If you have played craps before you understand how the come bet works. I won’t try to explain it in detail if you aren’t familiar with the game, but when you hear the phrase it basically means that you don’t have what you need right now, but you are willing to bet on getting what you’ll need to win the wager in the future.

In our office, we like to use the phrase when looking at the business points of a new potential tenant’s lease.

For example, I recently reviewed a proposal from a regional supermarket to come into a 50,000 foot vacancy at a center we were on the verge of acquiring. The grocer wanted $50 per foot in tenant improvement allowance, or $2.5mm.

This was not proposed as a rent concession either, this was cold hard cash, right out of our pocket. The proposed rent was only $6.50 per foot, plus another $4.50 in NNN charges. This means we would not break even on this deal until about year 4.5 which is longer than I typically like to see.

That being said, I decided to go forward with the deal. Why? I was betting on the come, or the back end.

First of all, this was a 20 year deal, with a strong tenant which really made the decision easier. We were buying the center at a 7.5 CAP. Which means that if we turned around and sold the center at that same 7.5 CAP again, the additional $550,000 in annual NOI we were getting from the grocer added $7,300,000 in back end value. Making a little less than 300% backed by a strong tenant is not bad.

But, it doesn’t end there, because the center was now positioned as a grocery anchored center, we could actually sell at a lower cap, about a 6. This means directly the grocery deal was worth $9.1mm, but that doesn’t take into account the rest of the NOI, another $1.5mm. The purchase price was $20mm at the 7.5 CAP. We would have to invest $2.5mm into the grocery deal, which at that same 7.5 cap valuation would be worth $27.3mm, but because of the CAP swing, that grocers value permeates throughout the rest of the NOI stream taking the total $2,050,000 in NOI to a valuation of $34mm at a 6 CAP multiple.

Investing $2.5mm in a deal that doesn’t pay off for 4.5 years may not sound incredibly exciting, but when you look at from the “betting on the come” standpoint, your $2.5mm investment is actually worth an additional $14mm in back end value. Home run.

Until next time,