How to Create a Profit Selling NNN Outparcels

NNN Lease Investments News


Create a Profit Selling NNN Outparcels

One of the time tested hallmarks of successful real estate developers and operators is the ability to create and maximize value of the assets they build, own, and acquire. Historically, these methods have been comprised of new construction, re-tenanting, and repositioning of centers. These aforementioned strategies will continue to be the bread and butter of their businesses. Due to an overall reduction in demand from retailers and the decline in market rents that many markets have experienced in the past few years, opportunities to create value for many companies has been limited. Facing a more challenging environment, real estate companies will need to get creative in order to find opportunities to maximize value. One commonly overlooked method that works in any market that can benefit companies in the near term is to capitalize on the arbitrage between shopping center and NNN investment CAP rates by selling the NNNoutparcels to shopping centers.

Let’s take a look at a couple of examples:

SCENARIO #1:

Purchaser acquires a shopping center for a 7% CAP rate and excludes a McDonald’s pad from collateral when obtaining her loan for acquisition. Subsequently, the developer sells the McDonald’s pad to a NNN investor for a 4.5% CAP rate. Assuming a McDonald’s rent of $100,000 per year, the developer can purchase the pad for $1.43M (7% CAP rate) and can sell it for $2.22MM (4.5% CAP rate), thus creating $800,000 in value by capitalizing on an arbitrage opportunity and selling off the McDonald’s outparcel separately.

Scenario #2:

Developer stabilizes a shopping center that is now valued at a 7% CAP rate. He decides to sell a Wells Fargo bank pad separately from the shopping center for a 6% CAP rate. Assuming a Wells Fargo rent of $300,000 per year, the value selling with the shopping center would be $4.29MM (7% CAP rate). Selling separately for a 6% CAP rate, however, the developer can realize a sales price of $5.0MM, thereby creating $700,000 in additional value.

While many owners have seen the value in selling pads separately many still have not capitalized on this simple yet pronounced arbitrage in the market. This practice can create opportunities to maximize value and potentially creates additional value in a proforma that can be utilized to win a bid for land or an existing asset that would have otherwise gone to competition.

In some cases, there can be hurdles to selling outparcels separately which can generally be overcome with advanced planning. Below is a list of steps that developers, acquirers, and existing owners can take to increase the ease of selling outparcels separately from shopping centers.

Steps for Developers:

Subdivide outparcels as early as possible

If possible, negotiate the right to sell separately as part of construction loan

Have a reciprocal easement agreement for the outparcel drafted by your attorney and approved by your lender before loan closing

Steps for Acquirers/Owners:

Subdivide outparcels as early as possible

When obtaining acquisition financing or refinancing, exclude parcels from collateral or negotiate release provision

Have a reciprocal easement agreement for the outparcel drafted by your attorney and approved by your lender before loan closing.

JonathanFlorin can provide consulting services to developers, acquirers, owners in strategizing optimal way to realize value through NNN outparcel sales.

www.calkain.com

Rates Continue to Dip for NNN Lease Investments

NNN Lease Investments News

 Net Lease Investments Rate Continue to Dip

The dominant story line for credit tenant net lease assets—the decline of cap rates in this space—continues, according to the latest quarterly report by locally-based Calkain Cos., and New York City-based Chandan Economics. Cap rates for retail net lease properties tracked by Chandan declined to a rolling average of 7.1% in June. Also, preliminary data for July and August show the compression continuing into the third quarter--even as spreads over the risk-free benchmark widened.

“This has been a consistent story for some time” Calkain principal Jonathan Hipp tells GlobeSt.com. “There is a direct imbalance between investor demand and supply, especially for well-located credit properties. Combine that with historically low interest rates and we get the current pricing and cap rate environment.” He adds that the industry is posting executions at the same level as 2007, “which a lot of people thought we would never see again.”

Bank branches and restaurant chain tenants are among the better performing assets, with the former seeing average cap rates fall to 6% in the second quarter. Most restaurant cap rates excluding such credits as McDonalds--fell to 8%. Other stable restaurant chains and some urban locations registered cap rates below 5%, rivaling high-quality assets in the office and apartment sectors.

Declining cap rates aren't the only story line of note in this space. Other fundamentals include rising prices and an enthusiasm for some sellers to exit the market. Some owners are finding that the strong valuations, the availability of low-cost financing for prospective buyers and the possibility of higher capital gains tax rates too enticing to resist.

Hipp estimates that one-third, if not more, of his clients want to close deals this year to take advantage of capital gains. “For that reason we think the fourth quarter will be a buoyant one for sales.”

The report was authored by Hipp and Sam Chandan, principal of Chandan Economics. The two firms partnered this year to begin releasing quarterly reports on this under-reported space.

www.calkain.com