Page 311 - James Caan - The Real Deal

30 · Private Equity

‘The better the quality of the tenant, the more the value of the
building increases?’
‘Correct.’
‘And if there’s no tenant the building is worth less.’
‘Yes. We buy the empty building because we know who the tenant’s
going to be – it’sme – so there’s none of the risk of unpaid rents that
other landlords would have. You buy the building, you put me in as
the tenant, I sign a fifteen-year lease, you go back to the bank and tell
them the building generates an income of x, guaranteed for fifteen
years, and they’ll lend you 70 per cent of the value of that lease.’
‘So the money I spend on buying the building in the first place
is recouped from the loan, the repayments on which are covered
by your rent?’
‘Correct.’
So let’s say David finds a building for £8 million which is bought
by me. I put down £2.5 million as a deposit and get the rest of the
money in a loan from the bank. I refurbish the building to David’s
specification before he signs a lease and agrees to pay £1,125,000
rent a year. I can then get the building revalued – and this always
has to be by a valuer that has been recommended by the bank;
typically, valuations assume a rental yield of 7.5 per cent which
would value the building at £15 million.
I can then go back to the bank and say, ‘My building has been
valued at £15 million. What will you lend me against that?’
They say: ‘Seventy per cent, Mr Caan.’
That’s £10.5 million. I say: ‘Thank you very much.’
That figure allows me to pay off the original £5.5 million loan
I bought the building with and take out the £2.5 million deposit I
had put into the building. The rest more than covers the
refurbishment costs and leaves me with around £1 million to put
in the bank. David’s rent covers the new loan and I would still own
100 per cent of the building, plus I would still own the serviced
office company. Win, win, win.

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