CASE STUDY: CREATING VALUE IN LEASE RENEWAL

When a lease termination date approaches, many commercial real estate property owners will sell, rather than risk vacancy or face difficult negotiations with corporate lawyers over lease renewal. Many times, their risk aversion is Alliance’s opportunity.

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Some of our best investments fit this profile, including a recent big success. We found a great property in South Florida where a kidney dialysis center was entering the last few years of their lease. The tenant was threatening to leave and asking for major concessions. This concerned the prior property owner, and was a turn-off for many prospective buyers when the owner listed the property to sell.

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But Alliance saw the value that others failed to realize. Because of our expertise in the medical field, we knew that this location was highly profitable for the tenant, and the disruption it would cause the tenant’s operations to shift locations. Furthermore, through our local supply-demand market research, we realized that the tenant had few possible alternative locations. And given the lack of local inventory for medical properties, long term vacancy was extremely unlikely for this property.

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Add on top of all this, a high creditworthy tenant, and the fact that the tenant had made significant investments in customizing the property.

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Even when the tenant ran the lease all the way down to expiration, we held firm.

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After some back-and-forth, the tenant signed a long-term year lease that substantially increased the property’s market value. The tenant also met their key objectives in the new lease around monthly rent and escalators. The result was a win-win, bringing tremendous value to the property with a happy tenant and owner.

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Earlier this year, we finally sold the property at a very nice effective IRR. This deal illustrates perfectly a key way that Alliance creates value. Industry expertise, local real estate market knowledge, and negotiation skills allowed us to drive significant value during lease renewal, and create a prime property profile when we eventually elected to sell.

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