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
