Tuesday, June 14, 2011


For the fifth or sixth time in a month or so, I've been sent on a wild goose chase by colleagues in this profession. Specifically going out to take an initial look at a building that might work for a buyer, then finding reality bears no resemblance to what was advertised.
Where do wild geese come in? Because the information being posted in the online listing is incredibly misleading. And when I use the word "misleading" I am being polite. When agents decide to list the potential Net Operating Income as actual, but fail to disclose it is a projection. The same issue with cap rates.
My partner at Blue Rock Capital Advisors, Jack Turner, and I have been neck deep in analysis of too many buildings in the past several weeks, only to find out in more than a half dozen instances that the actual numbers bear no resemblance to what was advertised. Now, I am totally in favor putting the best spin on a story, polishing the apple and all that. But this is flat out dishonesty. If the numbers don't show so well, tell other agents that the numbers you are listing are "potential" caps and NOI.

Case in point. A 40,000 SF+ office building. Listed at more than $2M. Noted that the occupancy is only 47 percent, but the NOI is $506,000. And a capitalization rate of 23. We knew the building, so drove out to take a look to see what shape it is in present day. Lots of upside potential, considering the numbers and what we saw. In pretty decent shape with minimal deferred maintenance here and there. The parking lot needs to be replaced. But overall, very doable. Then after yet another call to the listing agent (3 calls since last Thursday; as we know a handful of companies don't want to openly market listings in an attempt to find their own buyers, thereby doing their sellers an incredible disservice) we finally received a detailed financial analysis. Reality check:  actual numbers -- NOI is negative $80,380, and the actual cap rate is negative 3.65. Plus ridiculously below-market rents.
This is only the latest instance where this has happened. In the past four weeks I have experienced:
- NOI being dramatically different in reality than what was advertised in a medical office building in an upscale suburb;
- Rents being dramatically different (occupancy too) in a MUH property south of the city;
- Every tenant (there are five) lease expires in two years in high-end neighborhood retail strip, but the property is advertised as having 10+ years left on the leases. Get the funny math? Five tenants multipled by two years equals 10? Huh???
The count where this has occurred? The aforementioned corporate office building, a suburban medical office building, a retail plaza, a second MOB, a retail strip center, a multifamily complex east of Columbus, a portfolio of government office buildings, and a high-end retail strip center.

We have seen actual occupancy rates, length of leases, cap rates, NOI, property size and price -- different factors in different properties at polar opposites of what was advertised. Not just off slightly, but in no way close to the reality once you got into due diligence. If only these had been disclosed up front, with projects then showing the upside, AND realistic pricing from the agents and owners. Because agents should be representing the best interests of their sellers. If someone is taking the listing just to have their name on a sign, but there isn't a snowball's chance in hell the building will sell (unless a real rube walks in, unrepresented, and decides to make a run at the building), then what help is the agent giving the seller? How is the seller truly being "assisted" if an agent is blowing smoke up their a**?

Frustrating for me, but for those CoC readers who are investors, who go it alone and choose to travel these waters without using seasoned counsel, I cannot imagine how you react when you run into this. For I know what is going on. But to the unitiated, you could pretty much get a hate on for everyone in our industry, perceiving that everyone lies. The reality? A few bad apples are spoiling it for everyone. Please know this is not standard operating procedure.

In the residential world, agents will get needled about advertisements for "cozy" (small) homes, "handyman specials" (it may fall apart soon), and so on. But to blatantly present best-case projections as actual financials and not disclose? Grrrrrrrr ........ You do know, right, that the truth will be revealed in the due diligence period anyway?  Right?

As far as my projects? Today's resolution is Move On. Our many investors have needs, are motivated, are WELL qualified and bankable, and are ready to move now. No time to dwell on it other than shake our heads and remind ourselves ..... we do not operate that way.
Vent concluded.

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