Three deals on my desk right now. All three are labeled value add. All three are completely different bets.
1. Mark-to-market.
We recently acquired a deal in infill Sacramento that will barely cash flow for the first three years. We love it. The in-place leases are materially below where the market is today because it was owned for several decades by a family that wasn't pushing rents. In the last few years it was even operated by a trust that wasn't even doing expense reconciliations at the end of the year. The tenants are paying. Everything is operationally fine. But when those leases roll, we re-price to market, and in a supply-constrained infill location that gap is significant. We expect to stabilize above a 9% yield once we get there.
The patience is not the problem. The patience is the strategy. Buying below market leases in a tight market is one of the cleanest ways to build embedded upside before you own a single day of operations.
2. Sale-leaseback.
We acquire from an owner-operator who needs liquidity and needs to stay. Our recent Laredo deal is an example of this. They sell and we execute a leaseback (in this case, 3 years) at closing. They keep running their business. We collect rent from day one.
Seller gets capital and continuity. We get in-place cash flow and a second parcel to develop.
This is significant since an estimated 40% of all IOS in the US is controlled by owner-operators.
3. Vacant lease-up.
We acquire vacant or partially leased and execute the lease-up ourselves. This is the riskiest of the three.
Our Gilroy acquisition: we tied it up with zero executed leases. Zero. Was I worried? Is it harder to raise capital for these types of deals? Yes and yes. We signed leases on 87% of the property shortly before we closed. We were on version 23 of the excel model by the time we closed. This one will be a winner for our investors.
Here is why that works in a market like Gilroy: 3% vacancy, five other operators who would take the yard tomorrow. Single-tenant risk in a market that tight is not scary. It is just execution. The key is always market selection. We do not buy high vacancy in a soft market. We only take on this risk profile where we have high conviction the space will absorb.
Each structure fits a different moment in the cycle. We are not married to one of them. We are married to the discipline of only buying in markets where the fundamentals justify the structure.
Which of these three profiles fits where you are in the market right now?
“Value Add” Is Not One Strategy
