Exclusively Representing & Advising Tenants and Buyers for Commercial Transactions

By Randolph T. Mason
Senior Vice President & Partner, Lee & Associates Commercial Real Estate Services

If you could have an investment that paid your regularly with limited management, would that excite you?
If so, the long-term triple-net-leased property to a sound company with good financials (and maybe even personal guaranties or letters of credit) may be an investment for you.

One of the exciting components of a triple-net investment is that the tenant is the one who maintains the property and typically pays all of the building’s expenses. You, as the owner, receive your rent. Should you have any debt service on the building, this rental income goes to pay that expense. The balance is for you.

Let’s look at what’s currently happening in the market. Cap rates seem to be stable, or possibly shifting downward slightly, on most types of properties. Some of the lowest cap rates are apartments, followed by central-business-district office projects, R&D industrial, neighborhood retail and industrial properties. Some of the favorite triple-net properties are, not surprisingly that seem to offer the least risk – such as Wal-Mart, McDonald’s, Lowe’s, Walgreens and other high-profile tenants. Should an investor be looking for a higher return on their investment, they should probably look at lesser known, yet well capitalized companies.

While long-term triple-net investments provide stability and income, there is a downside. Your assets are locked into a long-term lease, and you’ll miss out on chances to capture any gains in rental income when fundamentals improve.

But there still seems to be a strong supply of debt available due to long-term leases to credit tenants, as well as due to the ease of underwriting for single-tenant properties. We are still seeing institutional investors, REITs and foreign buyers, as well as private investors, investing in all-cash transactions; currently, they have nowhere else to put their money and achieve a decent return.

So, investors looking for limited management responsibilities, longer-term leases with a stable cash flow and the unique tax benefits from real estate, a triple-net investment may be the right play.

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A sale-leaseback allows a company to raise money from the sale of its property while retaining its use, so a sale-leaseback opportunity typically happens when an owner occupant/tenant would rather not relocate.

When the owner-occupant company sells its building to an investor, the investor is buying the income stream that this tenant or seller would be providing. The higher the income stream, theoretically, the higher the value. But there are challenges, such as when the current owner agrees to an extremely above-market lease rate. Remember, the investor is buying this income stream, so should the seller go out of business, then the investor has the challenge of trying to release the property at an above-market lease rate – and that dog don’t hunt. That is why it is extremely important for the potential seller to understand the realistic lease rates so that they can better appreciate the investor’s point of view.

Now in a sale-leaseback, if the potential seller signs a slightly above-market lease rate, and is an extremely well-capitalized company with a good track record, the differential between the contract lease rate and the actual market lease rate may be insignificant. The length of the lease term is also important to investors.

Investors look closely at the reasoning and financial condition of the seller (now the new tenant) in order to determine the reasons for the sale. Due diligence is very important for all parties.

Sale-leasebacks can be an excellent way for an owner occupant to generate cash to pursue other opportunities like growing their core business or investing in a venture that would provide a greater return to the seller or perhaps to return capital to shareholders.

Published column on Commercial Property Executive by Randy Mason

http://www.cpexecutive.com/newsletters/capitalmarkets-newsletter/investment-column/analysis-of-a-sale-leaseback/

Office Market 2011

A “Base Year” is a term whereby the Landlord agrees to cover all the operating expenses of a building up to an amount established by a “Base Year” (normally the first year of the lease), and the Tenant will be responsible for their pro-rata share of any increase in expense for subsequent years.

Here’s an illustration of Base Year:

A tenant leases a 5,000 square foot office suite in a multi-tenanted building that has a total size of 25,000 square feet.

Tenant’s proportionate share of the building’s operating expenses is 20% (5,000/25,000).

Tenant’s lease commences in May 2011. The Lease states the Base Year is 2010.

The 2011 actual operating expenses totaled $225,000 (the “Base Year”).

The estimate for the 2012 operating expense is $236,250.

The increase in operating expense increase over the tenant’s Base Year is $11,250.

Tenant’s proportionate share results in $2,250 ($11,250 x 20%). Typically this amount is paid monthly ($187.50/month) at the same time as the Base Rent and at the end of 2011 a reconciliation is performed and any overage is credited to the following year or conversely any increase is charged back to the Tenant.

Bad news from NAGGL (National Association of Government Guaranteed Lenders – the trade association affiliated with SBA 7a lenders) or from the SBA….

Shutdown appears imminent:

News from Congress regarding a possible stopgap funding measure to keep the government open is grim, and the SBA has communicated its shut-down plan to lenders.

While the government is shutdown, SBA will be prohibited from approving any new loans. Unfortunately those hurt most by the shutdown will be the small businesses that are struggling to recover from the economic downturn. Those businesses with time sensitive funding requests, including things such as real estate and change of ownership transactions will be hit the hardest.

NAGGL hopes that the shutdown (if it occurs) will be short lived, but it reflects the 3-week long interruption that occurred in 1995-96.

What happens to SBA lending programs if the federal government shuts down?
As promised, SBA is proactively updating their lending partners about details of what the potential federal government shutdown means in practical terms for the loan programs. In case you did not receive the notification from SBA, here it is in full (emphasis added by NAGGL) -

“It is still possible that the Administration and Congress will reach a compromise that will avoid a lapse in federal government funding. However, prudent management requires that we plan for an orderly shutdown should Congress be unable to pass a funding bill by the end of the day on Friday, April 8th. Please read this message carefully, as it contains several critical pieces of information.

Should Congress be unable to pass a funding bill, the SBA will stop approving all new business loans in the 7(a) and 504 loan programs at 11:59 PM on Friday, April 8. This includes loans submitted under delegated authority. Lenders may continue to submit loans to the SBA, but none will be approved until a funding bill is signed by the President.

In the event of a lapse in appropriations, most SBA servicing and liquidation processing centers will also shut down. (However, liquidation activities related to the 504 loan program and to 7(a) loans that SBA has already purchased will not be shut down.) Previously scheduled lender oversight reviews, including Dealer Floor Plan reviews, will be postponed and re-scheduled as soon as a funding bill is passed.

Certain tools and services that do not require continued appropriations will, however, continue to operate as planned. These include:

The agency’s electronic E-Tran tool will remain operational. Lenders may submit loans for approval with the understanding that SBA will not fund any loans until a funding bill is signed by the President. Lenders may also submit unilateral servicing actions that do not require new funds; any servicing actions that require SBA approval, however, will not be completed.

The agency’s fiscal transfer agent, Colson Services, will continue to operate. Any functions normally handled by Colson Services will continue, including sales on the secondary market and the submission of Form 1502. Any actions, however, that require SBA approval–such as sales on the secondary market in which there are discrepancies between a lender’s data and Colson’s–will not be completed.

In addition, the agency’s microloan program will shut down; SBA microlenders may, however, continue to issue loans to small businesses using previously disbursed funds. Finally, the agency’s surety bond program will shut down for all surety companies in the Prior Approval program (though not those in the preferred program).”