Where the Alpha Hides

And how to tease it out

“Anyone can buy it, anyone can finance it, anyone can design it, anyone can build it, but it’s the one that leases it that creates the value”

- Trammell Crow

Ride an upward real estate trend and make piles of money. Use debt as leverage and the piles become mountains. When market performance (known to the bow tie investment crowd as “beta”) cooperates, investors look smart. When they load up with debt and get exacerbated returns, they look like geniuses.

There’s a rare few investors that don’t settle for market returns. These sharpshooters know markets go both up and down and what beta giveth, beta taketh away. Alpha - the ability to outperform the market - is the trademark of an elite real estateur.

Alpha is a fickle bitch and there’s only a few ways to tease it out:

Change of use

Change a building to something else, something attractive to another type of tenant - one that can justify more rent. The trick is making the conversion cost less than the value premium.

• Convert the vacant Kmart to self storage

• Build out lofts in the old cotton mill

• Put a taqueria in a closed gas station

Environmental abatement

Polluted sites scare away more developers than a STD. Understanding what it takes to clean a polluted site, and doing it, can tease out alpha.

• Remove the underground storage tanks

• Encapsulate the asbestos

• Excavate the contaminated soil

This work is not for the uninformed or cavalier. It’s risky business wrought with uncertainty, but skill here allows operators to buy at sometimes ridiculous discounts and then create something wonderful.

Add-on acquisitions

Combining properties can unlock hidden value and unleash the alpha train.

• Acquire access to an adjoining road

• Buy out a ground lease and get fee simple ownership

• Lease adjacent parking

Subdivision

The inverse of add-on’s - carving off parts of the whole - can also create alpha.

• sell off an outparcel

• sell off air rights

• sell off a billboard

Design

Given the same budget one person can create a more desirable building than a second person. Improving either form or function releases alpha.

• Add dock-high doors

• Create a rooftop bar

• Convert parking to an outdoor terrace

Entitlement

Obtain new legal rights and create alpha:

• Upzone the almond grove to industrial

• Get a transferable liquor license

• Obtain drive-through approval

Density

More space means more revenue, more revenue means alpha:

• Convert the strip mall to vertical mixed use

• Add covered boat storage to the marina

• Build an ADU

Sitework

Most investors have soft hands. Those that can shape the land, or hire someone that can, create alpha:

• Move the pond

• Flatten the grade

• Put utilities underground

Leasing

Market vacancy rates are for chumps. The ability to lease and lease at higher rates is a skill - the most primal alpha skill.

“Our founding fathers didn’t go to war for us to seek beta returns.”

-Me