How to Simplify Sale-Leaseback Transactions in Commercial Real Estate

Aviva (00:00)
This week's listener of the week is Kenzie Brown, 23. Kenzie, thank you so much for leaving us a five -star review. And for those of you listening, if you leave us a five -star review below, you might be next week's listener of the week, week, week. This week on Commercial Real Estate Secrets, we have Michael Salafia, who is the founder of STAX Real Estate.

Michael, thank you so much for being on the show today.

Michael Salafia (00:31)
Aviva, thank you for having me on. We're excited to talk.

Aviva (00:35)
 Yeah, so Michael, do you mind telling the audience a bit about who you are and how STAX Real Estate came to be?

Michael Salafia (00:44)
Yeah, absolutely. So I am a managing partner at STAX Real Estate. We're a commercial real estate investment firm based in Miami Beach, Florida. And we specialize in the development and sale of net leased retail properties. We mostly focus on a process called a sale lease back. So.

Aviva (01:08)
So let's, I'm sorry, go ahead.

Michael Salafia (01:10)
So to give you a simple example of what we do at STAX, we'll go out and say buy a gas station or convenience store that's maybe not in the best of shape, but it's a good piece of real estate on a good corner. And we'll buy it and then we'll renovate it. We'll bring in a new tenant. We'll assign a nice lease. So we'll improve the property and we'll improve the...

the quality and lower the risk behind it as an investment property. And then typically we sell these properties on the market to commercial real estate investors.

Aviva (01:48)
Out of curiosity, how long is your hold period generally?

Michael Salafia (01:52)
Depends. It could be as little as a very short period of time up to one year.

Aviva (01:59)
Awesome.

Michael Salafia (01:59)
Sometimes we don't want to let go of the property.

Aviva (02:03)
get that. I get the emotional attachment. So for the listeners who may not know, can you explain what a Sale lease back is?

Michael Salafia (02:12)
Yes, yeah, absolutely. So it happens all the time, say at a McDonald's. The McDonald's franchisee will buy a new store and they'll buy the piece of real estate and they'll set up their business and it'll be going well. And then they'll say, well, this is going really well for me. I want to open another store, but I've put all of my money into buying this first store and buying the real estate. So what you can do is sell the real estate to an investor.

and then lease it back to yourself. That frees up your capital to go and buy your next piece of real estate and open your next store. And this is actually how many retail properties or many retail operators grow. It's a common practice throughout the entire industry.

Aviva (02:58)
So why is a sale lease back advantageous for an investor?

Michael Salafia (03:03)
They like it because it provides a fixed stream of income, typically over a 15 to 25 year period. It can go out to 50 years easily. So now you have one tenant that's guaranteed a rent payment on a fixed schedule and typically will increase the rent will increase over time to keep up with inflation. So it makes a very stable and steady income stream. A lot of these properties are owned by real estate investment trusts.

So if you're someone, for example, if you have a 401k, your 401k probably holds mutual funds. Within some of those mutual funds, they might invest in the stocks of the real estate investment trust, we call those REITs, right? And then ultimately the REITs are the ones who become the landlords and buy the property. The REITs produce a return on investment based on where they bought the property and how much rent they're collecting.

Aviva (03:57)
Interesting. So let me ask you, how do you all find the properties that you pursue and ultimately improve?

Michael Salafia (04:06)
it's a very complicated process. Now, before I had the opportunity to go off on my own and become the founder of STAX Real Estate, I worked at a commercial real estate investment sales firm called Marcus and Millichap. They're the biggest in the country for doing these retail real estate investment sales. So I built a really strong track record there and

They have a very great process when it comes to training commercial real estate brokers on how to find the best properties. And I got to spend years working with the top REITs in the United States on acquisitions and learning exactly how they structure their criteria and how all of this works. And eventually when I was at Marcus and Milli chap, I was just very successful in working with my clients on identifying opportunities where we could add some value.

doing what I talked about earlier, finding a property that's a little bit distressed, the real estate's good, we can make some improvements, increase the value, and then we can sell it for a profit, right? It's real estate development, but you're not doing it from the ground up. You're doing it in a remodel process. Kind similar to the idea of what people do with flipping houses. You know what I mean?

Aviva (05:24)
Yeah, it's smart because if you're developing a property, you're going through a ton of risk, a ton of time spent entitling, permitting, plans, approvals, whereas you're already buying the fundamentals and the structures in place, it's just adding value.

Michael Salafia (05:28)
Mm -hmm.

Right.

Exactly. So, Marcus and Millichap is the best in the game at investment sales because that's all they specialize in. They're hyper -focused. So doing my business model of this hybrid development approach doesn't really fit the mold for building a team there. So I basically saved up all of my commissions and put everything in, opened an office. I hire the team of agents. I go into the startup scene. I have a background in tech startups. We can talk about that. I hire...

financial analysts and people who understand banking systems. I hire a gentleman just to do fundraising from family offices for private equity and for syndicating our deals. And I took a very different approach for building the team. Of course, I hired real estate agents that I knew to work under me as the broker. I built the marketing team, the PR team, the legal team.

build all of these people together and that became a humming functional business, even a construction team, right? And then I moved on to that. So piece by piece, we built STAX Real Estate to be just a fully functioning business that just can continue to do this investment model by following our thesis. And then we still partner, for example, with Marcus and Milichap time to time to help out with investment sales when needed.

Aviva (07:14)
Wow. So when you are, look, I know there's a phrase that you keep saying and that I hear every single day, and that's value add real estate. Can you explain to the listeners what value add real estate is and what you look for when you're looking for a property to add value to?

Michael Salafia (07:26)
Yes.

Mm -hmm. Mm -hmm. So big picture. It's exactly what you're thinking in your head right now. You're taking a piece of real estate and then you have some kind of strategy to add value to it. That strategy could be many things. It doesn't always require picking up a hammer and nail, right? It could be as simple as, hey, I have a CVS on this property. It has one year remaining on the lease. Okay. So now the value of that property has gone down because there was a big risk.

Will you get the income from CVS next year if they renew? Or what if they don't renew and they move out? Now, who are you going to get to go there to replace the rent? This could be very challenging. So you could simply add value by purchasing the property, negotiating with CVS, extending the lease. And now, if you can get them to agree to another 15 years of term, well, that's a lot more valuable property. You have 15 years of committed income stream versus one year remaining.

Aviva (08:36)
Yeah. It's so what about adding value in a.

like you said, hammer and nail way. What does that look like on a single tenant triple net? Yeah.

Michael Salafia (08:46)
Yeah.

Net lease property? Yeah. And for the audience, if you're wondering, what is this net lease, net lease, net lease? What we're trying to say, it's a type of lease where the tenant is responsible for everything. They're going to pay the property taxes, do all the maintenance, carry their own insurance. The landlord behaves more like a bank and simply collects rent checks.

Aviva (09:11)
And why is this advantageous for a landlord?

Michael Salafia (09:14)
It's advantageous for a landlord because you remove all of your management responsibilities. A typical landlord would have to have some kind of property management division or company to do all of the work that you're having the tenant do. And we find that this model of lease works very well on a single tenant property. So think of a standalone fast food restaurant, drug store, convenience store, even a standalone dollar store or supermarket.

When you have one tenant, they tend to have a really strong practice of property management inside of their own company. So it works out very well.

Aviva (09:52)
Love it. So back to the hammer and the nail. How are we improving and adding value to property?

Michael Salafia (09:58)
Yeah, so for example, we started a new company called RE-UP that just focuses on operating convenience stores and gas stations. So at RE-UP, we add value by renovating the gas station physically, right? So we'll start from the outside. And we also add value by restructuring the business and management process.

and all of the contracts associated with the property, right? But to talk about the hammer and nail thing, we go in and we start with the fuel canopy on the gas station and we'll completely re -image this. We'll make a new contract with a fuel, with a oil company and put up their branding on the gas station. We'll go in and fix all of the pumps. We make sure that they have the tap to pay card readers and that everything is very convenient.

Aviva (10:51)
Wow.

Michael Salafia (10:52)
and works every time you ever go to these gas stations and go to tap to pay and then you have to go in they try to they want you to pay cash. It's a whole thing. That's not convenient anymore. So our mission is to modernize and make convenience stores convenient again and make them friendly, clean, safe, healthy places. And you know, another thing we do is replace the bathroom. Every time we go in, we put in new counters, we change the ceilings, we

Aviva (11:01)
Ha ha!

Michael Salafia (11:21)
put in new floors, we paint, fix electrical and plumbing, all of these little things. In the gas stations, they have very complicated point of sale systems because you have all these pumps with all these different credit card readers. You wouldn't believe the mechanics of what goes on behind the scenes there. So we have an entire team that just manages that technology. And then we have additional layers of technology on the software level.

Aviva (11:24)
Yeah.

Michael Salafia (11:51)
that are powered by AI that run the entire management process for the business. So we have a very strong level of accountability going from the person who runs the cash register to the person who mops the bathroom floor, going all the way up to executive management.

Aviva (12:09)
Wow, so if I wanna buy a gas station, what's a rate of return that I'm looking for? Right, because you buy property, okay, you're looking for a seven cap. You buy a business, but this has the added element of oil and gas. What's a good return on this type of property?

Michael Salafia (12:22)
Right.

Well, it depends on how you're looking at it. For me as an owner operator of the RE-UP store, my return on investment will be completely separate. So I'll have a return for the business and then a return based on for the landlord based on the real estate. For the landlord rate of return, it's measured on a cap rate basis and it depends on the credit of the tenant.

Aviva (12:52)
Sure.

Michael Salafia (13:00)
So for RE-UP, we're a 42 store corporate operator. So our properties will trade, but we're a very new company. So our cap rate in the market is about 7 .5%, trending down to 7. We're expecting to go and start trading within the high sixes, probably by September. So that's going really well. Now on the other side of the spectrum, if you take like 7 -11.

They probably have the strongest credit in the market. They'll trade below a 5 % cap rate. They'll sometimes trade below interest rates if they have a strong corporate guarantee. And there's a lot that goes into these metrics and valuations and a lot of history. We can have a whole episode just on that. But it's a big range. Typically, gas stations trade around 6 % to 8 .5 % cap rates.

Aviva (13:56)
Fascinating.

Michael Salafia (13:57)
Yeah, and there's opportunities in the market. I think that drives a lot of interest into gas station convenience stores because they're so profitable. As an operator, if you're doing a sale lease back, sometimes you can afford an eight and a half percent cap rate. You could even go up to nine percent on a lot of gas stations just because the income is there.

Aviva (14:17)
I find it so fascinating. Selfishly, I love doing this podcast because I love hearing and learning all the different avenues of revenue in the business and talking to sophisticated operators who are pros and it's just, real estate is an amazing and abundant sport and lifestyle. So I'm jazzed up. So how do you analyze your...

Michael Salafia (14:30)
Yeah.

Mm -hmm. Mm -hmm.

Aviva (14:46)
deals before you get them while you own them and then before you take them to market.

Michael Salafia (14:52)
That's where STAX Real Estate comes in. There's a whole team and STAX has a proprietary AI software for assisting with the analysis and underwriting of all of these stores. We can do what takes a real estate investment trust like to do for them to do one store, we can do about 10 in the same amount of time using our tech.

And it all comes out to the same standards that they follow because as I mentioned, all of this came from hands -on experience of working with the Real Estate Investment Trust on the acquisitions. And, you know, prior to Marcus and Millichap, I was a consultant at Moody's CRE working with their chief economists hand in hand at understanding from an economic level how this impacts everything within this industry.

Yeah, because it's a big component of the American economy.

Aviva (15:47)
Huge and you know, you talk about a REIT and the time that a REIT takes to analyze a deal versus how you're analyzing them now with AI. What do you think the future of real estate analysis holds and looks like specifically understanding that real estate can be hesitant towards technology in the short term?

Michael Salafia (16:13)
I think maybe I'm 18 months ahead of the curb, right? And STAX will continue to be that way. We're just early adopters and we have a better process and it's within our core thesis to continue to innovate and automize and build better models and be better with data. But I think this is becoming mainstream very quickly and I'm doing a lot of podcasts and a lot of articles.

teaching people about these practices. I give away most of the information of how we do things. I'm a big believer in open source technology, so these techniques that we discover, we're happy to share with others.

Aviva (16:55)
How do you learn? Where do you learn from?

Michael Salafia (16:57)
I have a master's degree in high tech entrepreneurship. I've been involved in tech for over 15 years. I've done startup series, A rounds, B rounds, exits, the whole thing. I've learned to code many years ago. So I have a deep background in technology. The thing is technology is slow and you always have to convince people that you want to use it. And the investments, it's a much longer investment.

Aviva (17:12)
Okay.

Michael Salafia (17:26)
Horizon to realize returns like with venture capital, right? You'll put money in and see nothing It's a negative burn rate for years with commercial real estate investment. You put money in and you see returns day one So just as a financial product commercial real estate became much more attractive to me than technology But now that I've been deeper into it and I've managed so many of my own projects I have the opportunity to apply the technologies into these real -life situations

And we do that at STAX with our modeling and even just using simple AI tools that are available to everybody. But we set them up in a really special way. So they work really well for exactly what we're seeking to accomplish. And they wouldn't, you know, they don't work that way out of the box, right? So yeah, it's just a lot, a lot of testing, exploring standard research and development process.

Aviva (18:19)
I'm sorry.

You know, the standard, no, it's, I laugh because it is so hugely impactful. And like you said, in our economy, in our world, in the way we transact, I don't think people even quite grasp how important just commercial real estate is in general and the way that they use it. And so when you talk about integrating technology at a higher level,

Michael Salafia (18:35)
Mm -hmm.

Mm -hmm.

Aviva (18:51)
It's overwhelming the opportunity and what is coming. And it's all for the better. Yeah.

Michael Salafia (18:55)
Mm -hmm.

 And the ecosystem has been great. Companies have collaborated with us, for example, Airtable on the side for STAX Real Estate has been a great brand partner. We have Agora .ai. And on the re -up side of things, we have a software partner there as well for kind of the operation software that I mentioned.

We've been doing a really good job, like with exclusive licensing agreements, intellectual property rights, these kinds of things. And most notably, within the convenience stores at RE-UP, we've developed our own proprietary fast food service program, where in a lot of our stores, we noticed that they had kitchens and the kitchens were primarily making fried chicken. That was the biggest selling product.

So we partnered with a robotics company that exists and they're a big company, but we're the exclusive partner for integrating this technology into convenience stores. And in our current model, we can operate an entire kitchen that does fried chicken and French fries, all with one robotic, it's a robotic arm basically on a.

Aviva (20:21)
Thanks.

Michael Salafia (20:23)
a drone that moves back and forth. And then you have a digital ordering screen and just one attendant who just takes the food off and puts it into the warmers. Because in the convenience stores, it's more of concession food than it is a restaurant, right? Like people usually are taking it to go and you don't have to serve it to them. They can just take it as they go. They can put in a fresh order if they want, but it just comes off in a assembly line, essentially. So that's been really, really exciting.

Aviva (20:26)
Wow.

Michael Salafia (20:52)
and we're doing the big unveil of the prototype later this summer.

Aviva (20:56)
Look, I'm not the person buying the food in the gas stations, but I know there is a big demographic of people who are, and that is absolutely unreal and totally the future of, totally the future of food service, specifically in the convenience space. So, you know, with all this in mind, is retail real estate dead?

Michael Salafia (21:08)
yeah.

Mm -hmm.

No, not at all. I mean, for me, we focus on convenience. Convenience is always going to be there. It's in the name. The convenience store needs to be convenient. And the funny thing is, if you look at all of the new construction, gas station and convenience stores, they have a common characteristic. They're all very large, right? So my theory is that the larger the store is, the less convenient it is, right? People...

Keep talking to me about this company called Bucky's. Have you heard of them?

Aviva (21:55)
Yes.

Michael Salafia (21:56)
Okay, Bucky's is super cool and has an awesome business model and we really like what they're doing and their operations model is clearly the gold standard. We look at them all the time. However...

Why are people calling Bucky's a convenience store? It's the size of a Walmart. It's literally not convenient. It's big. The convenience part has been eliminated from that. And these big wah -wahs and things like this, they're not really so convenient anymore either. They're kind of too big and there's too many options. So we're really focusing on meeting the demand for having the newest products and some more healthier products on demand. We're not letting companies like

Frito -Lay and Coca -Cola tell us what to do. If they have a problem with the way we want to do it, they can get out of our store. That's our attitude. And we want to offer as many good, healthy products that we can, and we want to listen to our customers and have the newest things and organize the store in a way where it's super convenient for them to get what they need and get out the door.

Aviva (22:59)
That's cool. I feel like you are at the beginning of a real change in the way that we as people consume convenience stores. And I think you're onto something.

Michael Salafia (23:12)
I think so. I mean, we have a project going with the city of Miami and we're putting basically a standalone box. So imagine you have like a shipping container with all glass walls. Okay. And we're putting this right in front of a train station, like a Metro rail. So there's no way for you to go into a regular building. It's almost like a park entrance. And the convenience store is

Aviva (23:32)
Sure. Wow.

Michael Salafia (23:42)
fully autonomous. You walk up and when you tap your card, there's a facial recognition. It'll recognize you and then any guests you have can walk up, put their face, the door will unlock, you can go in. Take whatever you want. The entire ceiling is lined with security cameras that have the image recognition software. It picks up what you took with you. Yeah, put it in your hand, put it in a basket. It doesn't matter. Don't put it in your pockets. I mean, you can, it's still gonna ring you out, but whatever.

Aviva (23:44)
Wow.

down.

Wow.

Michael Salafia (24:12)
You go to the and then you go to walk out. There's a kiosk if you want to check your ticket and make any adjustments and then just walk out. It charges your credit card.

Aviva (24:21)
That's convenient.

Michael Salafia (24:22)
Now, keep in mind, we are in the business of applying the technology and commercializing it. We did not develop this technology. A big oil company is behind this huge R &D budget. But RE-UP is the team to bring it to market, do the prototype. We will staff and manage it. We actually run the convenience store and then we have the technology partner.

supporting us. So that's how we're able to achieve so many of these things without spreading ourselves too thin. We're really not. We're focusing on our core competency, which is commercialization and not research and development.

Aviva (25:05)
Wow, well, that's fascinating. I think you're really onto something and I've learned a lot and I think we've brought the listeners a ton of value. Now, before I have you tell the listeners where they can find you, follow you, contact you, et cetera, we always end the podcast with the question, with this question. And the question is, is what currently makes you happy with what you're doing in commercial real estate?

Michael Salafia (25:15)
Thank you.

what's, what's making me happy is bringing everybody together and producing good deals. you know, a lot of the projects we're taking on because it's value add, there was something negative behind it at some point, like the property's not paying as much rent as it should be. If it was being run correctly. So it's just putting this together. It's always so positive when I do a deal. So.

I think it's the solutions that we've been bringing to the table and the problems that we're solving that gets me really excited.

Aviva (26:09)
That's awesome. I think that's really, really cool and really fascinating. Michael, where can the folks online who are listening find you, follow you, and learn more about STAX and re -up?

Michael Salafia (26:25)
Sure, so just punch any of those keywords into Google and we'll come right up. I'm on Instagram Twitter and our websites are reupfuel .com and staxre .com.

Aviva (26:44)
Awesome, well thank you Michael for being on the show this week and for all of you listening. We'll see you next week.