First National Financial LP

Diversification: from gas stations to office

Aug 22, 2016

Transaction snapshot:
A family that owned several gas stations was looking to diversify to a single office building. The First National team helped the client secure the building, in the outlined timeframe, with a structure that enabled the deleveraging of debt in a two-year timeframe.

Client Objective:
The client was looking to diversify its portfolio from gas stations to a single office building. The closing timeframe on the building was aggressive, and the client wanted to inject equity in a shorter timeframe as it sold the gas stations.

Transaction Challenges:
In addition to low equity, the client’s desire to diversify meant that it lacked management expertise in this type of asset class. Gas stations are mostly “hands off” management. However, the building that the client was looking to purchase had 40 to 50 tenants and required day-to-day, ongoing management.

Solution Approach:
Within this deal, there were two key considerations influencing the financing. First, it was important to enable equity injection in a shorter timeframe. Second, the client lacked management expertise, requiring an interim solution to ensure the continuity of building performance.

Structuring the Solution:
The First National team structured the financing based on a two-year term to allow for equity injection in a shorter timeframe. But because the team evaluated the debt serviceability based on the building’s operations at the time of financing, it was essential to address the management gap. The First National team negotiated with the vendor to stay on as manager for the two-year term. That way, the client could gain the necessary management expertise without jeopardizing positive building performance.

Formula for Success:
The client’s desire to diversify presented very specific complexities. However, the First National team was determined to stick with the deal and see the smart risk pay off for the client. With resourcefulness and exhaustive efforts, the First National team helped the client diversify its portfolio successfully, in exactly the way the client had envisioned the transition.

Key Idea:
Diversifying has advantages, but can also present multiple layers of complexity. In this case, the financing structure had to complement the client’s equity needs, but there was also a management gap to fill to ensure continued building performance. The First National team was able to address both complexities effectively in one solution to drive the right results for the client.

Related content: 

Four key considerations when diversifying

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