🗞️ News & Moves 🏠

Extend and Pretend" is the hottest move in CRE lending right now.

What’s Happening: The 2024 CRE loan workout playbook has a rising MVP: “extend and pretend.”

Loan modifications surged 81.2% since January, with foreclosures trailing at 79.6%.

Meanwhile, full payoffs?

Down a shocking 53%!

Why It Matters: Chelsea Gardens in Atlanta tells the story.

A $37.1M loan defaulted, now staring at foreclosure.

Despite a value increase to $55.1M, it couldn’t escape non-monetary defaults or occupancy struggles.

Expert Take: Extensions are shrinking, foreclosures are rising, and REOs ($5B+) are making waves.

CRE is entering a new game.

The question is, are you playing offense or defense?

Pending home sales are on the rise—and it’s not just a blip.

Sales Surge: Pending home sales jumped 2% in October, smashing forecasts.

It’s the highest level since March.

What’s Fueling It: A short dip in mortgage rates over summer sparked buyer momentum that carried through October.

Regional Wins: Gains were seen nationwide, even in hurricane-hit areas like the Southeast.

Expert Take: NAR’s Chief Economist says job growth and increased inventory are pulling buyers back in.

Inventory is improving, but affordability is still a hurdle.

🚨 The Fed Pulse 🚨

📈 November Jobs Snapshot: The U.S. added 277,000 jobs in November, a solid number but not extraordinary.

Growth is steady, reflecting the economy’s current "okay, not great" trajectory.

📉 Rate Cut in December?: The Fed is likely to introduce a minor rate cut in its December meeting.

This tweak won’t meaningfully lower mortgage rates or cause major shifts—more of a nudge than a jolt.

🛍️ Retail Sales Status: Consumer spending remains steady, but lacks the spark to energize economic growth.

A sluggish retail sector supports the Fed’s cautious stance.

🇺🇸🇨🇳 U.S.-China Trade Tensions: Restrictions on tech exports to China and retaliatory measures on critical minerals loom over the long term.

While the Fed isn’t reacting now, these issues may influence inflation and supply chains down the road.

📷 The Big Picture: December’s Fed actions will offer little immediate impact.

A small rate adjustment won’t rewrite your financial future—but strategic preparation will.

DEEP DIVE

Small Bay Industrial is my favorite asset class of all time

This is the 21st issue of Value Builder (damn, time flies, it seems I just started it).

And it’s been a little over 2 years since we bought this small bay industrial property in Tinley Park, IL (YouTube Walk Through), which taught me a few very interesting lessons.

Let’s dive in:

Our partner Joe found this off-market deal through a broker.

He got the offer accepted at $1,100,000 with a $100,000 repair credit, CASH, AS-IS.

So the net price was $1M, which was $37/SF—a pretty good deal for that time.

He signed the deal on April 13, 2021.

It was a 27,000 Sq. Ft. industrial building on 2 acres with 4 existing tenants.

Each bay had 1 dock and 1 to 2 drive-in doors, with a clear height of 14-16 feet.

It was owned by a seller who hadn’t done much (if any) improvements for quite some time.

The leases were gross and month-to-month, close to $5/gross/foot.

Taxes were $3/SF, so the property was barely breaking even after operating expenses.

The property was in need of repairs, and tenants knew they were paying half of what the market rate was.

Our goal was to make some improvements, split the largest unit into two, and raise rents to market levels.

I projected that improvements would cost no more than $150,000 and that market rates would command $5.25-$5.5/SF NNN, which would bring us to $145K in NOI and $1.8M in value.

It should have taken us no longer than 12 months.

What happened next was quite unusual.

During due diligence, I walked the property and began tenant interviews.

I normally start this process during due diligence, especially when we have month-to-month leases.

Surprisingly, none of the tenants showed 100% commitment to stay.

They preferred to remain on month-to-month leases, and I was getting ready to look for new tenants.

What happened next was even more interesting—and something I’d never experienced before.

Foreclosure:

We were to close in 60 days.

But, the seller stopped providing needed due diligence info, including the leases.

He was essentially trying to back out of the deal.

Later, I found out that one of the existing tenants had tried to offer a higher price after we already had it under contract.

We muddled through due diligence almost blind.

So, we decided to close, despite the seller providing almost no documentation.

In terms of financing, we lined up a bridge lender for $850,000, with the remaining $150K down payment and $150,000 for improvements coming from our cash.

What happened next was even more unusual.

The seller refused to come to the closing and wasn’t committing to a closing date.

The funny part is that our attorney and the seller’s attorney were long-time colleagues.

They didn’t want to escalate to legal action, and we tried to find a peaceful solution for almost a year—with no luck.

The seller was stubborn, thinking he could get away with it.

I attempted to arrange a meeting with the seller through the broker, but it was no use.

I told my attorney to record the contract on title and cloud it.

This would prevent the seller from selling the property behind my back.

That didn’t help either.

Then, I instructed the attorney to file a suit for specific performance, which is essentially a foreclosure process.

I didn’t want to go this route, as I believe both parties typically lose in legal actions—the only winners are the attorneys.

The best way is usually to negotiate and settle issues face-to-face.

Unfortunately, this wasn’t possible since the seller refused to meet.

Luckily, after the county sheriff served the seller, he changed his tune.

Closing and Renovation:

He committed to closing—if we paid an extra $50,000.

We didn’t have to accept his counteroffer, but we just wanted to move forward, so we agreed.

We finally closed in September 2022 after being under contract for 1.5 years.

After closing, we proceeded with renovations.

We fixed the asphalt, sealed and striped it, and replaced a few HVAC units.

We fixed roof leaks, tuckpointed the brick façade, and painted the exterior.

That painting turned into another ordeal.

We pulled permits for all the work except painting, which normally isn’t required in other municipalities.

We received a citation and were required to remove the paint from the front-facing wall, which ended up costing us three times what we spent on painting.

With the building updated, we approached the original tenants to extend their leases.

One tenant, who had tried to buy the building, had purchased another property and left.

The other two tenants didn’t want a long-term agreement.

So, we signed 3-year leases with modest rent increases and a 60-day cancellation clause.

These were like month-to-month leases.

But, they had more weight with banks for refinancing than true month-to-month leases.

We also started marketing for lease (web flyer), and I had 4-5 prospects right away for the empty spaces.

Exit:

This was just post-COVID free money Disneyland, a time when rates were low and leasing velocity was high.

We decided to test the market and sell to owner-user.

Small businesses flush with stimulus funds were willing to pay more than investors for turnkey properties.

I knew the building’s value, based on NOI, would be $1.8M once leased up and could be held for the long term.

However, if we could find a buyer willing to pay $2M, we’d sell.

We hired a broker, and within two weeks, we received seven offers.

We took the highest one, $2,020,000, but the buyer never submitted their earnest money deposit.

We ended up closing with the backup offer for $1,945,000.

It was from a national company, Stanley Steamer.

They planned to use the building for their trucks and operations.

The sale closed in June 2023.

Takeaways:

1️⃣ While it took a long time, this deal was low-risk and not a heavy lift.

I’ll take this type of deal every time over a heavy lift with double or triple the profit.

2️⃣ Mismanaged small bay industrial properties with light rehabs are my favorite type of deal.

They're simple.

A bit of knowledge on renovations, leasing, and common sense is all it takes to unlock great value.

But the one thing you DON’T need is a degree in rocket science…because…well…it’s not :-)

If I can do it, you can do it.

Read that again.

You can do it.

And I’m showing you how.