By Sunny Sajnani, Senior Director
Common in this industry, you will hear the saying: the “four food groups” of Commercial Real Estate. This term refers to the four most popular commercial property types: Retail, Office, Multifamily and Industrial. Some would argue the fifth major commercial property type is land—depending on the use.
As a real estate financier, we get approached regularly by our clients engaging us to raise debt and/or equity for operating business such as hotels, restaurants and other special use facilities. These operating businesses underwrite completely different than one of the four food groups but, with the correct spin, the financing request can be made to look and feel like a commercial real estate transaction. For instance, an owner-occupied property can be disguised as a single tenant property by structuring a lease between your right pocket and your left pocket.
The first thing I ask when approached to raise capital for a special use facility is operating financials—both balance sheet and profit/loss statement of the underlying tenant. No matter how good your location or how cheap you are buying a property, the viability of the business (or tenant) is the most important factor when evaluating a business credit request.
Lenders and Investors rely on the strength of the tenant or historical performance to get comfortable with making an investment or loan into an operating business. Usually a hotel or restaurant credit request has capital budget items such as Furniture Fixture & Equipment (FF&E), Inventory, Working Capital and other startup costs that an investor or lender would get very little value for in a “doomsday” liquidation event.
For example, I have recently been retained by a mid-sized restaurant company to arrange a credit facility for future growth. My relationship with this client originated with an assignment to finance an owner-occupied piece of real estate—which in today’s capital market is a favored asset class. After closing the first deal and becoming more familiar with their current capital structure and growth plans, I suggested to my client that we should approach a variety of lenders to leverage their current cash flow to open new stores. This assignment has resulted in a multi-tranche credit facility to finance startup costs for leasehold units, as well as ground up construction for fee owned real estate which the restaurant will occupy. Although the balance sheet of this company would not put them into the “credit tenant” category, I had significant interest from lenders as I was able to prove a viable concept and strong operating cash flow from their existing stores.
On the flip side, we just had a client of ours approach us to finance a special purpose building in the middle of nowhere for an industrial tenant with limited operating history. For this particular assignment, we will have to lean heavy on the balance sheet of the prospective tenant. This tenant is heavily capitalized and makes the deal somewhat attractive. Without strong financials, this transaction will never get done mostly because a replacement tenant would be very difficult to find for this type of building. This request is considered a credit deal and will only be evaluated based on the strength and credit worthiness of the tenant.
As a client rep firm, we want to help our clients with all their capital needs. If there is any resemblance of commercial real estate, we will structure the transaction to fit the mold of CRE lenders and investors. The various ways to structure capital requests for special use facilities and operating business include owner-occupied leases, leveraging up existing cash flow for capital expenditures, sale leaseback transactions, credit tenant construction facilities, etc. Simply stated, a financier has to ask the question… is it real estate or is it a business? With the correct presentation and audience, you can usually spin one way or the other.
Want to learn more, contact Sunny Sajnani, Senior Director.