piece of encumbered vacant land. Through rezoning, site plan etc., it was approved for a residential subdivision. We sold the land to a developer and took back a Mortgage. This Mortgage became the down payment for an apartment building. We moved the equity through the apartment building to a Net Leased Government Building and Mobile Home Park. (“MHP”). The MHP had 67 pads, which were all rented. But 10 of the homes came with the purchase. We did “Lease to Own” agreements with the renters of the 10 homes. We then rezoned the excess lands to allow for a total of 170 pads. We sold this to a group who developed the excess lands. The increased equity was then moved from the revalued MHP and re-invested in a new geographical jurisdiction. It’s a good story and true. However, it did not just happen. Certain initial fundamentals needed to be in play from all parties to these various transactions.
We had an excellent quality large asset offered for sale. Owned by a successful non-profit, it had everything for the discriminating Buyer. Excellent dining facilities, beautiful well-appointed motel rooms, cabins, a land lease section with privately owned homes/cottages etc. etc. All located on a beautiful long beach etc. “Pride of Ownership” was written all over it. Besides the benefits noted, the project was owned free and clear of debt and enjoyed 2 separate registry titles. Potential buyers were impressed with the facility except for either: The location being considered just out of comfortable driving range; and/or The inability financially for Buyers to take on such a project.
We found an attractive parcel of land, ideal for our Buyer client’s latest commercial venture. However, coming to terms on the price for the property turned out to be a battle of wills between a well healed and non-motivated Seller and our Buyer. The Seller knew the property’s location and growing positive demographics would one day reap him the inflated number. The Buyer, on the other hand, knew the future was good for his business, but could not justify the Seller’s price at that specific time. All along in the negotiations, the Seller knew about the financial strength and integrity of the Buyer. Through this growing relationship, we negotiated a transaction whereby the Seller advanced substantial money to the Buyer, so he could construct a brand-new facility. In exchange, the Buyer and Seller entered into a long-term lease, with the Buyer having an Option to Purchase the property over a period of time. My Buyer, once his business was “proven up”, exercised his Option to Purchase. The Seller received a solid Net income stream for a number of years, had pride of ownership over this period and ultimately did receive his land asking price through the larger exercised Option. The Buyer took advantage of an excellent location, expanded the business, and was able to exercise his option through well over 100% bank financing based on the appraisals completed at the time of the option being exercised. We took this formula to yet another location in another city, with similar success. There are various additional interesting creative opportunities for Sellers and Buyers alike via leasing real estate with options to purchase. The Buyer will realize benefits of property ownership (including appreciation) without the potential early financial need.
Conventional wisom..
.. has us putting equity(s) we own on the market for sale, then waiting around for the cash buyer to surface and come to us. Why not take the initiative to use that equity as a buyer for the alternative equity being sought?
Equity definition;
Value of Asset Less Existing Debt = EQUITY
Every transaction is an exchange.
We exchange cash for a quart of milk. We trade our used car in plus add cash in exchange for that new vehicle.
If you..
.. get all cash for that equity, what would you do with it?
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