Special situations and operating companies

Separating a business from its real estate can be as simple as a sale-leaseback, where the company sells the building and stays as the tenant. It can also be part of a larger transaction: a company is sold and the founders keep the building, or a buyer of the business needs someone else to own the property.

We have been both landlord to a business and an investor in it. At 4444 52nd Street in Kentwood, Third Coast Development acquired and renovated an industrial building and leased it to SnackCraft, a snack co-packer and contract manufacturer. Carbon River also holds a convertible debt investment tied to SnackCraft, a loan that can convert into an ownership stake under terms agreed at the outset. The two investments are separate.

A recapitalization changes who has capital in a property or a company without necessarily changing who runs it. Common triggers are a loan maturity, a partner who wants to exit, an estate that needs to be settled, or an owner who needs funds for a project and does not want to sell. The asset may be perfectly sound. We can come in as new equity, and we are willing to look at positions elsewhere in the capital structure where we understand the underlying asset. Carbon River's mezzanine debt investment, a loan to an affordable housing fund that sits between the senior lender and the equity, is one example.

Property held by several family members, partnerships whose members have different goals, or real estate tangled up with an operating company can sit for years because a conventional sale is too hard to organize. These situations reward patience and a buyer who can be flexible on structure and timing. Third Coast Development's sale-leaseback with Proos Manufacturing in Grand Rapids, for instance, was built around a purchase option that let the owners control when the sale took place.

Excess land behind a plant, a building larger than the business now needs, a site whose zoning allows more than what stands on it. An operating company rarely has the time to pursue these, and a developer can. Where the answer involves construction, entitlement or a change of use, our development background applies directly. See value-add real estate for how we approach that work.

Some transactions need several moving parts to close together. As an example of the principals' experience, Third Coast Development's build-to-suit headquarters for Hart & Cooley in Grand Rapids was structured as a multi-property transaction in which Third Coast also purchased two of the company's older facilities. The new building solved one problem, and taking the legacy properties solved another.

That habit of looking at an owner's whole real estate position carries over to how we evaluate opportunities.

• We begin with the downside. If the business plan fails, what do we own and what is it worth?
• Where there is real estate, it has to stand on its own. A functional building in a good location is what we fall back on.
• Structure follows the facts. Equity, debt, a sale-leaseback, a joint venture or a combination, chosen to fit the situation.
• Speed and discretion. Many of these conversations are private, and some are time-sensitive. Decisions are made by the three principals.