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Bisnow Scoop: Real Estate Meets Goodfellas

WASHINGTON DC 09.28.2017

WASHINGTON DC STATE OF OFFICE

Development, Design, Finance & Investment, Tenant Demands, and Asset Management

Paul DeMartini -- Tishman Speyer
Brandon Ernst -- Lincoln Property Company
Chuck Watters -- Hines

As far back as we can remember, we always wanted to be a gangster. (Oops, we mean commercial real estate reporter.) An actor in Martin Scorsese’s Goodfellas is selling off a $20M zero cash flow CVS portfolio, and Bisnow got the details. (We can’t say which one, or we might get whacked.)

The consiglieres give background

Bisnow Scoop: Real Estate Meets Goodfellas

Quantum Real Estate Advisors EVP Jordan Kaufman (above on a recent fishing trip in Wyoming) and SVP Dan Waszak (below with the family) brokered the deals and gave us deets. The New York-based seller purchased a national portfolio of eight zero cash flow CVS properties in 2005 as a tax shelter for gains from other deals, putting down 10% equity with self-amortizing, high-leverage loans. The CVS rent equaled the loan payments, and went directly to the bank (hence the name zero cash flow). What he didn’t foresee: With amortization and depreciation, his “income” (CVS rent) outweighed his write-offs. Because he had no cash to pay the taxes, a “phantom income” issue arose. Time to sell.

The caper explained

Bisnow Scoop: Real Estate Meets Goodfellas

Quantum sold two of the properties in 2010. Between the equity and debt, the remaining properties were valued at about $12M, leaving the seller with heavy debt to replace in a 1031. So they sold a Walgreens he owned to Inland for roughly $8.5M to get more equity, and found a loan (with the required 75% LTV) to satisfy the $20M exchange. Quantum closed the sale of three leasehold CVS stores last month (Nevada, Georgia, Virginia) with the final three fee simple zero cash flow properties set to close this month. Timing was challenging, but the team already has three new Walgreens properties under contract.

The perfect mark

Bisnow Scoop: Real Estate Meets Goodfellas

Quantum found an ideal buyer for the entire portfolio, a New England-based professional zero cash flow investor with a private fund. (He buys them wholesale and makes a profit selling one-offs.) Due diligence was limited, Jordan and Dan tell us, since the buyer was so familiar with the deal structure and it was really just trading paper (buying 100% ownership interest in the LLC that owns the properties). The buyer paid $500k in non-refundable earnest money the day he signed the contract, which offered the seller the flexibility to trigger each closing when most convenient (giving him time to locate the new Walgreens stores).

Other wise guys are doing it, too

Bisnow Scoop: Real Estate Meets Goodfellas

Who is dealing with zero cash flow properties? Folks like the seller that took real estate losses during the recession, Jordan and Dan say. Net operating losses can be used to off-set phantom income from zero cash flow properties. These deals also allow 1031 buyers who are running out of time to buy properties to pay down the entire loan with 1031 funds. Then they can re-advance the loan, drawing cash out of the 1031 tax-free. Anyone know how we can reach Scorsese to pitch this plot for his next film?

Related Topics: New England, The New York