Borrower view: Ten Capital sees financing emerging as key dealmaking metric

Ten Capital Management, a Cleveland-based manager, believes the pervasive question behind any acquisition today is whether it is possible to line up intelligent and accretive financing in a volatile, rising rate environment.

The company, fresh off the acquisition of a southern Orlando office/flex property, is close to closing another deal. CEO Ben Adams says the processes is more complex than it was even a few months ago.

“It’s taken a lot more work in the debt markets than in the past to find the right deal and there are fewer lenders competing,” Adams says. “This does affect pricing and it underscores the importance of getting the right piece of financing on a property that you believe will be accretive over the long-term.”

In the not-so-distant past, the firm was able to lock in low, long-term fixed rates. “We followed this strategy because we thought this day would come,” Adams said. “It’s here now and while we try to create as competitive of a market as we can, things are certainly moving in the direction of the lenders in terms of how they’re able to price things. Rates simply are just not as good as they were six months ago.”

For its most recent acquisition, Ten Capital was able to lock in rates well before the acquisition of SunTech Commerce Park closed. The Class A flex-office/light industrial space in Lake Mary, Florida, is close to Orlando airport and represents what the firm sees as a unique angle. The strength of the surrounding market for flex office space was a factor, with Adams citing a 6 percent vacancy rate.

But another factor was how the property fitted with its margin-of-safety philosophy. “We want to be right about both investment fundamentals and the flow of funds. Our first principle is as simple to say as it is difficult to do – we want to buy excellent real estate at a fair price. This purpose built-flex industrial/office product offers extraordinary optionality and flexibility in a broad range of potential tenant use cases, which we believe further supports our margin of safety,” Adams explains.

The company makes equity investments of $10 million to $35 million throughout the US. The current environment could create opportunity for Ten Capital to expand its portfolio, Adams adds.

“A rising rate environment does create new opportunity for us in other asset classes,” Adams says. “In the multifamily sector, many players predicate their plan on pushing rents and then refinancing in three years once the property is stabilized. But many also did not necessarily underwrite cap rate expansion to the extent we’ve seen it right now. And we think that could present a recap opportunity for us. We’re trying to source those kinds of opportunities right now.”