Why You Should Take The Risk In Retail Real Estate With Jeff Rosenberg and Jason Nidiffer

Do you have your eyes on retail real estate investing? Want to invest but not sure where to start? This might be the episode for you! Joining your host Jeffrey Rutkowski are some of the top retail investors in the country, Big V Property Group’s President/CEO, Jeff Rosenberg, and CIO, Jason Nidiffer. Today, they explain just how retail and commercial real estate investing works and reveal their buying process. They give tips on what to look out for and things to consider before taking that risk! Stay tuned for expert knowledge you can use to grow your investments!

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Why You Should Take The Risk In Retail Real Estate With Jeff Rosenberg and Jason Nidiffer

In this episode, we have Jeff Rosenberg and Jason Nidiffer from a company called Big V Property Group, some of the top commercial retail investors in the country. You’re going to be blown away in this episode as they reveal their buying process, how to take down an $8 million, $100 million, $200 million retail commercial building.

Before I introduce them, as always for our word now is outparcel. What is an outparcel? We will be getting into retail commercial investments. We’ve all seen these large commercial buildings, these strip centers, as you call them. Oftentimes you’ll see on the front of these properties, maybe a standalone Chick-fil-A or Chili’s. An outparcel is an incredible opportunity when we purchase a retail center that includes a few of these standalone buildings.

We can buy these centers at a higher cap rate, and they go through the process of subdividing in a sense and separating these outparcels from the major center, and selling them at a lower cap rate, reaping an incredible profit. Everyone loves a Chick-fil-A. Everyone loves a Starbucks. There are many investors out there that will be happy buying these for the cashflow and the security over time. There are not many people that can take down large centers like the gentlemen we’re going to talk to. Let’s get into it.

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We have some heavy hitters in the booth with us. We have Mr. Jeff Rosenberg and Jason Nidiffer, Owners of a company called Big V Property Group. Welcome to the show, gentlemen. It’s good to have you here.

It’s good to be here.

Thanks for having us.

You have to offer a solid product to get people out.

I’m excited just because I know the value that you bring to our community. To get you on a channel, that’s going to reach out beyond our community. These guys are heavy hitters as I said. I especially like you because you’ve made me a lot of money the past couple of years. I want to thank you that personally for all these deals that you continue to crank out over and over. Jeff Rosenberg has about 30 years of experience in commercial retail, in the business. Jason is pushing twenty years. A lot of experience and about $1.6 billion in commercial assets correct me if I’m wrong.

That’s our portfolio.

What’s the goal to head to trillion? What are the benchmarks for that?

Trillion is a big number. Our goal now is about $5 billion or so.

You should aim a little bigger.

Is it $10 billion? $20 billion? Pretty big numbers.

If you’ve been reading the blog for a while, you’ve heard me mentioned the company Equity Street Capital, where FortuneBuilders partners with different operators across the country. This is one of our main relationships. There are almost over 30 deals where FortuneBuilders has partnered with Equity Street and has partnered with you. I really appreciate you being on the show. Big introduction, some big numbers but let’s take it all the way back. Let’s start with you, Jeff. How did you get started? What does Big V look like? How did you get started? Where’d you come from?

First of all, how far back do you want to go? Let’s go way back. When I was fourteen, I was pushing carts. We owned a chain of supermarkets, my parents did. We own both the supermarkets and shopping centers but I started way back, pushing carts. I was a checker like checking people out. I did every job you can imagine in the supermarket. I was out there in the rain. I was out there in the cold. I actually enjoyed it. I thought it was fun.

I asked my kids, “Do you want to work when you’re fourteen?” They look at me like I’m crazy. I worked. Taking the garbage out is work. I started there, went into the retail side of things, and then transitioned back into the real estate side back in the mid-’90s. I’ve always been involved in the family business. We’ve always owned shopping centers and retail real estate associated with the supermarkets we’ve owned. I became directly involved then.

Big V is the family business that you’re referencing, correct?

It is the family business started by my grandfather in 1942 and grew from there.

What does it look like now?

We’re basically a vertically integrated, open-air center sponsor and owner. Overall, we have about 70 assets all in and it’s close to $1.6 billion in value. It’s been good. We have about 70 team members or so making sure that we execute on our business plans.

 

For those of you unfamiliar, vertically integrated means that everything’s in-house, they’re not outsourcing leasing. They’re not outsourcing property management. You are getting the job done across the board in-house. What about you, Jason? How’d you get started? How’d you get connected with Jeff?

I grew up in a real estate family. From early on, in my teenage years, I’m learning the business. My father was a retail real estate developer. He’d build grocery stores, strip centers, single tenants and some Targets. There was actually a Target that he built and sold that we bought back later. That’s how it goes the full cycle. I always knew this was what I was born to do. I got my real estate license at nineteen years old. I am over twenty years, technically, in it.

My goal was to learn everything I could about the commercial real estate and retail real estate industry. I did brokerage work, leasing work, tenant representation, land assemblage development and tried to learn every facet of the business, to be really well-rounded. My true love and passion were buying an existing shopping center and adding value to it. I just saw so much potential in that.

That’s where I always gravitated towards. I did a lot of development work but the redevelopment of a shopping center, even if it’s a successful shopping center, you can feel it, you can see it right there, you know that you’re getting immediate cashflow, that’s what I always loved. That’s what brought Jeff and myself together that love for the existing shopping center business.

You are definitely passionate about what you do. What we’re going to get into is what would be the most impactful. We have many experienced investors and brand new investors reading. I thought running them through your buying criteria, how do you make the decisions to acquire certain centers and pass on others. Before we get into that, many people think in commercial real estate, you have an office, you have retail, and you have apartment buildings, which is true. Many people think when you talk retail, which is your expertise, that it’s all the same thing, not realizing there are many different types of retail properties. I don’t know who wants to take that question but just break down the types of retail and what you’re attracted to.

We get asked that question many times. Everybody tells us, “Retail’s all the same,” but retail is not the same. I’ll let Jason break it down. We’ve discussed this many times and there are very distinct categories between the retail opportunities that we pursue.

We’re speaking about the different classes of retail real estate. I’ll start off with what a lot of people would be familiar with. You have your neighborhood grocery shopping center that facilitates the neighborhood. You have your necessity needs. You have your strip center out on the road. Those are also convenience-based types of shopping, in and out very quickly. You’ve got power centers that are anchored generally by Walmart or Target.

You have these large junior box tenants that occupy about 25,000 to 30,000 feet and offer a lot of products. Those are the power centers. We really liked to play in that space. There’s been a lot of good value there, and there still is. You have lifestyle centers, which is something that we’d like to specialize in. The mixture of power and lifestyle is something we really love.

You’ve done a lot of those.

Why don’t you define what lifestyle is because maybe some of the folks reading don’t know what lifestyle is?

It brings an experiential component to the shopping experience. Instead of just, you need a product and you get it and you go home, this brings an element where you enjoy coming out because it’s aesthetically pleasing or there’s something about the way it’s put together. It’s very walkable and you can spend hours there and really enjoy yourself. It’s open air. It’s not an enclosed door.

It’s all outdoor.

It’s almost like taking a mall and opening it up.

There’s a lot of that. That’s a good way to think of it. It draws people out. What we focus on is getting the customers to the shopping center. You offer things that bring them out and make them want to come back. The tenants are going to be successful, and then they’re going to be paying you the rent. That’s why our investments are so successful.

I don’t know if you’ve been to the Fashion Valley Mall here in San Diego. Probably once a week, my wife and daughters want to go hang out. They want to walk around because they’re hearing the music being played, the restaurants, people hanging out having coffee and all of those things. I know that’s been a lot of what you have focused on. In the lifestyle centers, is typically where you’re going to see the higher-class tenants, the Lululemons, the Guccis.

That’s a good point. You have to offer a solid product to get people out. The tenants are definitely a large component of getting the people out and bringing them out repetitively. You’ve got to offer something they want to shop at and experience as well.

The flip side of that would be the indoor malls, which really got spanked over the past couple of years with everything that happened while the lifestyles have flourished. Is that what you have seen as well?

I would say that there is still a place for indoor malls. There are A-malls that do have Gucci or LV or Tiffany, that still seems to be surviving. It’s the B, B+, and C malls, the malls where you used to go and see JCPenney or Macy’s that are struggling. There’s a whole host of retailers that have gone out of business. By the way, the tenants that were in those malls are populating our shopping centers. Those tenants aren’t going away. Those tenants are relocating out of those malls where traffic has dropped dramatically and out into the open-air centers.

Tenants want to be where other tenants are.

Before I ask that question, to me, the elephant in the room is every time I talk about retail, Jeff, everything’s being bought on Amazon. Everything is online. I know a big focus for you is internet-resistant centers. Break that down really quick. Show the statistics on how much retail is being driven online, how much is still operating in centers like yours?

Historically, and this almost say I’m speak a few years ago, and then give you a five-year projection. It was only 90/10 percentage-wise. 90% on in-person and 10% online. That was probably a few years ago. The projection was that would flip in five years to 85/15, 85% in-store and 15% online. In about half of that 10% and the 15% is coming from Amazon. There is growth. People always talk about the growth but you forget how large of a difference of the pie is still over here on the in-person shopping. That growth is not as high as it was. It’s not going to continue up on that upward trend to where there are zero physical sales. It’s starting to merge itself, in a sense. You also have to factor in the omnichannel, which is huge for in-store physical retailers.

Break it down omnichannel for those that aren’t familiar.

What that means is it’s a tenant like Walmart, Target or Best Buy. They’re offering you an in-store experience that couples with their online experience. They make it so that it’s easy to do transactions but they offer you benefits to the physical experience. You can come into Best Buy and you can see, touch and feel it. You have an expert there that can tell you everything about the product that you wouldn’t understand.

You can also order it and they’ll ship it to your house or you can have bought that online, they’ll ship it to your house, and you can return it in the store. There are a lot of benefits to having both of those things. That’s why you see, even now, Amazon announcing they’re opening more physical stores. They know they have to do that to really compete with Walmart and Target.

We saw a statistic once about the number of visits to a website when someone opens a retail store in a marketplace.

It was approximately 40% and it would go both ways. If a retailer would open a location in this ZIP code or a 5-mile radius, traffic to their website would go up by 40%. The opposite would happen if you look at it and they closed that location. It was even more impactful, maybe it was 45% or 50% they would lose traffic in that zone if they didn’t have that as on it. Every day, brand loyalty is what they’re building.

Look what happened to Untuckit or Warby Parker, internet-only brands that have made a massive investment in retail. There’s a reason for that.

You’ve seen a lot of that. As you are reading to this, 85% of retail purchases are happening in-person, in-store. It’s not going anywhere any time soon. Let’s get into your buying criteria because this is what will help the readers that are out there looking for deals or just learning getting ready to get into deals. For you, the first box that has to be checked is the market. What attracts you to a specific market? What turns you off from one?

A lot of it is the growth of that particular market. We want to see higher than average national growth. The national average now is lower if people have been following the census data. America has been growing slower than it has in the past, which is a concerning issue in itself. We want to be above that national average. The national average is around 0.5% to 0.6%. We want to be 1% to 2% of the growth that we see in this particular market, especially in the trade area of a shopping center.

We really focus on where that growth is, how much more growth there is to be had and how dense is it. All those things factor in. It’s a two-edged sword. We want to have growth but we want to have discretionary income to go along with that growth to make sure that our tenants can be successful. We also want to see higher than average state income levels within that zone. Traders are normally what we’ll look at.

You mentioned earlier about 70-something properties you have. If I were to guess, I’d say about 95% of your stuff is Southeast. Would that be accurate?

That’s Southeast and South. We’re looking at the growth markets in the United States. Our retailers like to be in the growth markets where their sales grow, they feel comfortable. That’s where we like to acquire properties. That’s important to us. As Jason mentioned, what’s also important is making sure that we’re picking the right properties in the right retail corridor of the market.

Anybody can pick a market. Anybody can go to Dallas to test a good growth any place in Texas or Atlanta but where in Atlanta do you go? Where in Dallas do you go? You can make a poor choice. You can pick an area in Dallas that people may be shifting away from retail, or retail may be shifting down the road. You’ve bought an asset, which has a potentially declining population base. It’s important to look at the demographics, the population movements, and understand the market that you’re buying in.

You’re starting with the market, and then what submarket within that market. I’ve noticed typically, I don’t see you purchase much in the downtown area because probably the cap rates are a little too low. You’re looking for things on the skirts or outside where there are more attractive cap rates and you still see the same growth. Once you target in on a market, then what are the steps that you take? What are the things you need to see? You alluded to some of them in the demographics there in the submarkets.

We take a funnel approach. It’s how we look at deciding on a property. We’ll start off with a market. If it fits our market criteria, then we look at the submarket. Is this the submarket that hits all the high-level incomes, growth factors and density that we want to see? We take it a step further. Is this in the critical mass of retail we want to be? Tenants want to be where other tenants are. That’s where they’re the most successful.

Just to cut you off there. Critical mass, elaborate on that. You mentioned you want to see 2 to 3 million square feet of space in a certain area or something along those lines.

We want to see as much of that retail in there. It’s got to be occupied retail, too. We want low vacancy rates and a lot of density of retailers in there. That’s where the people are going to come. The answer to a lot of these questions is we want to buy shopping centers where the tenants know they’re going to be the most successful in this market that we choose.

If we’re in that dominant shopping center, that’s where all the tenants are going to flock to and they’re going to have really high sales numbers. They can then pay the rent and they can pay the rental increases. We have really strict criteria but they all come back to that same answer of, “Where are the tenants going to be most successful.” When we stick to these criteria it points us in this direction.

 

The tenants aren’t picking your shopping centers because they’re nice. They want to know, “I’m in a location, that’s going to make me money,” and then you’re bottling that. That’s smart. I know after you check the box of the market and the submarket, and then we’re looking at price. That’s usually the biggest concern, the biggest question I got. I want to get your thoughts on how you dial in price on a center.

Before we do though, I want to make everyone aware that we have a free class. You’ll see it on FortuneBuildersShow.com and this will get you a ticket to a free class with Than Merrill, who’s partnered with Jason and Jeff, on over 30 different centers across the United States. In that class, he’s going to teach you the fundamentals and the basics of getting started in real estate and really pull back the curtains and show the systems that Jeff and Jason are using on a day-to-day basis to where they’ve acquired over $1 billion in assets. If that’s of interest to you, check the website.

Let’s talk about price. We’ve checked the box theoretically of market and submarket. Before we go there, one of the deals I’ve invested with you was The Rim in San Antonio. Amazing shopping center, the largest in the State of Texas in terms of traffic, $208 million purchase. Just to bring that submarket to life, what attracted you about that particular center in terms of market and submarket?

San Antonio is one of the hottest markets in the country. It is the seventh-largest city in the country, so you’ve got great density. At the time, it was the second fastest-growing city in the country. Great growth, really stable employment base and great income levels, that’s what we loved about the market. We knew if we could get the most dominant shopping center in the entire market in the state. We love San Antonio, and we knew this Northwest pocket was where we wanted to be, where we needed to be.

That acquisition was not, “It came out to the market and let’s purchase this.” It was several years in the making, and that was based on experience and performance. We really knew that was the shopping center we wanted to acquire. We knew that the seller would bring it out to market eventually, and so we kept in touch and we were eventually able to strike a deal. It was out in the market on a public platform to be sold. COVID hit, they pulled it off, and then we were able to do a deal off-market and close on it. It was a great opportunity for us and a great shopping center.

Our approach to buying real estate is very measured. We don’t get caught up in the bidding of a shopping center. There’s a shopping center we bought in 2020. We bid for it. The price got up too high for us. We bowed out. All of a sudden, the purchaser let it go and did not complete the purchase. We ended up acquiring it for several million dollars less and less than what we had originally said we would pay after the fact. We need to be very measured buyers that are patient and that’s been important for us.

That’s a huge just lesson in general for anybody in real estate. It’s not emotional, it’s math, you take that measured approach and you put your offer out there. In residential, a lot of times, we’ll make sure we get into a signed backup position at our price. I’m not sure how you handle that but you’ve done a great job with that over the years, just acquiring centers at incredible pricing. You would draw away tenants from other centers. That’s why you start with the market and the submarket, and then you’re pulling away at lower lease rates. Talk a little bit about your approach to buying and what that does for the center overall.

You have to remember, when you look at the market if you want to charge a lower rate than a tenant may be getting from a center across the street, your cost of that shopping center and your cost of dollars need to be less for you to charge less. We make sure that we look at the market as part of our due diligence. We look at what the average is that people are paying. We look at the purchase price and what we need to charge for rent.

We make sure that’s below market, so we have an opportunity when it becomes available to offer another tenant a lower price than they would be getting, let’s say, across the street. That’s worked great for us. Again, it’s all about patience. It’s all about not getting emotionally involved in the win. Jason used to be an athlete. I was never an athlete but we’re all very competitive. We want to win but there are a lot of times you just need to know when enough is enough and you’ve hit your max. We do that time and time again. That has been very beneficial for us, and that we have, in the end been patient and won the deal.

This is off the script question. What you’re talking about are mindset and philosophy. One of the questions I ask every guest on this show and this comes from talking to maybe tens of thousands of investors, how do you overcome fear? You are out there taking it down $208 million buildings, sitting on $1.6 billion in property. How do you press through the fear that arises? Maybe it doesn’t and maybe you’re beyond that. In your personal life, you have to have fear in some capacity.

“Be fearful when others are greedy, and greedy when others are fearful.” – Warren Buffett

Let’s talk about. We bought retail in what was arguably one of the most fearful times. Why did we buy retail? Jason and I, and the rest of our team sat down. We know our business really well. We are experts in our business. We understand our business. We did not feel like the business was going away. We understood our business enough to say, “The business is not going away, so there’s an opportunity.”

By the way, I will tell you that I went back to my wife and I said, “We’re going to buy a bunch of stuff this year and I may be right or we may be wrong. If we’re wrong, we’re going to be living in one of our rental houses. If we’re right, we can stay in our regular house and buy another one.” We went back and said, “Do we know our business well enough? We’re all deathly afraid of what’s going on but is this a time to take a risk?” I think back to a couple of sayings from Warren Buffet. I’ve used this a lot because for me it was meaningful at the time and it still is meaningful.

There were two key phrases that were always important to me. When I thought about 2020, when I thought about what we were going to accomplish, and when I talked to the team and we all decided to move forward, one was, “When it’s raining gold, put out a bucket, not a thimble.” We, Jason and our team thought it was raining gold, which means that nobody else was buying retail. Pricing was beneficial. This would be, we thought, potentially a once-in-a-lifetime opportunity, so we would try to acquire as much as possible. Put out a bucket.

Can I warn up Warren buffet and say, “When it’s raining gold, put out a wheelbarrow, not a bucket.”

The second one, which I thought about a lot and I may get the paraphrase wrong a little bit but, “When others are fearful, be greedy. When others are greedy, be fearful.” We thought about it a lot last year and said, “There’s a lot of fear out there. Incredible fear. Are we bold enough to take advantage of this opportunity?” Thankfully, we did. It has rewarded those of us who were along with us as investors. It was very beneficial for all of us, yourself included.

We talked about that before the show. There’s a deal, the avenue that we took down in 2020. I remember my respect level for you went through the roof because I said, “These guys got balls.” I knew that you knew your stuff but I’m like, “In the middle of COVID.” It’s the only deal my wife ever questioned. She’s like, “Are you sure with retail now?” I’m like, “I’ve never been around more intelligent guys in the retail space. I want to be part of that because it’s either going to be a great story or you know.”

It’s going to be a great story. I would say all of the assets we purchased in 2020, and of course, the years before, are going to be great stories because we took a risk when nobody else was buying. We’re getting rewarded for the risks that we took and we will continue to be rewarded as we move forward. The lesson to be learned is if you know something really well and if you believe in your heart that other people are wrong and what you think is right, take a risk and act on it.

If you believe it and other people believe it because our team believed it, and we were able to talk to our investment group to believe it and to believe in us, we took that risk and we’re going to be rewarded for it. Lesson learned if you believe in something, if you really believe it’s the right thing and nobody else does, you might want to try in taking that risk.

No risk it, no biscuit.

There’s a piece of preparation involved in that because it is conviction. You got to make sure your conviction comes from a source of, “I’ve researched this really well. I’m very prepared for the decision I’m about to make.” That’s why we were so confident. We know that this is not going to go in the direction that a lot of people were fearful of. We had the research and the preparation to make that decision.

That’s obviously one of the reasons why we’re so big on education. I don’t think you could ever eliminate risk in real estate but the higher the education, the lower the risk. The lower the education, the higher the risk. That’s what you are speaking to. Know your stuff, surround yourself with people with wise counsel, and then make the decision.

If you understand your business really well, you’re well-educated, you can make an informed decision, and you understand what the negatives and positives are, you can take that risk.

Let’s get back to the buying criteria. We hit market, submarket, price, making sure we’re getting in at below market but then location and accessibility to the centers. You’ll look at Google Maps but you want to get out there, you want to drive the center, you want to experience the center. When you’re out there driving, boots on the ground, what are you looking for?

The accessibility and the visibility are the keys to what we’re looking for. I’ll start visibility. When we’re out there, we’re driving the market, we want to be able to see this thing from all angles. It can’t be down in a hole.

Tell the story about the shopping center we went under contract or were thinking about it and it was down in the hole we all drove around.

 

On a map, it looked great. It was right there in a relatively good submarket but when we finally got there, we got to see it for ourselves, it was down far below the road and on top of that, you couldn’t get to it. It’s a combination of those things and what you ended up seeing, you see that in the sales numbers when you get to it because there are problems with the center. Sometimes you can fix these problems as they’re good vacancy or bad vacancies. When you have poor visibility combined with poor access to the center, and people don’t know that it’s there and they can’t get into it and get out of it, the tenants are going to suffer. That’s where it shows up.

Not to put you in a category but value-add investors. You’re looking for centers as well, where there’s a tremendous upside, not just getting lower lease rates. When you’re out there looking at the centers, experiencing the centers, what are the value-adds that are available? What are the main things that you’re looking for?

One thing before Jason starts on value-add, I just want to mention we also love the stabilized, single store asset as well. For long-term security, we’re buying property. We have what’s called outparcels. We’re buying Chick-fil-As, SunTrust Banks, and McDonald’s as part of the center but also separately so that there’s long-term security and cashflows. There are two parts, and we’re buying them as part of the center, and then we’re spinning them off. We continue to own some of these for the long-term, just stable cashflows. It’s almost like a bond.

Back to your question, it was on the value-add piece of the equation. There are a lot of ways that we come in to add that value. The number one way is leasing up the vacancy. I’d mentioned earlier, there’s a bad vacancy and there’s a good vacancy. To explain what that means bad vacancy is something that we feel like is not really fixable and there are a lot of those out there. It can be a trap for people and investors that don’t understand.

What would be an example of a vacancy that’s not fixable?

An easy example is a shopping center that’s in a poor location or a market that’s declining. You’ve had tenants that have moved out of there. Maybe there’s bad access to it or you can’t see it, and all these reasons why. That vacancy is unleasable in a lot of ways. You’re not going to turn that center around anymore.

Also, a vacancy maybe in the corner. The shopping center may have a 90 or a 45-degree right-hand turn, and there’s a vacancy in that corner. That may be unleaseable. One other comment, we never pay for the vacancy. I would say that some people come up to us and say, “I’ve got this deal. What do you think about it? It’s XYZ price and the broker says I’m paying for the vacancy because it’s going to be leased up.” If that ever happens to you, you should go back and we never pay for vacancy.

That’s huge right there. I just want to reiterate for everyone reading if you’re looking at a center, don’t let them sell you on the future. They’re going to put together these nice packages, future pro formas, all of these different things and sell you on what could be but you’re evaluating it based on what is, and we’re not paying for the vacancy. What type of vacancy rates are you looking for in a center? What’s too little, what’s too much?

It’s all dependent on the market and how well the tenants are doing. We look at health ratios a lot. What a health ratio is, you take the sales of that tenant compared to the occupancy rate that they have at the property. It varies for different industries but if you’re under 10% generally, that’s a strong health ratio. If you’re getting up into the teens, 10% to 15%, it’s going to be dependent on that particular tenant and how big their margins are. That’s going to dictate what kind of rents they can afford.

We take a look at the market overall. What are people paying? Sometimes they’ll pay a little more than you might think because they know there’s so much growth in this area that their sales are going to increase to the point where eventually, they’re going to be making a lot of money. Tenants will do that. It really depends on the market as to what kind of rates we would want to see. Generally speaking, this isn’t always the case but the smaller the space, the higher the rental rates, and the larger the space, they’ll go down per square foot as you get larger.

When you’re looking at a center, obviously there are going to be existing tenants there. There are going to be existing leases in place. What are some of the things there that you’re looking for? What type of tenant is attractive? What types of leases are attractive? On the flip side, what would turn you off there?

Let me start off by saying, that’s part of the due diligence that we do and the important component of the success of the shopping center. We were talking about the value-add component. Earlier we’ve talked about valued add and understanding the success of the tenants. ou have to remember, we always think about real estate as just a sum of the cashflows. You have to ask yourself, “How secure are those cashflows to come in and how good do you feel about the fact, ‘Are those going to continue or are those going to stop?’” That’s part of the evaluation of the tenants. Those are important components. Most commercial real estate is just really how secure you’re going to get the cashflows and how long they will continue.

Back to your question on the leasing, the leases that we want to see, and the types of tenants, we want to see high-credit tenants and we want to see tenants that drive traffic to the property. That would be a big focus in that regard. We study the credit of all of our tenants if it’s public knowledge. We also have ways of gathering information on the private tenants, speaking to them and gathering that intel. Why do we want to know they have good credit? They can pay their rent. If something doesn’t go well, you want to have that security that you’ve got a high-credit tenant. That would be the number one thing that we’re going to want to see.

Even with that, you’re going to interview them for the non-existing tenants, the ones that you consider bringing in.

Make sure your conviction comes from a source of research.

We interview these tenants, we see how they’re doing, and we find out what their problems are. We’ll get a full rounded scope of what we’re getting into at the property, and then we can determine, “Are they paying above market or below market?” We make all those determinations to establish our own risk coming in. We also want to see long-term leases if we can get them or the ability to extend those leases.

We really want to see rent growth because that’s what can drive future value. There are so many different ways to drive the value but that is a big one. When you’ve got annual escalations in the ramp or bumps at the option that we know that we’re going to hit, you can buy a property and through passively managing it. If you’ve got a lot of escalators, the value’s going to go up.

That was the light bulb moment for me years ago. Maybe retail or commercial is new to our audience but the value of the building is directly correlated to the income it produces. It will be the net operating income, which is a beautiful thing. We’re not dependent on the market going up or the market going down. We control our own destiny, in terms of we drive more revenue, we’ve increased the building.

You have to remember all those components like Jason was talking about, visibility, access and location. Those were all helping to drive the success of the retailers, which is helping to drive value.

Poplin Place was a great deal. I invested in with you years ago. For those of you that are reading, check out our Facebook page where Poplin Place is. Just to give an overview, I know I’m jumping all over the place. What’s the overview of the deal and specifically, the outparcel opportunity that we had there with the Chili’s restaurant?

The property is outside of Charlotte. There’s a lot of growth in Charlotte and a stable employment base. This road takes you directly into the city. You have a lot of residential growth, bedroom community, and people coming in to commute back and forth to work. The traffic counts 38,000 cars a day, a great traffic flow. You’ve got all this frontage. I believe it was 0.5 mile of road frontage. The problem we saw when we went to the center, you had overgrown trees along the entire front. You couldn’t see the shopping centersIt was there. People weren’t seeing it through. It wasn’t in their face as a reminder.

We knew that’s something we can fix. We checked with the city, we did a study. We knew we could come in and remove those, replace them or just clean them up a little bit, trim them up where you can see. That was a huge component. We did it and we were extremely successful. I was talking earlier about the good and bad vacancies. This had a great vacancy because this had an institutional owner who was not paying attention to the property anymore. They had millions of square feet. It was performing well enough that they didn’t care about it.

We came in, we knew we could lease those up and we immediately did. We got this up to a 100% leased and extended the leases at Ross, TJ Maxx, and PetSmart. We replaced Gander with a higher rent payer in Burlington. We executed on all fronts and then we had three outparcels. We originally knew we could sell the Chili’s relatively quickly. We took that out within a year. Our team did a great job and extended that lease out to ten years, which gets you a lot more value because people want to see that ten-year lease. It matches up a lot with loan terms that they’re getting. When you hit that ten-year number, it jumps up the pricing.

There are not many guys out there like yourself that could take down a center like that but when you break off an outparcel, that opens it up to a much larger buyer pool that wants an attractive cap rate and cashflow.

That cap rate was 4.91% we sold that far, which is very good for a single-tenant Chili’s. Reminder, we bought this for $9 million. We basically doubled our money with that sale. It’s the same thing with McAlister’s Deli. There’s a little strip over there. We did the same thing. We sold that for a little over $6 million, so nice outcome. The cap rate was slightly above 5%.

There was another one that’s South or below that we sold.

We bought this in late 2018. The remaining parcel was just appraised and it was appraised for 50% more than the original purchase price without the outparcels, so nice outcome.

End of 2018, what was the purchase price on the overall center again?

This was $28 million.

Current value?

The current value of just the back piece is about $35 to $38 million. If you add the outparcel sales and everything, the total value would be up close to $50 million for the property. It was good execution. You have to remember, we knew the market. The criteria that we’ve been talking about for a selection, we’ve been doing this for many years. Jason talks about the importance of visibility, access, the market and the submarket. Those are really keys. You look at the center and it hit all of those checkmarks. We execute and we come away with an outcome that we continue to repeat over and over again.

It’s been absolutely amazing watching from a distance and being a limited partner over the past few years. These guys operate at a high level. If anyone was wondering, “How do I get connected with these guys? How do I invest?” There are two different ways. BigV.com is their website. You can find them there and see the properties that they’re working on and any future ones. EquityStreetCapital.com is another place to be connected there, and even potentially invest with you, along with these deals.

A couple of things that come to mind just from listening to you talk in the past, the lighting in centers. Your brother is really big on painting the back of the buildings and protecting the long-term value of the asset. To me, that’s an equivalent of what we call sizzle features on the residential, doing a nice little backsplash in the kitchen, not necessary but you should do. What are some other examples? Maybe the two I mentioned there are some other things also.

We did that both here. We did LED lighting. We replaced all the lighting with LED. A lot of our shoppers are women, and we want to make sure they feel safe at night. LED lighting, while saving money in terms of electricity, also increases by a significant magnitude the visibility at the shopping center for people walking around.

It’s a big safety feature and every single shopping center that we buy, you’re right, that’s the first thing that we do. Painting in the back of the building, people don’t think about that but that’s a longevity issue. You’re saving the block. You’re preventing water intrusion. While we make fun of it, it’s an important part of making sure that the building that you’re buying is going to be around for many years.

 

We’ll start landing this plane right here. I believe the only box we didn’t check so far was the financial underwriting. If a deal made it this far, market, submarket, price, tenants leases, the location, the accessibility, we talked about all of those. It’s made it this far. What do we need to see? What could it be a deal-breaker in the final phase of the financial underwriting?

A lot to unpack on that but it really does come down to, “Do we believe that we can execute on the business plan to deliver the returns that we know our investors are anticipating?” If we can’t hit those numbers, we would pass. We look at it in a conservative fashion. We’ve got to have ten different ways that we’re going to get to that metric because we want to set the bar, and then we want to overperform. That’s what we’ve been doing over and over again, and that’s how we want to continue with that reputation.

When we get to this final stage, that’s the criteria that we look at, and there are so many ways to get to that level. When you look at the vacancy that you’ve got with the property or the below-market rates that we could push, we do all these things to add value. Outparcels to sell, leases to extend, repurposing buildings. There are so many ways to get there but what it really boils down to is making sure that we can deliver those numbers that people are anticipating.

You have definitely done very well at that over these past couple of years. I personally appreciate that. I want to get you out of here with this question. I mentioned, in the beginning, the variety of people that are going to read this, see it on social media, etc., you’ll have people like yourself, experienced investors all the way down to somebody looking for their first commercial deal. Going back, knowing what you know now, 20, 30 years of experience, what would be your top piece of advice for the readers?

If you break down most commercial real estate, it’s really how secure you’re going to get the cash flows and how long they will continue.

We’ve talked about it already, education. Educating yourself, understanding your business, and taking a deep dive, and spending the time, effort and energy to know what you’re involved in because then you can make a decision as we made in 2020. Our decision to acquire that environment was not made in a bubble. It was made because, as Jason shared and we shared, we’re educated, we understand our business, we believe in what we do, and it was what we thought was a reasonable risk.

What about you, Jason? Was that the top tip?

I’ll play off of that a little bit and say that it’s about pulling the trigger when you’re prepared and convicted versus this paralysis of analysis. That’s sitting over here, whether that means you’re buying your own property or you’re investing with someone or whatever that is, to sit on the sideline and think through all these different reasons why not to do it instead of just doing it. I’ve always found for us, once we’ve prepared, we’re convicted in our beliefs of how this is going to work and why it’s going to work, we pull the trigger. It’s worked out well.

You have the system. If it checks these boxes, there’s nothing else to think about. You take action. That’s a great tip. I see so many investors get caught up, “Everything was good but what?” The bottom line is if you think of reasons not to do something, you’ll find lots of them. Jeff Rosenberg and Jason Nidiffer, thank you so much. It’s awesome to have you on the show. I’d like to say thank you as always to our audience. If you want to learn more about Jeff Rosenberg and Jason Nidiffer, go to FortuneBuilders.com/podcast, the information to check out their companies is available there.

As always, if you want to learn more about real estate education, commercial or residential, everybody that we’ve helped over the years has started simply by visiting FortuneBuildersShow.com. It helps you figure out, “Where do I start? How do I get from where I am to where I want to be?” Check that out. God bless you. See you next time on the FortuneBuilders Real Estate Investing show.

 

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