[IMGCAP(1)]MISSION HILLS, CA-Asset Management Consultants Inc. has hired two new execs as part of the firm’s plan to acquire more than $150 million in commercial real estate this year. Company president and CEO Jim Hopper tells GlobeSt.com that the deals will be designed to take advantage of the distress that many property owners will be facing as loans come due, but he emphasizes that Asset Management’s approach will be “not to beat anybody up” but to work with sellers in a way that benefits them as well as Hopper’s Mission Hills-based firm.
The two new hires are Ryan Smith, director of capital markets, and Ken O’Brien, director of investor relations. Hopper says that Asset Management expects to find more investment opportunities than it can currently fund, so it has brought on Smith, formerly of Newport Beach-based Buchanan Street Partners and O’Brien, formerly with 1031 exchange intermediary Capital Exchange Services, to help raise more equity.
[IMGCAP(2)]Hopper explains that Asset Management is looking for very specific types of deals that will meet his and his investors’ twin goals: risk mitigation and cash flow. As an example of the type of deal he is pursuing, Hopper cites a property in North San Diego County that his firm is looking at right now.
The property is a building that Hopper describes as great real estate that is well-located and is 98% occupied. The owner has $4 million cash in the property and a $10.5 million loan that is coming due. The most he will likely be able to refinance for will be $8.5 million, or $2 million less than required for the refinancing, and he doesn’t have $2 million to make up the difference.
Considering how the credit markets have turned since the owner originally financed the building, Hopper explains, the situation leaves the owner with basically two choices. One is to sell the building, in which case he would not get the $14.5 million that he has invested in it. Hopper estimates that the building would sell for $12.5 million at most, with the seller losing $2 million or more in equity. The other option would be foreclosure, in which case the owner would lose his entire $4 million of equity.
Hopper’s proposal is for Asset Management, which values the building at $12 million, to secure an $8.5 million loan and invest $2 million of its own cash to pay off the existing loan that’s due, with the current owner remaining as a partner with $1.5 million in equity. Asset Management would then take 100% of the cash flow from the building until it achieves its desired 8% cash-on-cash return for its $2 million. The current owner would then receive 100% of the remaining cash flow until achieving 8% return on his $1.5 million. Beyond that, the partners would split the cash flow according to an agreed-upon formula.
Under Hopper’s proposal, Asset Management would own and operate the property until the market improves and the property increases in value enough that the partners could sell the building profitably. The structure would be designed to enable both Asset Management and the current owner to recoup their equity investments and to split any additional proceeds.
Hopper says that the deal will work because the building is quality real estate that will generate ample cash flow. “It’s great real estate, but it has financial problems,” he says.
Finding such deals, however, takes a lot of work. Asset Management looks at 147 properties for every one it buys, Hopper says. Nonetheless, the company has closed eight acquisitions in the last nine months, four in California and four in the San Antonio and Austin markets. As a result, AMC now owns and manages more than three million square feet of investment real estate.
Despite the difficulty of finding deals that meet its criteria, Hopper says that the broker relationships that AMC has established, along with current market conditions, “are going to bring us more than we can currently fund.” Hence the hiring of Smith and O’Brien.
As AMC continues to build its portfolio, Hopper says that the two new execs will play an integral role in expanding its holdings and bolstering its capital position.Smith oversaw more than $630 million in investment sales and asset capitalization assignments at Buchanan Street Partners, before that spending two years with Secured Capital and 10 years with Cushman & Wakefield as an investment sales broker. O’Brien, a 12-year industry veteran, was a founding partner of Capital Exchange Services, a nationally qualified 1031 exchange intermediary.