Why Syndicators Are Stuck Holding Deals Longer

Ken Naim (00:00)

Yes, we are seeing longer horizons. Three-year deals are going to five and five that’s going to seven. And a lot of syndicators are stuck in a bad spot. They might have been paying distributions. They might have been paying the prep and everything. But if they sell today, they might sell at a loss of 10%, 20%, 30 % to the asset value. So the investors are happy getting their eight

percent preferred return. But if they sold today, they might take a loss of 10, 20, 30 percent on their principal.

Dylan Silver (02:08)

Hey folks, welcome back to the show. Today’s guest, Ken Naim is a commercial syndicator focused on value at office, industrial and retail. Welcome to the show, Ken.

Ken Naim (02:19)

Thank you, happy to be here.

Dylan Silver (02:21)

Now, when we talk specifically about the industrial space, I’ve seen a trend, I don’t know if it’s just because it’s more popular now online or if there’s more people getting into it or a little bit of both. It seems like there’s a lot of interest in industrial, right?

Ken Naim (02:37)

Industrial has been hot pretty much for 20 years now. There’s been a big push for industrial spaces, office spaces. It got overbuilt for a little while, and it took probably a 10, 15 % hit for a couple of years, and now it’s back on track and growing. And it’s been so hot that it’s been hard to find deals in that area, and especially value add deals.

or a term I like to use, value included deals, there might be not a lot of value to add, but you’re buying it at significant discount that the value is already built into the purchase. So those deals have been really hard the last few years and we haven’t bought a lot, but we’re starting to find some deals now. So this is the market for it, if you can find the right deal.

Dylan Silver (03:32)

Now, specifically industrial, think encompasses a lot of different areas of real estate itself. There’s segments within industrial. For myself and for folks who haven’t done a deal in this space, what all does industrial encompass?

Ken Naim (03:47)

It starts off from light industrial and warehousing where the actual facility, they don’t do any real manufacturing there. It’s just storage of parts or equipment or, and it could be as small as 5,000 square feet, 10,000 square feet. And it can go all the way up to heavy industrial manufacturing in the hundreds of thousands, millions of square feet.

It can be an Amazon facility with over a million square feet. So there’s a very wide range and it services pretty much any company that doesn’t really have to be customer facing, you know, where they have storage needs, where they have product needs, where there’s logistics out of there. It even includes cold storage where ⁓ you have these huge refrigerator facilities for fruits or vegetables or other.

perishable products. So it’s a very wide range of things. My focus is more on the smaller side, let’s say five to a hundred thousand square feet, like industrial warehousing, where you don’t get into too much manufacturing. And I like that area because it’s very plug and play. You can take one tenant out and replace it with someone else. If I have a 400,000 square foot

factory for cement, it’s very hard to repurpose that for another tenant if they move out. Now you might buy it super cheap, but you might never be able to rent it. It might take you five years, 10 years to find a tenant and you might have to spend a fortune repurposing it for something that size. So that’s why I like the more warehousing where you can take out 120,000 square foot tenant and put one or two tenants in there.

fill up the space quite easily.

Dylan Silver (06:32)

How often are there similarities between leases in the industrial spaces? Is there like a standardized lease or is each agreement with each tenant very much specific to that one situation?

Ken Naim (06:49)

Well, no two leases are really identical in commercial. They can be very similar, but you’re always going to have nuances between them. But we do have a standard lease and for these smaller spaces, especially in Texas, 99 % of the lease is the same. It’s a standard Texas bar leasing contract. And then the big action happens in the addenda.

where you specify the differences between the contracts. So every contract, every lease is going to have, okay, this is the rent, this is the late fee, these are the penalties, these are what allowed or not allowed. But in the addendum, it says, okay, this is a triple net lease where the tenant’s responsible for all these different items, okay. Are they responsible for maintaining the HVAC or are they responsible for replacing the HVAC if it dies?

and so on and so forth. So that addendum also specifies free rent, for example, which is not part of the standard if they get a month’s free or something like that, which is not always the case, but sometimes you could get a T.I. Oh, they want us to install a 10 ton crane in there. And that’s part of the deal. So that addendum covers most of it, but that addendum is typically a page long or two pages long. So it’s not

a huge lease and it doesn’t have to be custom except in extraordinary circumstances.

Dylan Silver (08:26)

Now for finding these deals, I can imagine there’s a number of different ways where you might have come across industrial deals, people might be bringing them to you, you know, it might be a seller who comes direct to you. I’m sure brokerage is a big part of this as well and having a relationship with, you know, with a broker.

But for folks who are looking at getting started in industrial investing, I’m imagining they’re probably gonna be looking at smaller deals and they’re probably gonna be checking places. The first thing that comes to mind is like the crexies of the world, LoopNet and so forth. How are you finding deals?

Ken Naim (09:02)

A lot of deals start with Crexie and Lutonet and we try to ⁓ find good brokers in certain areas and they’re hard to find. Like most professions, only a small percentage of brokers or any other profession are really, really good at it. A lot of brokers will just go to CoStar, get all the listings in the area and just send it to you. That’s all information that I can get myself. I don’t need to

Okay, we want to build relationships, get off market deals. We want to get them before they’re listed. Times when we have to, when before 10,000 people have looked at it, because at that point it’s really hard ⁓ to find a diamond in the rough if 10,000 people already looked at. So, so we do outreach. There is cold calling and mail and email and all of that, but we try to make relationships with attorneys.

Dylan Silver (09:50)

That’s right.

Ken Naim (10:01)

that real estate attorneys that know stuff that are going for sale might put us in contact sooner. ⁓ Divorce attorneys, probate attorneys, we like to talk to ⁓ real estate brokers, find the really good ones, the ones that they’re getting the calls because they’re already well known in that market. So they’re getting the calls right away or they’ll know, this is a vacant building and I’m negotiating a lease for it. And I know the seller wants to sell.

Dylan Silver (10:11)

Hmm.

Ken Naim (11:04)

So the second that leases sign, we can go in and buy it already without the risk of lease up. Or if they know they’re desperate to sell and they’re trying to lease it first, we can make a cash offer to buy it vacant if we know that it has a strong possibility of leasing in the next few months. We don’t like taking on completely vacant buildings with a ton of risk.

but for the right price we will work it out.

Dylan Silver (11:38)

How often are you buying these deals when they’re fully occupied versus when they may have some vacancy or maybe substantial vacancy?

Ken Naim (11:47)

In this market, it’s hard to find real deals. You have to make the deal. So a lot of times we’ll find something listed online and it’s not a deal. know, at with bank financing and bank rates with appraisals and standard down payments and standard everything, the numbers are just not good enough for us. But

We talk to the broker, we find out how flexible the seller is, see if they’ll offer some kind of seller financing or what the value add is on the property. So if it’s already leased up and there’s no value add, it comes down to the terms. So we might offer them their price, but get a longer amortization period or get interest only.

get ⁓ a lower interest rate like one of the deals we just closed. Typically that market is 15 to 20 year and we got a 22 year and with a 6 % interest rate instead of banks in that area are typically around 7, 7, 1, 7, 2. So those little differences on these, you know, $5M deals, it all adds up and all of that.

gives us enough margin that we can have a good return for our investors and have enough margin on top of that so we can keep something ourselves.

Dylan Silver (13:20)

Historically,

sorry to cut you off, but historically, I’ve seen what feels like a rise in seller financing across the board. I everything from single family up to commercial. Have you seen this as well, or have you seen seller financing been around for a long time and it may be catching more steam right now, but it’s been around for a while.

Ken Naim (13:43)

Seller finance has been around for a very long time, but it’s usually rare. And I’ve almost never closed deals with seller financing. It either doesn’t make sense. They want too much down. But nowadays bank financing is getting tough again because so many banks are underwater with multifamily deals, with commercial deals. A lot of people went into these with no experience and now they’re getting bit. And now consequently the

banks are suffering or at least their at risk portfolio is getting bigger. So they might not default, but the banks don’t care if you actually default, they care if you’re at risk for default. And that’s a very big distinction that a lot of banks have a lot of money at risk and they’re becoming very conservative. So a lot of sellers want to sell, but banks will not approve it or they won’t underwrite it.

properly or they’ll try to bring down the price too much that they’ll only approve a certain balance so people can’t afford to pay their price. So a lot of times to get their price, it makes sense to sell our finance. And so we’re seeing a lot more sellers open to that concept.

Dylan Silver (15:01)

I’ve also heard that in the syndication space, there was a lot of people, and I guess there’s two sides to this story, but there was a lot of people who took out variable rate debt specifically in the multifamily space, which as I know, not your avatar of investor of investment right there, really, and they didn’t foresee the future uptake in rates. And so that was kind of the perfect storm of a lot of things. had,

in multifamily rates double, materials increase, rent stabilize or go down in some places like Austin, Texas. And then you also had changes in the law and changes in the ⁓ environment and political climate. So you’re looking at all these factors and you’re saying, wow, it’s not an easy time to be ⁓ a multifamily syndicator specifically.

Ken Naim (15:30)

around.

Yeah, even in the commercial space, our debt is typically fixed rate debt. So we didn’t suffer as much with the variable rates. But a lot of properties that were purchased four or five years ago for a three and a half percent interest, their loans are now coming due because there are five year mortgages typically in the commercial space. So the five years is pretty much up.

So a lot of these properties are now being refied and luckily interest rates have come down about a point in the last six months or so. So they’re being refied at six, but if you bought at three and a half or four, it’s still a 50 % increase to your interest rate. And that results in about a 30, 35 % increase on your mortgage payment because the principle pretty much stays the same. So if you’re paying 20, $30,000 a month,

mortgage all of a sudden goes to 30 or $40,000 a month, that can pretty much wipe out a lot of cash flow for these loans that are these deals that are marginal. If you were at 1.25 DSCR to start, you might only be at 1.1 and you might have to bring cash to the table to refi. So lot of sellers don’t have that or they don’t want to put more money into an existing deal. they’re

Dylan Silver (17:43)

Yeah.

Ken Naim (18:00)

kind of forced to sell it because they don’t want to contribute, especially if they have been grown in equity. So especially stabilized deals where there was no value at, you’re kind of forced to sell them at this

Dylan Silver (18:15)

Now, has this also had the effect of maybe some syndicators looking at longer horizons and longer timeframes as opposed to five years maybe say, we may have to be in this for 10 years or seven years. Has any of that happened?

Ken Naim (18:33)

Yes, we are seeing longer horizons. Three-year deals are going to five and five that’s going to seven. And a lot of syndicators are stuck in a bad spot. They might have been paying distributions. They might have been paying the prep and everything. But if they sell today, they might sell at a loss of 10%, 20%, 30 % to the asset value. So the investors are happy getting their eight

percent preferred return. But if they sold today, they might take a loss of 10, 20, 30 percent on their principal.

So they go, why should we do that? Let’s just hold it, you know, get our 8 percent until the market recovers. So we’re seeing a lot of syndicators struggling with that. And syndicators are struggling because they might not be making money on the deal. They might be paying the preff to their investors, but they’re not actually pulling out anything themselves.

So they’re doing all this work and they’re not getting paid for it and they might never get paid for it. But their reputation is also on the line. So it’s better to pay investors 8 % rather than take, we lost money on a deal at 10 or 20, 30%. And that’s a good scenario if it’s only 10, 20 or 30 and not some deals that I’ve heard of that are minus 50, minus 100%.

Dylan Silver (19:50)

Yeah.

Ken Naim (20:02)

on Princeton.

Dylan Silver (20:02)

No, yeah,

there’s I think there’s a lot of that. And I can tell you, as someone who’s licensed in Texas, there’s, you apartments, this sounds unbelievable. But I’ve been saying this a lot recently, there’s apartments that are doing, you know, two months free rent, you know, two months free rent, plus, you know, some type of financial incentive on top of that, like an Amazon card, right. And that’s not just one metro. Yeah.

Ken Naim (20:23)

Yeah. Moving. They’ll pay your

moving fees. Yeah.

Dylan Silver (20:29)

When was the last time we heard of this? I I feel like it was not that long ago where there was just no…

you know, available apartments in so many markets. And now that there’s this surplus, you’re now seeing urgency on the other side. Hey, we got to get tenants in here. And I’ve actually said this to a buddy of mine. said, you know, when they’re saying that it’s, you know, however much percentage occupied, is it really? it really? How many of those units maybe need some work? And maybe they’re not ready for someone to come in, but they may be damaged in some capacity. So they’re saying that, you know, 90 % occupancy is it, is it 90? Is it 70? You know, what is it? And you can imagine those investors in those

syndicators who own those deals, they want people in those units.

Ken Naim (21:11)

Yes, and it is a big struggle out there. It’s just. We actually have still a shortage of apartments, but we also have a shortage of affordability. And that’s the problem. Like we have enough people for every available apartment, but prices have gone up so high in so many different areas that people can’t afford to rent.

You know, so two people are living in the same apartment, in the same home, or they’re moving back in with their parents or with their friends or something, because they just can’t afford to live on their own nowadays. Incomes haven’t risen as fast ⁓ as prices.

Dylan Silver (21:52)

Yeah.

We are coming up on time here, Ken. Any new projects that you’re working on, and then as well, what’s the best way for folks to get in contact with you or your team?

Ken Naim (22:07)

So ⁓ we just closed two projects in Odessa, Texas, one in December, one in February. We have one or two that are still in the works right now. And these are all brand new construction in the last three years, fully leased up oil services companies, leased oil services companies. these companies, they do really well when oil is high and they do

fairly well when oil is low because these oil rigs, as you can imagine, need to be maintained regardless of the price of oil. Nobody wants to redrill an oil well for millions of dollars when it just costs something to service it. So we don’t deal with oil drillers because they’re very boom or bust, but oil services is a very strong market ⁓ historically.

And so we were buying these like 20,000 square foot industrial buildings, leased out to them with large acreage, five acres, six acres, seven acres. So it leaves plenty of space for indoor storage, outdoor storage. And these companies love it. They have their offices as about 10, 15 % of the building. So they can run their, their office staff through there. And it’s a very solid play for us in Texas right now.

So we’re looking at several of those and wherever we can structure a good deal with the right terms. And being new construction, means CapEx is a minimum, risk is a minimum. Biggest risk is that they’re single tenants, but most of these companies can be from $20 million revenue to $800 million revenue. So for them to pay,

three, four, 500,000 in rent is not a big deal for them. So we find that risk to be relatively low. How I can be reached? You can reach me through our website at beacononecapital.com. I’m available on LinkedIn, Instagram, Facebook, and just reach out to me.